Legal Liability of Banks in Forged Cheque Cases
The banking sector plays a pivotal role in facilitating safe financial transactions. Among the core duties of a bank is to honor the cheques drawn by its customers strictly in accordance with their mandate. However, when a cheque bearing a forged signature is honored by the bank, questions of negligence and liability inevitably arise. This article examines the legal liability of banks in cases where they encash cheques bearing forged signatures, duly supported by case law.
Legal Principle: A Bank Must Honour Customer’s Mandate
Banks act as agents of their customers in operating current and savings accounts. It is settled law that a bank must act strictly as per the mandate of the customer, which includes honouring only such cheques that bear the genuine signature of the account holder.
If a bank pays a cheque bearing a forged signature, such payment is deemed to be unauthorized, and the bank acts without authority in such a case.
Key Judicial Pronouncements
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Canara Bank v. Canara Sales Corporation, (1987) 2 SCC 666
Facts: The bank honored several cheques that were forged by the employee of the customer. The customer sued the bank for wrongful debit. The Supreme Court held that a forged cheque is a nullity. A bank cannot debit a customer’s account unless the mandate is genuine. Forgery gives rise to no mandate. The bank had no authority to debit the account of the customer for cheques bearing forged signatures. The bank was held liable to reimburse the amount.
The Court succinctly held thus:
“The relationship between the customer of a bank and the bank is that of a creditor and debtor. When a cheque which presented for encashment contains a forged signature the bank has no authority to make payment against such a cheque. The bank would be acting against law in debiting the customer with the amounts covered by such cheques. When a customer demands payment for the amount covered by such cheques. the bank would be liable to pay the amount to the customer. The bank can succeed in denying payment only when it establishes that the customer is disentitled to make a claim either on account of adoption, estoppel or ratification.
The principle of law regarding this aspect is as follows:
When a cheque duly signed by a customer is presented before a bank with whom he has an account there is a mandate on the bank to pay the amount covered by. the cheque.However. if the signature on the cheque is not genuine. there is no mandate on the bank to pay. The bank, when it makes payment on such a cheque, cannot resist the claim of the customer with the defence of negligence on his part such as leaving the cheque book carelessly so that third parties would easily get hold of it. This is because a document in cheque form, on which the customer’s name as drawer is forged, is a mere nullity. The bank can succeed only when it establishes adoption or estoppel.”
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Bank of Maharashtra v. Autoclinic, AIR 2001 SC 2569
The case involves a dispute over a forged cheque. The Apex Court in this case, overturned lower court decisions that had ruled against the bank. The court found that the bank had taken reasonable care in processing the cheque, despite the fact that the branch was in an area prone to forgery and did not use an ultraviolet lamp for scrutiny, unlike other branches. The court ultimately decreed the suit in favor of the bank for the principal amount but without interest.
The case highlights the importance of reasonable care in banking operations, particularly in relation to handling potentially fraudulent documents. The court’s decision emphasized that while the bank had taken steps to mitigate risk, the specific circumstances of the case did not warrant the imposition of full liability. The decision to award the principal amount without interest reflects the court’s nuanced approach to balancing the bank’s responsibility with the specific facts presented.
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Bihta Co-operative Development Cane marketing Union Ltd. & Ors. v. The Bank of Bihar & Ors. (AIR 1967 SC 389)
In this case the negligence of the customer was set up as a defence by the Banker. The Court held thus:
“If the signatures on the cheque had been genuine so that there was a mandate by the customer to the banker but the cheque was somehow got hold of by an unauthorised person and encashed by him, the bank might have had a good defence. If the signatures on the cheque or at least that of one of the joint signatories to the cheque are not or is not genuine, there is no mandate on the bank to pay and the question of any negligence on the part of the customer, such as, leaving the cheque book carelessly so that a third party could easily get hold of it would afford no defence to the bank.”
The Court further held thus:
“In this case, the finding is that one of the signatures was forged so that there never was any mandate by the customer at all to the banker and the question of negligence of the customer in between the signature and the presentation of the cheque never arose.
Not only was there negligence on the part of the banker in not ascertaining whether the signatures on the cheque were genuine, the circumstances attending the encashment of the cheque show conclusively that the banker was negligent and some of its officers fraudulent right from the beginning. The cheque form did not come out of the customer’s cheque book. A loose cheque form returned by ,in ex-constituent had been used for the purpose of making out a cheque purported to be drawn by the customer.
The entries in the register for the issue of such loose forms were so suspicious that it is difficult to believe that the employees of the bank concerned with the encashment of the cheque were acting bonafide. There was no negligence on the part of the customer according to whose resolution, the cheque had to be signed jointly by two persons. The fraud could only be perpetrated because of the complicity of the employees of the bank, no doubt, with the help of one of the officers of the Union. The dishonesty of a particular officer of the Union was not the proximate cause of the loss to the bank.”
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R Ramesh v. Vijaya Bank & Ors (RFA No. 401 of 2015, decided on 13 June 2025) Kerala High Court
The Kerala High Court in a very recent judgment held that banks are liable for negligently encashing cheques bearing forged signatures unless they can prove the customer had prior knowledge of the forgery. The plaintiffs had alleged that 47 such cheques were wrongly honoured by the bank, causing financial loss, but the trial court dismissed the suits citing insufficient proof of fraud.
Setting aside this dismissal, the High Court relied on Canara Bank v. Canara Sales Corporation [(1987) 2 SCC 666], observing that a forged cheque carries no mandate for payment and that the bank had failed to prove the plaintiffs’ knowledge of the forgery. It found the trial court erred in treating the case as fraud-based and wrongly shifting the burden of proof, ultimately ruling in favour of the plaintiffs and awarding recovery with 6% interest.
The court held thus:
“The incidents in relation to the cheques in question occurred within a period of three months. As soon as it was detected by the plaintiffs, steps were taken. It could not be established, nor was it attempted to prove, that the plaintiffs had knowledge of the forgery prior to its encashment. Hence it can only be concluded that the Bank is liable for having effected payment of the forged cheques.”
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Babulal Agarwalla vs State Bank of Bikaner and Jaipur AIR 1989 CAL 92
The Court followed Canara Bank v. Canara Sales Corporation (supra) in identical facts held thus:
“On carefully considering the above decision of Supreme Court I am of the view that the decision of the Supreme Court clearly holds that the mandate of the customer to the Bank to pay the cheque signed by him for the bearer which is statutorily recognised by Section 85(2) of the Negotiable Instruments Act ceases as soon as it is proved that cheque paid by the bank was a forged one because a forged cheque is no cheque issued by the customer. Therefore the mandate of the customer is not there to the bank to pay such forged cheque. So the protection given to the bank by Section 85 is not available to the bank in respect of forged cheque.”
Underlying Legal Principles
- Forgery Confers No Title: A cheque with a forged signature is void ab initio and confers no title, even if encashed. The bank, therefore, acts at its own peril when it honours such an instrument.
- Bank’s Duty of Care: The bank is expected to compare the signature on the cheque with the specimen signature on record. Failure to detect discrepancies amounts to negligence.
- Burden of Proof: Once forgery is established, the burden shifts to the bank to prove that it was not negligent and that the customer was grossly negligent or complicit.
Exceptions and Mitigating Circumstances
- Negligence of the Customer: In some rare instances, if the customer has been grossly negligent—such as leaving signed blank cheques accessible to others—the bank may claim contributory negligence.
- Forgery by Authorised Signatory: Where an authorized signatory of a company or partnership exceeds authority, liability may shift depending on internal controls and bank notices.
Position Under Negotiable Instruments Act, 1881
Section 85 of the NI Act protects the paying bank in cases where the cheque bears the signature of the drawer and is not materially altered. However, this protection is not available in cases of forgery, as the cheque is considered non-genuine.
Remedies for Customers
- Civil Suit for recovery of wrongfully debited amounts.
- Consumer Complaint for deficiency of service under Consumer Protection Act.
- Criminal Complaint if collusion or fraud by bank staff is suspected.
Preventive Measures Expected from Banks
- Strict signature verification protocols.
- Periodic internal audits and cross-checks.
- Use of automated signature matching software.
- Staff training to detect alterations and discrepancies.
Conclusion
A bank that honours a cheque with a forged signature does so at its own peril. The liability is strict, and the payment made is unauthorized. Indian courts have consistently held that the burden lies on the bank to show that it was not negligent. Unless the customer has been grossly negligent, the bank is liable to reimburse the debited amount.
The principle serves to reinforce trust in the banking system and ensures accountability in handling customer funds.
Inder Chand Jain
M: 8279945021
Email: [email protected]
