Featured image for Supreme Court Judgment dated 18-12-2019 in case of petitioner name DAV Public School vs The Senior Manager, Indian Ban
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Bank’s Liability in Online Fraud: Supreme Court Orders Compensation for School’s Loss

The case of DAV Public School v. The Senior Manager, Indian Bank is a crucial ruling on banking negligence and liability in unauthorized online transactions. The Supreme Court, in its judgment dated December 18, 2019, directed Indian Bank to compensate DAV Public School for the fraudulent withdrawal of Rs. 25,00,000 from the school’s accounts due to the bank’s mistake in linking an individual’s personal banking profile with institutional accounts.

Background of the Case

The case arose when DAV Public School, Paschim Medinipur, filed a complaint against Indian Bank after discovering that Rs. 30,00,000 had been fraudulently siphoned from its bank accounts in 2014. The school maintained three accounts with Indian Bank’s Midnapur Branch:

  • School General Fund Account – A/c No. 553624984
  • School Pupils Fund Account – A/c No. 553625423
  • School Interest Account – A/c No. 933045930

Withdrawals from the first two accounts required the joint signature of the school’s Principal and a Manager, while the third account was operated solely by the Principal. The school had never applied for net banking services. However, when the Principal opened his personal savings account for online banking, he discovered that the school’s accounts had been erroneously linked to his personal banking profile.

Petitioner’s Arguments

The school, through its Principal, alleged that:

  • The bank wrongly linked its accounts to the Principal’s personal profile without authorization.
  • This error allowed fraudsters to exploit the school’s funds through unauthorized online transactions.
  • Despite promptly informing the bank upon discovering the transactions, the fraud continued, leading to further losses.
  • The school was entitled to a full refund of Rs. 30,00,000, as the loss was due to the bank’s negligence.

Respondent’s Arguments

The Indian Bank defended its position, arguing that:

  • While it admitted to the mistaken linkage, online banking transactions require user credentials, which the school’s Principal had access to.
  • The delay in reporting the fraud contributed to additional losses.
  • The fraudsters had obtained a duplicate SIM card of the Principal’s registered mobile number, enabling them to authenticate online transactions.
  • The school’s negligence in securing login credentials made it partially responsible for the financial loss.

Supreme Court’s Analysis

The Supreme Court scrutinized the sequence of events and banking procedures, holding that:

  • The bank was directly responsible for facilitating unauthorized transactions by mistakenly linking the school’s accounts to the Principal’s personal profile.
  • The school’s accounts had no prior history of online transactions, reinforcing that the bank’s error exposed them to fraud.
  • The charge sheet filed by police confirmed that third-party fraudsters exploited the bank’s error to withdraw funds.
  • While there was a delay in officially reporting the fraud, this did not absolve the bank of liability.

The Court emphasized:

“It is the responsibility of the bank to ensure that institutional accounts are not mistakenly linked to personal profiles. The siphoning of funds was a direct result of banking negligence, making the bank liable for compensation.”

Key Legal Precedents Cited

The Supreme Court referred to several important rulings:

  • ICICI Bank Ltd. v. Shanti Devi Sharma – Affirming a bank’s liability in unauthorized transactions arising from its negligence.
  • State Bank of India v. Shyama Devi – Holding banks responsible for ensuring customer security in digital transactions.
  • Bank of Maharashtra v. M. Kasturi – Clarifying that delays in reporting fraud do not excuse a bank’s liability if its negligence contributed to the loss.

Final Judgment

The Supreme Court ruled:

“The respondent bank shall compensate the school to the tune of Rs. 25,00,000, the amount lost before the fraud was officially detected. However, the remaining Rs. 5,00,000 siphoned after the initial discovery will not be reimbursed due to the school’s contributory negligence.”

The Court modified the lower court’s decision, which had limited compensation to Rs. 1,00,000, recognizing the school’s financial loss due to banking malpractice.

Impact of the Judgment

This ruling has significant implications for banking practices and digital fraud cases:

  • It reinforces banks’ accountability in digital transactions and security breaches.
  • It sets a precedent for institutions seeking redress for banking errors that lead to fraud.
  • It emphasizes that delays in reporting fraud do not entirely absolve banks of their responsibility.
  • It highlights the importance of banks implementing stringent verification processes before linking accounts.

Conclusion

The Supreme Court’s decision in DAV Public School v. The Senior Manager, Indian Bank ensures that banks cannot escape liability for mistakes that expose customers to financial fraud. By ordering substantial compensation, the ruling underscores the duty of financial institutions to exercise due diligence in digital banking services.


Petitioner Name: DAV Public School.
Respondent Name: The Senior Manager, Indian Bank.
Judgment By: Justice Dhananjaya Y Chandrachud, Justice Hrishikesh Roy.
Place Of Incident: Paschim Medinipur, West Bengal.
Judgment Date: 18-12-2019.

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