Banking Law & Incidental matters part 5
Summary of Question - SMS Alert sent to Bank’s customer as to withdrawal
Question – Whether Bank is exonerated from liability for unauthorized withdrawal on the ground that SMS alerts was sent by the Bank to the customer.
Answer- No. Bank is liable for unauthorised withdrawal from customer's account if there is no junction of the customer with the fraudester , and mere SMS alerts cannot be the basis for determining the liability of the customer if there does not exist a specific term in the contract between a bank and the customer to the effect that the bank would be exonerated from the liability in connection with the unauthorised transactions if the customer does not respond to the SMS alerts.
In the second Appeal RSA.No. 1087 of 2018 ( filed by STATE BANK OF INDIA, who was defendant in the suit), decided on 19th. January 2019, the Hon’ble Kerala High Court observed and held:
"9........The relationship between a bank and its customer, in so far as it relates to the money deposited in the account of a customer, is that of debtor and creditor. The contractual relationship exists between a bank and its customers are founded on customs and usages. Many of these customs and usages have been recognized by courts and it is now an accepted principle that to the extent that they have been so recognized, they are implied terms of the contracts between banks and their customers. Duties of care is an accepted implied term in the contractual relationship that exists between a bank and its customer. It is impossible to define exhaustively the duties of care owed by a bank to its customer. It depends on the nature of services extended by the bank to its customers. But one thing is certain that where a bank is providing service to its customer, it owes a duty to exercise reasonable care to protect the interests of the customer. Needless to say that a bank owes a duty to its customers to take necessary steps to prevent unauthorised withdrawals from their accounts. As a corollary, there is no difficulty in holding that if a customer suffers loss on account of the transactions not authorised by him, the bank is liable to the customer for the said loss."
"10. Coming to electronic banking regime, it is the obligation of the banks providing such services, to create a safe electronic banking environment to combat all forms of malicious conducts resulting in loss to their customers. The basis of the said obligation is the implied term in the contracts entered into by the banks with their customers to exercise care to protect their money from transactions not authorised by them. In developed countries, in the light of the said obligation, statutes are put in place to protect the interests of the customers of the bank by defining the liabilities and providing enforcement mechanism. The law that governs the area in this connection in the United States of America is Electronic Funds Transfer Act. The said statute provides that a consumer is liable for any unauthorised electronic fund transfer involving his account only if the card or other means of access utilised for such transfer is an accepted card or other means of access and if the issuer of such card or other means of access has provided a means whereby the user of such card or other means could be identified as the person authorised to use it such as by signature, photograph or fingerprint or by electronic or mechanical confirmation. In Canada, electronic banking consumers and card users are protected under the Canadian Code of Practice for Consumer Debit Card Services. Under the said Code, consumers are not liable for losses arising from unauthorised usage of a card. In the absence of any statutory provision in India, the Reserve Bank of India, excercising control over the banks has issued directions to the banks from time to time indicating the various steps to be taken as part of the duties owed by them to their customers. Considering the recent surge in customer grievances relating to unauthorised transactions in the accounts of the customers enjoying electronic banking facilities like ATM-cum-Debit Cards, net banking etc, in terms of circular No. RBI/2017 18/15 dated 6/07/2017, the Reserve Bank of India has directed all banks, among others, to put in place, appropriate systems and procedures to ensure safety and security of electronic banking transactions carried out by customers; robust and dynamic fraud detection and prevention mechanism; mechanism to assess the risks resulting from unauthorised transactions and measure the liabilities arising out of such events; appropriate measures to mitigate the risks and protect the banks against liabilities arising therefrom and a system of continually and repeatedly advising customers on how to protect themselves from electronic banking and payment related frauds. It is clarified in the said circular that the customer shall have no liability at all in the case of third-party breach where the deficiency lies neither with the bank nor with the customer but lies elsewhere in the system. The only obligation which casts on the customers of the bank in terms of the circular is that the unauthorised transactions shall be brought to the notice of the bank forthwith so as to enable the bank to block the account. The circular aforesaid only reminds the banks, their obligations and responsibilities and it does not create any new rights or obligations. In short, there is also no difficulty in holding that if a customer suffers loss in connection with the transactions made without his junction by fraudsters, it has to be presumed that it is on account of the failure on the part of the bank to put in place a system which prevents such withdrawals, and the banks are, therefore, liable for the loss caused to their customers. All over the world, the courts are adopting the aforesaid approach to protect the interests of the customers of electronic banking...... "
11.......... SMS alerts is one of the facility extended by most of the banks to their customers in connection with the savings bank accounts having electronic banking facilities including ATM- cum-Debit Card facilities. Such facilities are provided not only to those who specifically request for the same, but also to those who do not ask
for such facilities. Could such a facility voluntarily given by banks to their
customers determine the rights of parties, is the question. According to me, only if there exists a specific term in the contract between a bank and its customer to the effect that the bank would be exonerated from the liability in connection with the unauthorised transactions if the customer does not respond to the SMS alerts, SMS alerts cannot be the basis for determining the liability of the customer, for, there would be account holders who may not be in the habit of checking SMS alerts at regular intervals and account holders like the plaintiff in the instant case who is working in an offshore oil rig, who may not be able to access their mobile phones for several days having regard to the peculiarity of their avocation. The defendant has no case that there is a contract between them and the plaintiff to the effect that if the plaintiff does not respond to the SMS alerts given by them regarding the withdrawals from his accounts, they would not be liable for the loss, if any, caused to the plaintiff."
Summary of Question- Director’s Liability in 138 complaint
Question – Whether merely because a person is Director of a company, he/ she (Director of a company) would also be liable if a 138 complaint is filed against the company.
1. Vide the Hon’ble A.P High Court decision in a case reported in 2004 CRLJ 1029 , every director is not automatically, vicariously liable for the offence committed by the company ; Only the director incharge and responsible to the company for the conduct of the business at the material time when offence was committed would be liable.
2. Vide the Hon’ble Karnataka High Court decision in a case reported in 2004 CRLJ 1029, the liability of a Director of a Company for prosecution for an offence punishable under section 138, Negotiable Instruments Act, apart from the company and the person who signed the cheque is only if he was in-charge of and was responsible to the company for the conduct of the business of the company at the time the offence was committed and complainant makes an averment to that effect in the complaint.
3. A three Judge Bench of the Hon’ble Supreme Court in CRIMINAL APPEAL Nos 403 -405 of 2019 , decided on 28th February 2019, observed and held:
“………………………In a case pertaining to an offence under S. 138 and S. 141 of the Act, the law requires that the complaint must contain a specific averment that the Director was in charge of, and responsible for, the conduct of the company’sbusiness at the time when the offence was committed. The High Court, in deciding a quashing petition under S. 482, Cr.P.C., must consider whether the averment made in the complaint is sufficient or if some unimpeachable evidence has been brought on record which leads to the conclusion that the Director could never have been in charge of and responsible for the conduct of the business of the company at the relevant time. While the role of a Director in a company is ultimately a question of fact, and no fixed formula can be fixed for the same, the High Court must exercise its power under S. 482, Cr.P.C. when it is convinced, from the material on record that allowing the proceedings to continue would be an abuse of process of the Court. [See Gunamala Sales Private Limited v. Anu Mehta and Ors ., (2015) 1 SCC 103]"