When a bank inadvertently omits to upload the stop payment instruction issued by its account holder and the cheque is thus credited to the account of the payee despite such instruction, the bank is well within its rights to freeze the account of the payee till he returns the money with interest.
This was the view taken by the Andhra Pradesh High Court in Ganesh Cotton Traders, Guntur, v. The General Manager, UCO Bank, Kolkata & Others. One Lakshmi Ganesh Textiles (P) Ltd had issued a cheque in favour of the petitioner for some Rs 24 lakh for which a stop payment advice was issued to the bank due to dispute in quality and quantity of goods purchased from it. It was a post-dated cheque and the stop payment advice was received and acknowledged by the bank well before the date mentioned on the cheque. It was therefore clearly the bank’s fault that it did not upload the stop payment instruction to the system as a result of which the cheque was cleared on presentation by the petitioner’s bank. Nearly half of the amount thus credited was used by the petitioner in the course of his business. It was at this point that the respondent bank wrote to the petitioner’s bank and got the account of the petitioner frozen.
The AP High Court sustained this action of the respondent bank on the ground that on issue of stop payment instruction, the money did not belong to the payee in the first place in terms of section 72 of the Indian Contract Act, the negligence of the bank notwithstanding. It went on to hold that a person into whose account a wrong credit is made is duty bound to return it along with interest.
(The author is a New Delhi-based chartered accountant)
Keywords: account holder, rights to freeze the account of the payee, Lakshmi Ganesh Textiles, Andhra Pradesh High Court in Ganesh Cotton Traders, Guntur, v. The General Manager, UCO Bank, Kolkata, stop payment advice
Comments:
The ruling appears unfair on the respondent, and even slightly
ridiculous. It assumes the respondent is aware in all cases of stop
payment instructions, which may or may not be the case. Funds
deposited into payee's account(s) may in fact, be used by the latter
in good faith. In this instance, the goods were faulty, hence the stop
payment. Had the merchandise been without defect and the transaction
fulfilled per contract law, would the respondent's bank account still
have been frozen in a similar instance of a stop payment request from
the payer? The court's judgment appears flawed and needs to be
challenged in a higher court, since it sets a dangerous precedent by
conflating two separate issues: the contract, and the mode and
mechanism of payment. The contract may have been breached, but that is
a determination unique to this case, and may not apply in all such
cases of future stop payments. The ruling is this at risk of being
abused; liability falls solely on the respondent's bank.
The ruling of the high court may make the life of banker so lethargic in carrying out the stop payment instructions of the customer since he can always freeze the payee's account. The ruling is based on stop payment merely or on the grounds of quality of merchandise to be cleared. In later case being subjective, either the drawer or the payee may be correct. The ruling favours banks by shifting its responsibility towards the customers.
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