Dismissed

Hsbc v. State Bank Of India

DRAT24 Apr 2025REGULAR APPEAL/121/2017

Case brief

AI extract

What is this about?

The Debt Recovery Appellate Tribunal dismissed the appeal filed by H.S.B.C. against the DRT order holding it liable for fraudulent dividend warrants presented by its customers. The Tribunal ruled that the appellant must pay the amount if the primary borrowers cannot repay.

What did the court decide?

Appellant bank directed to pay the determined amount if recovery from respondents 2 and 3 is not feasible.

Hsbc versus State Bank Of India — Contract and Commercial Disputes | DRAT (2025)

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RA 121/2017

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IN THE DEBT RECOVERY APPELLATE TRIBUNAL AT CHENNAI

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Dated the 24^th day of April, 2025

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PRESENT: HON’BLE MR. JUSTICE G. CHANDRASEKHARAN CHAIRPERSON

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RA 121/2017

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(arising out of OA 69/2008 on the file of DRT, Coimbatore)

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Between

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The Hong Kong and Shanghai Banking Corporation Ltd.

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108, Race Course, Coimbatore 641 018.

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…..Appellant Bank

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And

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1. The State Bank of India Main Branch, Coimbatore.

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2. Ravinder Pal Singh, C/o H.S.B.C., 108, Race Course, Coimbatore 641 018.

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3. Anil Singh, C/o H.S.B.C., 108, Race Course, Coimbatore 641 018.

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…..Respondents

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Counsel for Appellants : M/s S. Rajendra Kumar & Co. Counsel for 1^st Respondent Bank : M/s Ramalingam & Associates

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R2 and R3 are given up.

RA 121/2017

ORDER

This appeal is filed under Section 20 of RDDB & FI Act, challenging the order passed by Learned Presiding Officer, DRT, Coimbatore dated 21.9.2011 passed in OA 69/2008.

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Aggrieved by the aforesaid order, first respondent before Tribunal below in OA 69/2008, viz., The Hong Kong and Shanghai Banking Corporation Ltd. filed this Appeal.

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First respondent in this Appeal i.e., State Bank of India as applicant filed OA No.69/2018 against the appellant and two others for recovery of a sum of Rs.21,25,278/- together with interest at 16.75% with monthly rests from the date of the application till realization and costs.

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The case of the first respondent bank before Tribunal in brief is that respondents 2 and 3 are customers of the appellant bank. They have account with Noida branch of the Appellant Bank. They presented Redemption Warrants with various amounts amounting to Rs.19.50 lakhs purported to have been issued by SBI Mutual Fund, the Principal Trustee of State Bank of India drawn on State Bank of India, Dividend Warrant Section, Mumbai, for clearing through the appellant bank.

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These warrants are payable at par. On receipt of these warrants, first

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respondent bank with a bona fide intention and good faith paid the value of respective dividend warrants. Thereafter, dividend warrants were sent by the first respondent to SBI Mutual Fund for payments. They were returned as fake.

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First respondent wrote to the appellant bank on 12.22.2007 calling it to furnish the address of second and third respondents’ account details with address to proceed legally against them for recovery of amount. Appellant bank replied on 24.12.2007 assuring payment. However, appellant bank neither paid any amount nor furnished account details, address, etc. of second and third respondents. It resulted in non recovery of the amount from respondents 2 and 3. In the circumstances, the aforesaid OA was filed before DRT, Coimbatore for recovery of amounts against the appellant bank and respondents 2 and

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Appellant bank and respondents 2 and 3 had not contested the claim of the first respondent bank before the DRT. Learned Presiding Officer,

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DRT, Coimbatore on going through the documents produced, found that appellant bank and respondents 2 and 3 are liable to pay a sum of Rs.21,25,278/- together with interest at 16.75% p.a. and costs of Rs.50,000/-. Challenging the said order, appellant bank filed this appeal.

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RA 121/2017

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Learned Counsel for appellant bank submitted that respondents 2 and 3

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presented dividend warrants issued by SBI Mutual Fund for collection through the appellant bank. In the usual course of business and in good faith, appellant presented these warrants for clearance. These dividend warrants were cleared by first respondent bank and amounts were credited into the accounts of respondents 2 and 3. The warrants were cleared between 27.10.2007 and 5.12.2007. Coimbatore Branch of first respondent bank vide its letter dated 12.12.2007 wrote to appellant bank stating that these warrants are fraudulent and requested the appellant to recover the amounts from respondents 2 and 3 and refund to the first respondent bank. It was replied on 17.12.2007 informing that most of the funds had been withdrawn by respondents 2 and 3, however, a hold has been placed on the accounts of respondents 2 and 3 with immediate effect. Thereafter, there was no follow up by the first respondent bank. Only after three months, a legal notice dated 1.3.2008 was received by the appellant bank. Appellant bank informed in its reply dated 31.3.2008 that as per law under RBI guidelines, KYC details of customers are confidential and can be disclosed only under criminal investigation or orders of Competent Court and rejected the

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request of the first respondent bank. First respondent bank failed to

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initiate any criminal proceedings against respondents 2 and 3. Without

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lodging criminal prosecution against respondents 2 and 3, first respondent found fault with appellant bank for merely presenting the dividend warrants for collection. The transaction involved in this case cannot be brought under the definition of ‘debt’ as defined under Section 2(g) of RDDB & FI Act.

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It is further submitted that Learned Presiding Officer, applied wrong provisions of law and fastened the liability on the appellant bank. It is the duty of the honouring bank to verify the genuineness of the dividend warrants before honouring it. There is no jural relationship of ‘debtor – creditor’ between the appellant and first respondent bank. Even if money is paid by mistake, it is not recoverable whatever the circumstances may be. Thus, Learned Counsel for appellant bank prayed for setting aside the order of the Learned presiding Officer and allow the appeal so far as the appellant bank is concerned.

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In support of his submission, Learned Counsel for appellant bank pressed into service the judgment reported in United Bank of India Vs. M/s A.T. Ali Hussain and Co., a firm and others reported in AIR 1978 Cal 169 for the proposition “ A person to whom money has been paid, or

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anything delivered, by mistake or under coercion must repay or return.

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If however, there is change in position of payee, acting in good faith, in transferring money to another without any benefit to himself, he cannot be held liable”.

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It is submitted that appellant bank was merely a conduit pipe and it transacted the dividend warrants on the bona fide belief that warrants are genuine. Fraudulent nature of warrants was reported to the appellant bank after the amounts were withdrawn by respondents 2 and

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In the said circumstances, appellant cannot be held liable.

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10.Learned Counsel relied on the judgment in re, Andhra Bank Vs. State

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Bank of India represented by its Chief Manager and another reported in 2015 (5) MLG 408 for the same proposition.

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11.In reply, Learned Counsel for first respondent bank submitted that appellant bank has not contested the case before the Tribunal below and this appeal was filed along with IA 771/2012 to condone delay of 271 days. Since delay condonation application was not prosecuted, it was dismissed for default on 11.4.2013. Thereafter, IA 427/2013 was

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filed to restore IA 771/2012 and that was also dismissed on 29.7.2013

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due to non prosecution. Again IA 721/2013 was filed to restore IA 427/2013. On 28.1.2014, this Tribunal showed indulgence and allowed these applications. Waiver application IA 94/2014 was also not prosecuted by the appellant and was dismissed on 25.4.2014. IA 531/2014 for restoring waiver application was allowed on 3.11.2015 and IA 94/2014 (waiver) was restored to file. Even thereafter, appellant had not properly prosecuted the matter, therefore, this matter was posted for orders on 11.11.2016. Ultimately Appeal AIR 536/2012 was dismissed on 11.11.2016 for want of appearance of appellant. Thereafter, IA 511/2016 was filed to restore the appeal and it was allowed on 3.5.2017 and appeal AIR 436/2012 was restored to file. On 14.6.2017 order was passed in IA 94/2014 (waiver application) for making pre-deposit of Rs.5.00 lakhs within four weeks from 14.6.2017. As the appellant complied with the condition order dated 14.6.2017, Appeal AIR 536/2012 was ordered to be numbered on 12.7.2017 and accordingly it was numbered as RA 121/2017. These chronological events would show that appellant had not at all shown any seriousness in filing and prosecuting this appeal. As a collecting banker, appellant bank is liable for payments received by its customers i.e., respondents 2 and 3 for presenting fraudulent warrants. Appellant bank has not taken due care and action in verifying the credentials of respondents 2 and 3

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and tried to safeguard them by not divulging their addresses and other

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details. Appellant bank has not followed the KYC norms with regard to its customers viz., respondents 2 and 3. Learned Presiding Officer, on going through the documentary evidence produced rightly found that appellant is liable to make the payment. Thus contending, Learned Counsel for first respondent bank prayed for confirming the order of Learned Presiding Officer and dismissal of this appeal.

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12.Learned Counsel for first respondent bank relied on the judgment in re United Bank of India, Madras Vs. Bank of Baroda, Madras reported in AIR 1997 Madras 23 for the proposition that it is the duty and responsibility of collecting bank to exercise due diligence, care or action expected of it when opening the account. When the appellant bank has not chosen to share address details and account details of respondents 2 and 3, it goes without saying that it is not in possession of these details. Taking umbrage under the alleged RBI guidelines that KYC details are confidential and cannot disclosed, deliberately not disclosed the vital details and deprived the first respondent bank to take proper criminal and civil legal action against respondents 2 and 3.

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13.I have considered the rival submissions and perused the records.

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14.From the facts narrated above, admitted facts are that respondents 2 and 3 have their account with Noida Branch of appellant bank and they have presented 39 dividend warrants issued by SBI Mutual Fund for collection through appellant bank. Appellant sent these warrants to first respondent bank for collection and first respondent bank honoured these warrants. When sent for SBI Mutual Fund for payment, it came as a rude shock that these warrants are fake. Thus, arises this dispute.

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15.In an identical case, in re, United ban k of India Ltd. Vs. M/s A.T. Ali

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Hussain and C., a firm and others reported in AIR 1978 Cal 169, defendant No.2 therein Union Bank of India presented a cheque for Rs.5200/- purported to have been drawn on Metal Ally Co. Private Ltd.

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in favour of first defendant A.T. Alihussain and Co. to the plaintiff bank. Plaintiff bank acting in the mistaken belief that the cheque had in fact been duly signed by the said Metal Alloy Co. paid this amount to defendant Union Bank by debiting the account of the plaintiff bank. Later, it transpired that writings and the signature on the cheque had been forged. There was a criminal proceeding initiated. In the said circumstance, plaintiff bank has filed a suit for recovery of Rs.5200/-

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from defendants and suit was contested and Learned Trial Judge found

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that it is not possible to the trained eye to deduct the forgery and that

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first defendant acted in bona fide and good faith, therefore dismissed the suit. This finding was appealed before the Hon’ble High Court. Hon’ble High Court discussing the English and Indian Law on the subject especially Section 72 of the Indian Contract Act, ultimately found that normally a person to whom money has been paid or any thing delivered

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by mistake or coercion must repay or return it. However, this proposition will not apply in the change in the circumstances, when the payee acting in good faith parted with the money to another without any benefit to himself before mistake is deducted. The relevant portion

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is extracted here for better appreciation.

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“14. Upon the consideration of the [principles of law as noticed above, it seems to us that so long as the status quo is maintained and the payee has not changed his position to his detriment he must repay the money back to the payer. If, however, there has been a change in the position of the payee who, acting in good faith, parts with the money to another without any benefit to himself before the mistake is detected, he cannot be held liable. Equity disfavours unjust enrichment. When there is no question of unjust enrichment of the payee by reaping the benefit of an 'accidental windfall' he should not be made to suffer, for he would be as innocent as the payer who paid the money acting under a mistake.

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In the instant case, the defendant bank was merely a 'conduit pipe' through which money passed to the defendant No. 1. After the money was received by the defendant bank it intimated about the same to the defendant No. 1 who, in his turn, delivered the goods to the alleged representatives of the Metal Alloy Co., acting on a bona fide belief that the cheque was a genuine one, for otherwise it would not have been encashed by the plaintiff bank. Both the defendant No. 1 and the defendant No. 2 changed their position for worse before the mistake was detected by the plaintiff and communicated to them. Neither the defendant No. 1 nor the defendant No. 2 can be said to have derived any benefit from the mistake committed by the plaintiff bank.

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It is true that the defendant No. 1 made a transaction of sale in lieu of the money that was credited to his account by the defendant No. 2, but it had to deliver its property to those alleged representatives. In these circumstances, in our opinion, both from the point of view of equitable principles and the doctrine of estoppel, the plaintiff is disentitled to recover the money from either of the defendants.

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For the reasons aforesaid, we affirm the judgment and decree of the learned Judge and dismiss this appeal”

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16.This judgment squarely applies to the facts and circumstances of this case. In the case before hand, the appellant bank had acted in good faith in receiving the dividend warrants and sending them for collection to the first respondent bank. It had no chance of verifying the genuineness of the dividend warrants, as they were issued by SBI Mutual funds, which is founded by State Bank of India. First respondent bank is better placed to verify the genuineness of the dividend warrants before honouring them. It appears that first respondent bank has not taken any effort to verify the genuineness of the dividend warrants before honouring them. By the time fraudulent nature of dividend warrants was intimated to the appellant bank, it appears that respondents 2 and 3 have withdrawn money from their accounts.

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17.It is seen from the letter dated 12.12.2007 addressed by the first respondent bank to the appellant bank, first respondent bank requested

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the appellant bank to furnish the account number, name and address of

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its customers viz. respondents 2 and 3 to proceed further in this regard since instruments are fraudulent one and customers are fraudsters. This letter was replied by appellant bank on 24.12.2007 stating that instruments were cleared by first respondent bank between 27.10.2007 and 6.12.2007 and fraudulent transaction was reported to appellant only on 11.12.2007. By the time it was reported, most of the funds had been withdrawn from the account of respondents 1 and 2. However, it was informed that appellant bank placed a hold on their account and no future transaction will be possible without security. It was also stated that payment of balance amount would be released after due investigation by the bank and competent authority. From this letter, it

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can be gathered that still some funds have not been withdrawn by respondents 2 and 3 and it is available in the appellant bank

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In the Legal notice dated 1.3.2008 given on behalf of first respondent

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to the appellant bank, amongst other information, details of respondents 2 and 3 were sought. In the reply notice dated 31.3.2008, with regard to divulging the details of the customers, it was informed

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that first respondent has not furnished necessary Court Orders, therefore, details could not be furnished. This part of the reply that

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details of respondents 2 and 3 cannot be furnished unless court order is

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obtained, in the facts and circumstance of the case and in the considered view of this Tribunal is not correct. For lodging criminal prosecution, details of fraudster’s name, age, father’s name, address are required. Same details are required for initiating civil proceedings.

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19.Learned Counsel for appellant bank has not produced the alleged RBI Guidelines, which prohibits showing KYC details without Court Orders. This is the case, where respondents 2 and 3 cheated the first respondent

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bank and the appellant bank by producing fake dividend warrants resulting in first respondent bank losing a sum of Rs.19.50 lakhs plus interest. Immediately, on the request made by the first respondent, appellant bank ought to have furnished the name and other details of respondents 2 and 3 for facilitating the first respondent to initiate criminal prosecution and civil action for availing appropriate remedy. But not producing the required details, appellant bank effectively prevented the first respondent from seeking civil and criminal remedy against respondents 2 and 3.

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20.In the said circumstances, this Tribunal is of the view though appellant

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bank had transacted the dividend warrants in its normal course of

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business, by failing to provide necessary information about respondents

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2 and 3 for facilitating civil and criminal remedy for first respondent bank, put the first respondent bank under loss.

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21.In the said circumstances, this Tribunal is of the view that appellant bank is also liable to pay the amount claimed in the OA in the event first respondent bank is unable to recover the said amount from respondents 2 and 3. If first respondent bank is able to recover the amount due from respondents 2 and 3, appellant bank’s liability ceases. On the other hand, if the first respondent bank is not able to recover the amount determined from respondents 2 and 3, appellant bank is liable to pay the amount determined.

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