Supreme Court Holds Bank Liable for Unauthorized Net Banking Transfer: DAV Public School vs. Indian Bank (2019)

Date of the Judgment: December 18, 2019

Citation: (2019) INSC 995

Judges: Dr Dhananjaya Y Chandrachud, J. and Hrishikesh Roy, J.

Can a bank be held responsible for financial losses when a school’s account is linked to internet banking without authorization, leading to fraudulent transactions? The Supreme Court of India addressed this critical question in a recent case involving a school and a nationalized bank. The court examined the extent of a bank’s liability when such unauthorized actions result in significant financial loss to the account holder. The bench consisted of Justice Dr Dhananjaya Y Chandrachud and Justice Hrishikesh Roy, with the judgment authored by Justice Hrishikesh Roy.

Case Background

The DAV Public School, Paschim Medinipur, maintained three accounts with the Indian Bank, Midnapur Branch. These included a School General Fund Account, a School Pupils Fund Account, and a School Interest Account. The first two accounts required joint signatures for withdrawals, while the third could be operated by the Principal alone. The school had not requested net banking for any of these accounts.

On September 2, 2014, the Principal of the school opened a personal savings account and discovered that the school’s three accounts were tagged with his personal account, enabling online transactions. Before he could report this, he had to leave for an official tour.

On September 7, 2014, a school employee tried to update the passbook but could not due to a technical issue. On September 9, 2014, it was discovered that Rs. 25,00,000 had been transferred from the school’s account without authorization. This was reported to the bank manager, who advised the school to visit the next day. By the time the account could be blocked, another Rs. 5,00,000 was transferred.

The Principal’s mobile phone SIM was blocked on September 5, 2014, and a duplicate SIM was issued. The phone bill was also paid before the normal bill generation date. The school demanded the return of the siphoned amount with interest.

Timeline

Course of Proceedings

The State Consumer Disputes Redressal Commission, West Bengal, acknowledged the bank’s error in tagging the school’s accounts with the Principal’s personal account without any request from the school. However, the State Commission suspected the Principal’s involvement in the fraudulent transactions and limited the bank’s liability to Rs. 1,00,000, along with a cost of Rs. 10,000.

The National Consumer Disputes Redressal Commission (NCDRC) also upheld the State Commission’s order, agreeing that the bank was at fault but maintaining the limited compensation of Rs. 1,00,000. The NCDRC also questioned why the principal did not inform the service provider about the inactive mobile phone for six days.

The Banking Ombudsman also found the bank at fault for linking the school’s account with internet banking without authorization, but closed the complaint because the claim of Rs. 30,00,000 exceeded the Ombudsman’s pecuniary jurisdiction.

Legal Framework

The case primarily revolves around the concept of deficiency of service under the Consumer Protection Act. The core issue is whether the bank’s actions constituted a deficiency in service, making them liable for the financial loss suffered by the school. The Consumer Protection Act aims to protect consumers from unfair practices and deficiencies in services.

There is no specific section quoted in the judgement.

Arguments

Appellant (DAV Public School) Arguments:

• The school argued that the bank was deficient in its service by linking the school’s account to the Principal’s personal account without any request.
• The school contended that since the deficiency of service was established, the bank should be liable for the entire loss of Rs. 30,00,000.
• The school emphasized that the police investigation did not find any complicity on the part of the Principal in the fraudulent transactions.

Respondent (Indian Bank) Arguments:

• The bank acknowledged that the school did not apply for internet banking, and the tagging of the accounts was an error.
• The bank argued that the school’s delay in reporting the unauthorized transaction contributed to the loss, specifically the additional Rs. 5,00,000 transfer.
• The bank tried to justify the limited compensation of Rs. 1,00,000, citing the alleged involvement or negligence of the Principal.

Issues Framed by the Supreme Court

• Whether, without the school’s account being linked with net banking facility, any money from the bank account could have been siphoned out by the miscreants.
• Whether the denial of the compensation corresponding to the extent of the School’s loss, by the State Commission as well as by the NCDRC would be justified.
• Whether the Bank should be asked to compensate the school for the entire loss through such fraudulent transaction.

Treatment of the Issue by the Court

Authorities

Judgment

How each authority was viewed by the Court?

• The Banking Ombudsman decision was cited to highlight that the bank was at fault for linking the accounts without request.
• The police charge sheet was crucial in establishing that the Principal was not complicit in the fraud, which was a key factor in the court’s decision to hold the bank liable for the initial loss.

What weighed in the mind of the Court?

The Supreme Court was primarily influenced by the following factors:

• The bank’s deficiency in service by linking the school’s account to the Principal’s personal account without authorization.
• The police charge sheet which clearly indicated that the Principal was not involved in the fraudulent transactions.
• The fact that the school had not requested net banking facility for their accounts.
• The delay in reporting the initial fraud, which the court considered as contributory negligence for the subsequent loss of Rs. 5,00,000.

Logical Reasoning:

The court considered the argument that the Principal might have been involved or negligent, but rejected it based on the police charge sheet. It also considered the delay in reporting the fraud, using it to justify not holding the bank liable for the additional Rs. 5,00,000 loss.

The final decision was reached by holding the bank liable for the initial loss of Rs. 25,00,000, emphasizing that the bank’s actions directly enabled the fraudulent transactions.

The Supreme Court stated:

• “The obvious answer to this question has to be in the negative. As concurrently found by the State Commission, the Banking Ombudsman and also by the NCDRC, the bank has rendered themselves liable by enabling net banking facility by linking the individual account of the school’s Principal, to the school’s account.”
• “But, insofar as the loss of Rs. 25,00,000/- is concerned, the complainant cannot be held responsible directly or even vicariously, either as an institution or the Principal, as an individual.”
• “We are therefore of the view that the respondent Bank should be directed to compensate the School to the tune of Rs. 25,00,000/- transferred until 9.9.2014, when the misappropriation was first detected but not for the additional sum siphoned on the next date from the School’s account.”

Key Takeaways

• Banks must ensure that they do not link accounts to internet banking without explicit authorization from the account holder.
• Banks can be held liable for financial losses resulting from their deficiency in service.
• Account holders also have a responsibility to report fraudulent transactions promptly to mitigate further losses.
• Police investigations play a crucial role in determining the complicity of individuals in fraudulent transactions.

This judgment has significant implications for the banking sector, emphasizing the need for stringent protocols in granting internet banking facilities and the importance of prompt reporting of fraudulent transactions.

Directions

The Supreme Court directed the respondent bank to compensate the school to the tune of Rs. 25,00,000, which was the amount transferred until September 9, 2014, when the misappropriation was first detected. The court did not hold the bank liable for the additional Rs. 5,00,000 siphoned on the next date, citing contributory negligence of the school authorities.

Development of Law

The ratio decidendi of this case is that banks are liable for losses incurred due to their deficiency of service when they enable net banking facilities without the account holder’s request, leading to fraudulent transactions. This judgment clarifies that even if there is a delay in reporting the fraud, the bank cannot escape liability for the initial loss caused by its unauthorized actions.

Conclusion

In conclusion, the Supreme Court held the Indian Bank liable for Rs. 25,00,000 due to its deficiency in service by linking the school’s account to the Principal’s personal account without authorization, which enabled the fraudulent transactions. The court emphasized the bank’s responsibility to ensure proper authorization before enabling internet banking facilities. While the court acknowledged the school’s contributory negligence for the subsequent loss, it firmly established the bank’s liability for the initial fraudulent transfers. This judgment underscores the importance of secure banking practices and the need for banks to act responsibly in safeguarding their customers’ funds.