Chagla, J.
1. The plaintiff as the true owner of a cheque for Rs. 4,000 has filed this suit against the defendant bank for conversion of the said cheque and claiming. Rs. 4,000. The material facts are really not in dispute. On February 5, 1945, Messrs. Ramchandra Ramgopal, a firm of merchants at Akola, drew a cheque upon the Laxmi Bank, Limited, for the sum of Rs. 4,000 payable to the plaintiff or bearer. The cheque was crossed generally by Messrs. Ramchandra Ramgopal before delivery to the plaintiff. On the same day the plaintiff despatched this cheque by post from Akola to his commission agents Messrs. Chimanlal Mohanlal Suratvala for presentment and collection. This cheque never reached Messrs. Chimanlal Mohanlal Suratvala and apparently it was stolen during transit.
2. On January 25, 1945, the defendant bank opened a branch in Bombay, and on January 26, 1945, one Nemchand Amichand Gandhi opened an account by paying to the credit of that account Rs. 300 in cash. Although the name of the depositor was Gandhi, he signed his application form as 'N, A. Gandi.' On January 30, 1945, Gandhi withdrew from his account by a cheque written in Gujarati the sum of Rs. 225. On February 7, 1945, Gandhi drew a further sum of Rs. 50 by drawing another cheque -this time in English. Therefore the position was that on February 7, 1945, there was only a sum of Rs. 25 to the credit of Gandhi's account. On February 7, 1945, Gandhi paid in into his account the cheque for Rs. 4,000 which had been drawn in favour of the plaintiff and of which the plaintiff claims to be the true owner. This cheque was collected by the defendant bank and the amount credited to Gandhi's account. On February 8, 1945, Gandhi drew a cheque for Rs. 3,800 on his account. The cheque was drawn in favour of Kantilal Maganlal Shah or bearer and has been endorsed by R. H. Desai, Bapulal Premchand, the plaintiff, has given evidence and also Chimanlal Nagindas Suratvala bearing out the facts as to the cheque being given to the plaintiff by the firm of Ramchandra Ramgopal and the cheque being stolen while in transit. On this evidence there can be no doubt and it has not been disputed by Mr. Taraporewalla that the plaintiff is the true owner of the cheque; nor can there be any doubt that Gandhi ,who paid in this cheque to the credit of his account had no title to this cheque.
3. It is, therefore, clear that as against the true owner the defendant bank is guilty of conversion. Under the ordinary law the bank would have no answer to the plaintiff's claim. But Section 131 of the Negotiable Instruments Act, 1881, affords the defendant bank a statutory protection against the true owner in cases of conversion provided certain conditions mentioned in that section are complied with. If a banker in good faith and without negligence receives payment for a customer of a cheque crossed generally or specially to himself he shall not, in case the title to the cheque proves defective, incur any liability to the true owner of the cheque by reason only of having received such payment. In order therefore to escape the liability which the general law imposes upon a person or a party who converts the goods belonging to the true owner thereof, the banker must discharge the burden of establishing that he received payment on behalf of a customer, of his of a cheque not belonging to the customer but to someone else in good faith and without negligence. In this case it is not suggested that the bank acted without good faith, but the plaintiff's allegation is that the bank acted with negligence in collecting the cheque and thereby has lost the protection afforded to a bank by Section 131 of the Negotiable Instruments Act; and the short point that I have to determine in this case is whether on the facts established the defendants have discharged their burden of proving that they acted without negligence. Now negligence is essentially a question of fact and it must depend upon the circumstances of each case whether negligence has been proved or not. It is difficult to define ' negligence,' but an attempt was made by Lord Justice Scrutton in E. B. Savory & Co, v. Lloyds Bank, Ld. [1932] 2 K. B. 122 (This case ultimately went to the House of Lords and is reported in [1933] A. C. 201. Mr. Justice Scrutton says (p. 130):
A question at once arises, as there is no ' negligence' without a legal duty, what was the exact duty imposed on the bank, and to whom Before the Acts, the bank, of course, owed a duty to every owner of property not to convert it, but that duty was absolute, and independent of reasonable care. In my view, Section 83 lessened the duty of the bank by limiting it to an obligation only to use reasonable care in dealing with the cheque, or by providing that if the bank proved that it had used reasonable care in discharging its obligation to the true owner not to convert his property, it was discharged from liability though it had converted that property.
Then Lord Justice Scrutton cites with approval the observations of Mr. Justice Kennedy in Hannan's Lake View Central, Limited v. Armstrong & Co. (1900) 5 Com. Cas. 188 (p. 191):
The only question is, Did they act without negligence What does ' without negligence' mean It means, I take it, without want of reasonable care in reference to the interests of the true owner, the principal whose authority the customer purports to have.
Therefore what I have to determine in this case is whether in collecting the cheque belonging to customer Gandhi the bank acted without reasonable care in reference to the interest of, the plaintiff, the true owner of the cheque.
4. The Privy Council in Commissioners of Taxation v. English, Scottish and Australian Bank [1920] A. C. 683 laid down the principle which ought to guide the Courts in considering the question whether a bank is guilty of conversion in having been negligent in collecting a cheque on behalf of a customer which in fact did not belong to him. In that case one A. Friend of Sydney put a cheque drawn by himself on the Australian Bank of Commerce for 786-18-3 into an envelope, along with some other cheques drawn by other members of his family, and addressed the envelope to the Commissioners of Taxation, George Street North, Sydney. This cheque was in payment of an assessment of income tax. It was crossed with the word ' Bank ', that is to say, generally not specially. This cheque was stolen by some person unknown and was never cashed by the Commissioners of Taxation. On the following day a man who gave his name as Stewart Thallon entered the head office of the respondents' bank at Sydney and stated that he wished to open an account. The Accountant took his name and address which this man gave at certain well-known residential chambers in Sydney. He then handed in a sum of 20. The Accountant filled up the ' paid-in ' slip and the account was duly opened and a cheque book issued to Thallon. On the following day the stolen cheque was handed in by Thallon; and on the next day Thallon withdrew three sums of 483-16-6, 260-10-0 and 50-12-6 by cheques drawn by himself. Thallon was never seen again and it was found that no person of that name lived at the address he had given. The Commissioners of Taxation then filed an action from which the appeal went to the Privy Council against the bank for conversion of the cheque. The Supreme Court for New South Wales held that the bank was not guilty of negligence. In discussing the question of negligence, their Lordships of the Privy Council are at pains to point out that the negligence with which the Court was concerned was not in opening the account but ' in collecting the cheque' though the circumstances connected with the opening of an account may shed light on the question of whether there was negligence in collecting the cheque, and the test of negligence which their Lordships adopted was whether the transaction of paying in any given cheque coupled with the circumstances antecedent and present was so out of the ordinary course that it ought to have aroused doubts in the bankers' mind, and caused them to make inquiry. Their Lordships emphasized that negligence was a question of fact and they rejected the argument of the learned Chief Justice of the Supreme Court that the care that the bankers should take should not be less than a man invited to purchase or cash such a cheque for himself might reasonably be expected to take. Their Lordships thought that that was an inapposite standard for the simple reason that it was no part of the business or ordinary practice of individuals to cash cheques which were offered to them, whereas it was part of the ordinary business or practice of a bank to collect cheques for their customers. The argument that was presented to the Board was that the bank was negligent in collecting the cheque for a customer who was of recent introduction and about whom the bank knew nothing. Their Lordships then pointed out that there was nothing suspicious about the way the account was opened; they were of the opinion that there was nothing suspicious in the fact that a cheque was paid into that account for collection one day after the account had been opened; they further pointed out that if it was laid down that no cheque should be collected without a thorough inquiry as to the history of the cheque, it would render banking business as ordinarily carried on impossible; customers would often be left for long periods without available money. But their Lordships do say that if the cheque had been for some unusually large sum, perhaps suspicion might have been aroused; but whether the cheque is or is not for an unusually large sum is really a question of degree. Their Lordships finally point out that in the cheque presented by Thallon there was no note of alarm or of warning which could have aroused the suspicion of the bank. Under the circumstances their Lordships dismissed the appeal and held that the bank was not negligent. I have taken some pains to reproduce at some length the reasons of the Privy Council in coming to the conclusion they did because both the decision and the observations of their Lordships are of considerable assistance in deciding the case before me and also of applying the test which the Privy Council did in the case before them.
5. The first contention of the plaintiff is that no individual of the name of Gandhi in fact existed and that the identity of Gandhi has not been established by evidence in this case.
6. I accept Modi's testimony that he did know Gandhi as a broker before Gandhi came to him for the purpose of opening an account on January 26, 1945. I have also got the evidence of Gupte, the accountant of the defendant bank, on this point. Gupte says that when the cheque for Rs. 225 came to him in the ordinary course, he noticed that although the name of the drawer was Gandhi, he was signing as ' Gandi' and he therefore sent for Gandhi and inquired of him about this. This man who said he was Gandhi told Gupte that he did this because his signature should not be forged.
7. The next question I have got to consider is whether Modi was negligent in recommending Gandhi to the defendant bank as a customer. It is true that even taking Modi's evidence at its best, Modi had a rather casual acquaintance with Gandhi. But it is difficult for me to see why Modi did anything wrong in giving a reference if Gandhi went to him with actual cash and wanted to open an account in the bank after he had met Gandhi before at the pedhi of his friend Dave and had known him as a broker. Assuming that Modi was negligent in introducing Gandhi to the defendant bank, the next question is whether the negligence of Modi can be imputed to the bank. Now it is not suggested and it cannot be suggested on the record as it stands that it was any part of the duty of Modi and the cashier to introduce customers. It is true that Modi has said that before he was employed he told the Manager that he would be able to introduce a few customers. That perhaps improved his chance of his being taken on as a cashier, but that does not mean that it was incumbent upon him in the performance of his duties to introduce customers. Modi gave a reference for Gandhi to the bank just as any other outsider would have done. The reference was not given in the performance of his duties as a cashier and therefore the negligence, if any, of Modi cannot be imputed to the bank. In order that the plaintiff should succeed, he must establish that the bank was negligent in accepting Gandhi as a customer if such negligence is sufficient to disentitle the defendant bank from the protection given to it under Section 131 of the Negotiable Instruments Act.
8. It is next urged by the plaintiff that the bank was negligent in accepting Gandhi as a customer. On this point the practice as to accepting customers is deposed to by Gangooli, the manager of the defendant bank, and he says that the bank opened accounts only of such persons as were known to any member of its staff or to any outsider who was known to the bank. Gangooli further says that when a customer was introduced by a person other than a member of the staff, the bank made no reference to him about the customer either in writing or orally; but when a customer was introduced by the members of the staff, he always sent for that member of the staff and questioned him about the credentials of the customer. Gangooli also pointed out one of the rules of the bank which was that the proposed customer should be properly introduced and his interpretation of the word ' properly ' was that it must be by one whom he could trust; and in the ordinary course he would trust every officer and servant in the bank if he introduced a customer. Gangooli, the manager, has further told me that when he saw the application form for opening the account of Gandhi and he saw that Gandhi was introduced by Modi he sent for Modi and asked him about Gandhi and Modi told Gangooli that he knew Gandhi well, that he was a broker and also knew that he had effected transaction with Dave. The manager stated that after he had this discussion with Modi he passed the form and initialled it in red ink. The manager further said that he followed the same practice with regard to the other customers introduced by Modi. On January 26, 1945, there were nine applications for opening new current accounts. Of these nine, three were introduced by Modi; three by the manager himself; and the remaining three by an outsider. In respect of all the three persons introduced by Modi the manager made personal inquiries of Modi.
9. Mr. Tendolkar has commented on the fact that the manager did not tell Sub-Inspector Paltonwalla about what Modi had told him about Gandhi before his application was sanctioned. In my opinion that fact by itself is not sufficient to make me come to the conclusion that the manager's testimony on this point should be disbelieved. I accept the evidence of Gangooli, the manager of the defendant bank, that when he received the application form of Gandhi, he sent for Modi and made the inquiries to which he has deposed here.
10. In the next place a great deal of emphasis was laid by the plaintiff on the fact that the address given by Gandhi, namely, 103, Kavarana Street, Fort, in his, application form was a non-existent address. Now the position with regard to this address is that I have the evidence of Desai, Road Inspector, ' A ' Ward, Bombay Municipality, who has stated that the Municipality keeps a record of all the public streets and of such private streets as the public have access to; and no street, public or private, by the name of Kavarana Street appears in this record. But he admitted to Mr. Taraporewalla that the Post and Telegraph Office Directory did mention this street as being near the Bombay General Post Office. Sub-Inspector Paltonwalla also said that he could not find any such street as Kavarana Street in the Fort. But the Road Inspector of the Bombay Municipality did admit that there was a building known in Frere Road called Kavarana Building; next to this building there was a bye-lane off Frere Road; that bye-lane was not named; and the address of Kavarana Building was No. 103, Frere Road. There is no evidence before me whether any man by the name of Gandhi was living in this Kavarana Building, the address of which is No. 103, Frere Road.
11. It is further contended that there were suspicious circumstances attendant upon the opening of the account by Gandhi. In the first place, it is pointed out that whereas the name of the customer was Gandhi, he signed his application form and his specimen signature card as ' Gandi.' Gangooli, the manager, has stated that it was not uncommon for a man to give his specimen signature which was differently spelt from his own name; and as I have already pointed out, both Gupte and Modi have stated that in answer to inquiries by them Gandhi told them that he signed his name differently from the way in which it was spelt in order that his signature should not be copied. Then it is pointed out that it is very, unusual for Modi, the cashier of the bank, to have filled in on behalf of Gandhi the paying-in slip in respect of the deposit of Rs. 200 and also the application form for opening an account with the bank. It is true that the manager says that it is not customary for the cashier to do these things but Modi has stated in the witness-box that he did this because Gandhi did not know English and he did it as a friendly act. Modi also said that he filled in the application forms of other customers besides Gandhi whom he had introduced.
12. The important fact to remember in connection with the opening of Gandhi's account is that the account was opened with cash and not with any cheque paid in by Gandhi. When a customer opens an account with a cheque, certain inquiries may become necessary as to the cheque; but when an account is opened with cash, obviously the position is very different. I am stressing this point because when I come to deal with the authorities cited at the bar, its importance and relevance will become clear.
13. It is further urged that the bank's suspicions should have been aroused before they collected the cheque from Gandhi by the manner in which Gandhi's account was operated. A great deal of emphasis was placed on the fact that by February 7, 1945,. the credit to Gandhi's account only stood at Rs. 25 and that on that very day a cheque for Rs. 4,000 was paid in. Now the rules relating to current accounts of the bank provide that accounts should be opened with a minimum sum of Rs. 500; but as far as the Bombay branch was concerned, the evidence is borne out by the subsequent amendment of the rule itself that the managing director had given his sanction to opening accounts in Bombay with a minimum sum of Rs. 300 and in Bombay the minimum balance required to be maintained was Rs. 50. If the balance of Rs, 50 is not maintained, then a fee of Re. 1 is charged to the customer. The manager stated that it was not unusual for a customer to deposit the minimum amount necessary arid then to withdraw within four or five days the maximum amount permissible and leave just the balance required. It is true that Gupte, the accountant in the defendant bank, did not quite agree with this view of the manager because he said that he knew of two or three cases where a customer had opened an account with the minimum deposit required and withdrawn practically the whole of the amount within a few days. He would consider such a thing as unusual. But Gupte went on to say that he did not think that that circumstance would put the bank on inquiry. It is difficult to see why a customer who opens an account with the' minimum permissible, namely, Rs. 300 should not operate upon it so as to reduce it to an amount less than required under the rules to maintain the account and when he finds that he has gone below the minimum necessary, pay in a sum of Rs. 4,000 so that the balance goes up to a much larger sum than required. It cannot be suggested that the payment of a cheque for Rs. 4,000 was for such a large sum or such a disproportionate sum that it should have aroused the suspicion of the bank. Gupte, the accountant, has stated in his evidence that in the course of one day sums aggregating to rupees four lakhs are paid into the bank. If one were to look at the proportion between the original deposit, namely, Rs. 300, and the payment of Rs. 4,000, it is less striking than the proportion between the 20 deposited by Thallon in the Privy Council case and the deposit on the subsequent day of a cheque for 786. The Privy Council there did not think that the cheque for 786 was for an unusually large sum. There is less reason to think here that the paying in of a cheque for Rs. 4,000 by Gandhi was of so unusually a large sura that the suspicion of the bank should have been aroused.
14. A further point was sought to be made that cheques were drawn by Gandhi is Gujarati and in English; but Gupte, the accountant, produced two cheques of another customer, one written in Gujarati and the other in English. Thus there is nothing in this fact by itself which was sufficient to put the bank on inquiry with regard to its customers.
15. Having considered the various contentions of the plaintiff and having reviewed the evidence on the various points, I should now like to consider, in view of the authorities, what is the true and correct approach to the facts of this case. Primarily inquiry as to negligence must be directed in order to find out whether there is negligence in collecting the cheque and not in opening the account, If there was anything suspicious about the cheque of Rs. 4,000 which Gandhi paid in to the credit of his account, there can be no doubt that it would have been the duty of the bank to make the necessary inquiries before they cashed the cheque. To use the language of the Privy Council, if there had been any note of warning or alarm on the cheque itself, then if the bank-had collected it disregarding the note of warning or alarm it would have done so at its own peril. But in this case the cheque is a perfectly innocuous document. It is made out in the name of the plaintiff or bearer and, as I have said, it is generally crossed and it is drawn by two partners of the firm of Ramchandra Ramgopal; and it is not seriously disputed by Mr. Tendolkar that there is nothing on the face of the cheque which should put the bank on inquiry. Therefore, prima facie, the bank was not negligent in collecting this cheque which on the face of it did not in any way arouse its suspicion. But it is not sufficient that the cheque itself should not arouse the suspicion of the bank. If there is any antecedent or present circumstance, again to use the language of the Privy Council, which aroused the suspicion of the bank, then it would be the duty of the bank before it collected the cheque to make the; necessary inquiry and undoubtedly one of the antecedent circumstance would be the opening of the account. Now it is important to bear in mind that there is no connection whatever in this case between the opening of the account and the stealing of the cheque. The cheque did not come into existence till February 5, 1945, and the account was opened on January 26, 1945. It is impossible to believe that Gandhi or whoever opened the account on January 26 had the remotest idea that on February 5 Messrs. Ramchandra Ramgopal would make out a cheque in favour of the plaintiff on February 5 and that the plaintiff would post it to his commission agent Suratvala and he would get an opportunity to steal the cheque and get his bank to collect it. But apart from there being no connection whatever between the stealing of the cheque and the opening of the account, was there any suspicious circumstance at all about the opening of the account As I have pointed out, the account was opened with cash. There was a reference by the cashier and that reference was sufficient according to the practice followed by the bank. The manager made the necessary inquiries and the account was opened. But what Mr. Tendolkar contends for is that it is the duty of the bank to make inquiries about the respectability of an intended customer in every case although there may not be the least suspicious circumstance attendant upon the opening of the account and, according to Mr. Tendolkar, proper and sufficient inquiries were not made in this case by the bank about the respectability or the integrity of Gandhi, their customer. For this proposition reliance was particularly placed on Ladbroke & Co. v. Todd (1914) 111 L.T. 43. In that case the plaintiffs, who were a firm of bookmakers, had as one of their clients an undergraduate at Oxford University by the name of Robert Howard Jobson. This undergraduate won some money on a bet and the plaintiffs, intending to pay him, drew a cheque for 75-lls-3rf upon the National Bank, Limited. This cheque was stolen and the young man who stole it went to the defendant's bank and said that he wanted to open an account with the assistance of that cheque. He gave his name as Richard Henry Jobson and his address at the University College, Oxford. The defendant accepted the cheque and opened the account. After the cheque was cleared, this customer drew a cheque for 65. On that, the defendant was held liable for conversion to the plaintiffs. (Now two important facts with regard to this case must be borne in mind. The first is that no reference was taken of any sort whatever with regard to the customer by the defendant; and, secondly, the account was opened with a stolen cheque and no inquiry was made about the cheque at all. Strong reliance is laid on an observation of Mr. Justice Bailhache who decided this case to the effect that (p. 44) it is true that banks are willing to take cheques, but before they allow them to be operated upon they must be satisfied as to the respectability of the intended customer. A little before he made this observation in the judgment, Mr. Justice Bail-hache expressed his own opinion that if he had been left without any evidence on the point he should have been disposed to think that the defendant was under no obligation td make any inquiries in the absence of anything to make him suspicious; but he relied on the evidence on the practice of banks, namely, that it is usual to make inquiries. He further adds that inquiries as to the respectability of the intended customer can be done by references and sometimes by an introduction through a customer. In the 'Privy 'Council case (Commissioners of Taxation v. English, Scottish and Australian Bank [1920] A.C. 683 curiously enough the case was cited at the bar by Mr. Romer K. C. on behalf of the appellants not on the question of negligence but on the question of what is sufficient to constitute a person a customer of the bank, and in the judgment of their Lordships this case is not referred to at all; and when one turns to the facts of the Privy Council case, which I have already set out in some detail above, it will be remembered that Thallon, the customer of the bank in that case, was given no reference. The bank knew nothing about him and yet the Privy Council, far from imposing upon the bank any necessity for making an inquiry about this customer, held that the bank was not negligent because there was nothing suspicious about the way the account was opened. It is true that in Ladbroke & Co. v. Todd, at least in the judgment as reported in 111 L. T. 43, Mr. Justice Bailhache does say that there was nothing suspicious in the opening of the account by Jobson and yet he took the view that it was incumbent upon the bank to make the inquiries about the respectability of the customer. In view of the Privy Council decision, it is difficult for me to hold that the principle of law enunciated in Ladbroke & Co. v. 'Todd is the correct law. According to the Privy Council, as I read the judgment, if a customer opens an account with cash and there is nothing suspicious about the manner in which the account is opened, the fact that the bank made no inquiries about the customer would not disentitle the bank to the protection given to it by Section 131 of the Negotiable Instruments Act. Of course on the facts before me there was actually a reference given by Modi to Gandhi and I have also held that the manager of the defendant bank did make inquiries about the position and status of Gandhi.
16. Ladbroke & Company v. Todd is referred to in Lloyds Bank v. The Chartered Bank of India, Australia and China [1929] 1 K. B. 40. Lord Justice Sankey at p. 69 refers to Ladbroke & Co. v. Todd and Commissioners of Taxation v. English, Scottish and Autralian Bank for the proposition that a bank may be negligent in not making inquiries as to a customer on opening an account. With great respect to the learned Lord Justice, it is impossible to understand how the Privy Council case can be an authority for the proposition for which the learned Lord Justice had made use of it. If anything, the Privy Council decides the contrary of the proposition which Lord Justice Sankey enunciates in that judgment. With regard to Ladbroke & Co. v. Todd it is true that it does lay down the necessity for an inquiry; but Lord Justice Sankey has worded the proposition in a cautious manner because what he says is that a bank may be negligent in not making inquiries as to a customer on opening an account. It would depend on the facts of each case and the circumstances attendant upon the opening of the account whether an inquiry as to a customer was necessary and called for or not. Lord Justice Sankey does not say, as Mr. Tendolkar contends for, that in every case it. is obligatory upon a bank to make inquiries as to the respectability of a customer in order that it should avail itself of the protection given to it under Section 131' of the Negotiable Instruments Act. In that case the plaintiffs were bankers having a branch office in Bombay. One Lawson, their Chief Accountant at the Bombay Branch, had express authority to draw cheques on other bankers with whom the plaintiffs had an account. He had an account with the defendants, who were bankers in Bombay, and another account with the plaintiffs' Bombay branch. The plaintiffs paid his salary by crediting his account with their Bombay branch. In 1922 Lawson began fraudulently drawing cheques on the plaintiffs' bankers in favour of the defendants, to whom he sent written instructions to place the cheques to the credit of his account with them. These frauds were continued for two years by means of false entries in the books of the plaintiffs' Bombay branch. When these fraudulent cheques had been cleared and the amounts credited to Lawson's account by the defendants, Lawson immediately drew cheques against the balance standing to his credit. Some of these cheques were in favour of stockbrokers with whom Lawson had speculative dealings; the others he paid to the plaintiffs, either to the credit of his account with them or in respect of special services to be rendered by them. The plaintiffs brought an action against the defendants for conversion. The Court held that the defendants could not claim the protection of Section 131 of the Negotiable Instruments Act. The Court also held that the defendants were negligent on the ground that they were put upon inquiry by various facts. Lord Justice Scrutton, in delivering the judgment, at p. 59 accepted the measure of duty owed by the defendant bank to the true owner as laid down by Lord Dunedin in Commissioners of Taxation v. English, Scottish, and Australian Bank [1920] A.C. 683. Lord Justice Scrutton further observes:-
Lord Dunedin adds to it the qualification, which 1 entirely accept, that to require a thorough inquiry into the history of each cheque would render banking business impracticable, and that therefore there must be something markedly irregular in the transaction.
Ladbroke & Co. v. Todd is also referred to in Lloyds Bank v. E, B. Savory & Co. [1933] A.C. 201 Lord Wright states (p. 231):
It is now recognized to be the usual practice of bankers not to open an account for a customer without obtaining a reference and without inquiry as to the customer's standing; a failure to do so at the opening of the account might well prevent the banker from establishing his defence under Section 821 if a cheque were converted subsequently in the history of the account: this rule was applied by Bailhache J. in Ladbroke & Co. v. Todd, who on that ground held that the banker had not made out his defence under Section 82.
Mr. Tendolkar relies on this passage as indicating that a mere reference to a customer is not sufficient but there must also be an inquiry as to the customer's standing. But it may be observed that what Lord Wright says is that the absence to do both these things might ' well prevent' the banker from establishing his defence. Lord Wright does not say that the absence to take these precautions must in all cases be tantamount to negligence on the part of the banker.
17. Further it is always dangerous to rely on observations of Judges; torn from their context or read without reference to the facts of the case which necessitated the particular observation. The facts of the case in Lloyds Bank, Limited V. E. B. Savery & Co. were very peculiar, A firm of London stockbrokers had in their employment two clerks, Perkins and Smith. Perkins had an account at one country branch of the bank. The wife of Smith had) an account at another country branch. Perkins stole many cheques signed by the stockbrokers in payment of jobbers' accounts and handed them in at one or other of the bankers' London branches. Smith also stole many of the cheques and handed them in at the bankers' head office, making out paying-in slips directing payments to be made to the account of his wife which was at a country branch. The stolen cheques in each case were received by the London office and sent to the clearing house. The House of Lords, in coming to the conclusion that the bankers were negligent and were deprived of the protection of Section 82. of the Bills of Exchange Act, particularly took into consideration the rules framed by the bank and the negligence of the bank in not giving; effect to those rules. One of the rules of the bank was that no cheques or other documents made payable to a firm, company, or anyone in the capacity of a principal, should be accepted for credit of the private account of a partner, agent, or clerk, or other person closely connected with the principal, or negotiated for such person, without the principal's written authority; and the other rule was that no new current account should be opened without the knowledge of, or full inquiry into, the circumstances and character of the customer. In this case although inquiry was made as to the occupation of P. and information elicited that he was a stockbroker's clerk, the bank did not take the precaution of finding out what the names of the stockbrokers were. If the bank had done so, it would have immediately put on inquiry because it would have realized that P. was paying to the credit of his account cheques drawn by his employers. When an employee credits to his account cheques drawn by his employer, it is always a question of suspicion or at least a matter calling for inquiry and, therefore, as a banking practice banks safeguard themselves against employees cheating their employers and rules are framed so that the bank should know whether their customers are employed by anyone; and if so,, by whom In the case of the account of Mrs. Smith very perfunctory inquiry was made, and here again if a proper inquiry had been made, the bank would have known that Mrs. Smith was the wife of Smith who was employed with a particular firm of stockbrokers and that she was crediting to her account cheques drawn by the employers of her husband. The observations of Lord Buckmaster at p. 214 must be read in the setting of the facts I have just stated. This is what Lord Buckmaster says:.I regard the result of this evidence as meaning that a prudent bank manager, opening an account with a stock-broker's clerk, would ascertain who his employer was, unless the character of the reference was so satisfactory, or given by a customer so highly valued that the quality of the reference might be taken as dispensing with the need for the inquiry.
Therefore in the case of a stockbroker's clerk a mere reference, unless the quality of the reference was very high, would not permit the bank to dispense with the elementary precaution of finding out what the names of the stockbrokers were. A further passage relied on is in the judgment of Lord Russell who delivered the dissenting judgment taking the view that the bank was not negligent. At p. 226 the learned Law Lord says:
They must make sufficient inquiries to satisfy themselves of the integrity of the proposed customer and of the desirability of having his account on their books.' The learned Law Lord, took the view that there was no justification for adding to the obligation of the banker the burden of making inquiries as to the names of the employers of his customer. It is difficult to say, with respect, why it was incumbent upon the bank to make sufficient inquiries to satisfy themselves of the integrity of the proposed customer if in this very case the learned Law Lord took the view that there were no circumstances calculated to arouse suspicion in the bank's mind which would have necessitated an inquiry as to the names of Perkins' employers.
Ladbroke & Co. v. Todd is also referred to in two leading and well-known text books. Byles on Bills, nineteenth edition, p. 39, lays down the proposition that it is negligence not to make inquiries as to the respectability of a proposed customer, and Ladbroke & Co. v. Todd is cited in support of that proposition; but in the twentieth edition, p. 40, the proposition is toned down and is worded as follows:Failure to make inquiries as to the respectability of a proposed customer may be sufficient to constitute negligence.
The change from 'is' to 'may be' is noteworthy. There can be no doubt that in certain cases failure to make inquiries would constitute negligence. Halsbury, Volume I, p.. 811, states the proposition in the same emphatic form as the earlier edition of Byles on Bills, and Ladbroke & Co. v. Todd is cited in the foot-note in support of the proposition. But curiously enough Commissioners of Taxation v. English, Scottish and Australian Bank [1920] A.C. 683 is also cited in support of this proposition. How the assistance of the Privy Council can be requisitioned in support of this statement of the law it is not possible to understand.
18. It is further urged that it was incumbent upon the defendant bank, Gandhi having given his address as 103, Kavarana Street, to ascertain whether in fact such an address existed and whether Gandhi lived at such an address; and in support of that proposition, Hampstead Guardians v. Barclays Bank Limited (1923) 67 S.J. 440 is relied upon. In that case a man describing himself as Donald Stewart opened an account at a bank and paid in a small sum, stating that he expected to pay in larger sums shortly. On the following day he paid in two stolen orders for large sums made out to ' D. S. and Company ' stating that he carried on business under that name. A reference was given by the customer which the bank found satisfactory, but that reference ultimately turned out to be a forgery. Mr. Justice Acton held that the bank was guilty of negligence in collecting the orders on the ground that the bank failed to investigate the genuineness of the name D. S. & Co. as to which a reference to a directory would have shown that no such firm existed at the address given. Mr. Justice Acton, although he referred to the Privy Council case (Commissioners of Taxation v. English, Scottish and Australian Bank [1920] A.C. 683 still came to the conclusion that the bank should have made a reference to a directory which would have given them the information that Donald Stewart did not carry on business at the address given by him. I frankly confess that I find it very difficult to understand this judgment of Mr. Justice Acton, because it does not appear from the judgment that there were any suspicious circumstances attendant upon the opening of the account by Donald Stewart which would have put the bank on suspicion. The case is not reported in any authorised reports, and the judgment given in the Solicitors' Journal is rather sketchy and incomplete.
19. In my opinion there is no absolute and unqualified obligation on a bank to make inquiries about a proposed customer. I agree that modern banking practice requires that a customer should be properly introduced or, in other words, that the bank should act on the reference of some one whom it could trust. Therefore perhaps in most cases it would be wiser and more prudent for a bank not to accept a customer without some reference. But I am not prepared to go so far as to suggest that after a bank has been given a proper reference with regard to a proposed customer and although there are no suspicious circumstances attendant upon the opening of the account, it is still incumbent upon the bank to make further inquiries with regard to the customer. In this case of course, as I have already pointed out, the manager of the defendant bank accepted the reference of the cashier Modi and also in fact made certain inquiries of Modi as to the position and status of Gandhi. In my opinion it was not obligatory upon the defendant bank to make any further inquiries about this customer, and in having failed to make any such further inquiries, in my judgment, they are not guilty of negligence.
20. It is further urged that it is the duty of a bank to notice the account of a customer from time to time and in failing to notice the account the bank is guilty of negligence. Reliance is placed on an observation of Lord Justice Sankey in Lloyds Bank v. The Chartered Bank of India, Australia and China [1929] 1 K.B. 40 for this proposition. This is what the learned Lord Justice says (p. 70):-. and there may be negligence in not noticing the account of the customer from time to time and considering whether it is a proper or a suspicious one.
Again the language used suggests that it is not obligatory, but in certain cases it may become necessary. But even for this limited proposition Lord Justice Sankey relies on Morison v. London County and Westminster Bank, Limited [1914] 3 K. B. 356. When one turns to that judgment, it is difficult to find anything in the judgment of Lord Reading, Lord Chief Justice, to warrant the proposition laid down by Lord Justice Sankey, In Crumpton v. London Joint Stock Bank Limited (1914) 109 L.T. 856 Mr. Justice Pickford observed that if the account had been opened with a very small sum to credit or with a sum that was very soon drawn down practically to nothing, and then large sums were paid in by cheques in quick succession, he would have no hesitation in coming, to the conclusion that that fact ought to have put the banker upon inquiry and he ought to have seen that the matter was right. But in this particular case the learned Judge came to the conclusion that as the cheques paid in were for comparatively small amounts and the cheques were paid at long intervals, there was no negligence on the part of the bankers to make any inquiry.
21. It is true that in the case before me the account was opened with a very small sum and had been brought down practically to nothing. But I have not the case where after that large sums had been brought in by cheques in quick succession, All that happened was that when the account was reduced to Rs. 25, a cheque for Rs. 4,000 was paid in. In my opinion that was not sufficient to put the bank on inquiry and the bank was not negligent in not having made any inquiries when they discovered the state of the account on February 7, 1945.
22. Under all the circumstances of the case the bank has established that there was no negligence on its part in collecting the cheque of Gandhi and crediting it to his account and therefore the bank is protected by Section 131 of the Negotiable Instruments Act and is not liable to the plaintiff for conversion.
23. I should like to mention one further contention on which an issue has been raised and which has been very rightly not pressed by Mr. Taraporewalla and that is the issue of contributory negligence. In their written statement the defendants have alleged that the plaintiff was guilty of contributory negligence. It is difficult, to see how a person who converts an article belonging to the true owner can turn upon the true owner and say: ' I am not guilty of conversion because you showed negligence in relation to your own article.' However negligent the true owner may be, it can be no answer by the person who converts the article that he should be let off from his liability because of the negligence of the true owner. But for the protection afforded to the bank by Section 131 of the Negotiable Instruments Act the bank would have no defence whatever to the claim of the plaintiff.
24. Suit dismissed with costs. I fix the costs at Rs. 2,500 including costs for summons for directions.