Recently, the Kerala High Court held a nationalised bank liable for negligently encashing cheques containing forged signatures of the plaintiffs’ authorised signatories. The decision came in a set of appeals filed by sister concerns challenging the dismissal of their money suits by the trial court. The Court observed that when the signature on a cheque is forged, there exists no mandate for the bank to honour it, and the bank must bear the loss unless it can prove estoppel or adoption.
Brief Facts:
The plaintiffs, being sister concerns, maintained several accounts, including current, savings, and cash credit accounts, with the defendant bank. They filed separate suits seeking damages for loss caused by the encashment of 47 cheques allegedly bearing forged signatures. While 32 of these cheques resulted in payments made to third parties, the plaintiffs sought recovery of the corresponding amounts. The trial court, however, dismissed all suits, primarily on the ground of insufficient pleading and proof regarding the alleged fraud.
Contentions of the Counsel:
The counsel for the appellants argued that the signatures on the cheques did not match those of their authorised signatories, and that the bank had failed in its duty to verify the authenticity of the cheques before encashment. They relied on internal investigation reports (Exts. A1 & A2) prepared by the bank’s own Vigilance Officer, obtained under the Right to Information Act, to substantiate their claims.
Contentions of the Respondent:
The counsel for the respondent denied all allegations of negligence, claiming procedural compliance and sought to discredit the Vigilance reports as improperly prepared and inadmissible. It was also contended that the suits were time-barred and bad for non-joinder of necessary parties, specifically, the employees of the plaintiffs alleged to have committed the forgery.
Observations of the Court:
The High Court emphatically disagreed with the trial court’s approach, noting that the plaintiffs had not alleged fraud by the bank, but had rather pleaded negligence. Yet the trial court proceeded as if fraud was the issue, thus misdirecting itself.
The Court clarified the burden of proof lies initially with the plaintiffs to show that the cheques bore forged signatures. This burden, the Court noted, had been satisfactorily discharged. PW1, the auditor and a plaintiff, had deposed clearly about the forgeries, and notably, no cross-examination was conducted to challenge this assertion. The Court remarked, "The plaintiffs' case that the signatures in the cheques were not those of their authorised signatories and were forged, remains unchallenged." Exts. A1 and A2, the Vigilance Reports of the bank, confirmed that many signatures varied from the bank’s records, and in some cases, specimen signatures weren’t even available. Despite attempting to discredit these reports, the bank failed to produce any evidence showing they were procedurally deficient or that their conclusions were incorrect.
Importantly, the bank never outright denied the core allegation, that the cheques bore forged signatures. In such circumstances, the Court held that non-production of original cheques or signature records was not fatal to the plaintiffs’ case, especially when the bank had the burden to refute forgery and failed to do so. The Court also invoked the Supreme Court’s landmark ruling in Canara Bank v. Canara Sales Corporation (1987), which held, "A cheque containing a forged signature is a mere nullity. The bank cannot resist the customer's claim merely on grounds of negligence or failure to safeguard cheque books."
Further citing Bihta Co-operative Development Cane Marketing Union Ltd. v. Bank of Bihar, the High Court reiterated that a bank has no mandate to pay on a forged cheque, and negligence of the customer cannot be set up as a defence unless the bank can prove estoppel, which it failed to do.
The Court firmly rejected the bank’s claim that the forgeries were committed by employees of the plaintiffs, "Such a contention cannot stand in the teeth of the settled law on banker’s liability regarding forged cheques." The Court also addressed a final argument by the bank regarding partial re-deposit of some misappropriated funds, clarifying that the suit was confined only to the amounts lost, and not those credited back.
The decision of the Court:
SSetting aside the trial court’s findings, the High Court delivered a sharp indictment of the bank’s conduct, allowing the appeals and holding it squarely liable for the financial loss suffered by the plaintiffs due to the negligent encashment of forged cheques. Emphasising the bank’s failure to detect clear irregularities in the signatures, the Court ruled that the plaintiffs are entitled to recover the amounts claimed in their respective plaints, along with interest at 6% per annum from the date of the suit until full realisation. Costs were also awarded throughout. In a strong message on banking accountability, the Court concluded that the plaintiffs deserved compensation for the bank’s lapse in its fundamental duty to verify the authenticity of instruments before honouring them.
Case Titile: R. Ramesh & ors. v. Vijaya Bank & ors.
Case No: RFA No. 401 of 2015
Coram: Justice Sathish Ninan, Justice P. Krishna Kumar
