Bank Liable for Encashment of Forged Cheques: High Court Sets Aside Trial Court’s Dismissal, Upholds Customer’s Claim for Negligent Payment
- REEDLAW
- Jun 20
- 3 min read
The Kerala High Court held the Bank liable for encashment of cheques bearing forged signatures and set aside the trial court’s dismissal of the suits, thereby upholding the customers’ claim based on negligent payment.
The Kerala High Court Division Bench comprising Justice Satish Ninan and Justice P. Krishna Kumar, while adjudicating multiple Regular First Appeals (RFAs), held that a bank is liable for negligence in honouring cheques bearing forged signatures of a customer’s authorised signatory, as such instruments carry no valid mandate for payment. The Court further observed that the burden of disproving the forgery and justifying the payments rests squarely on the bank, especially when its own vigilance reports substantiate the allegations of forgery.
In consequence, the High Court held the bank liable for the encashment of forged cheques and set aside the trial court’s dismissal of the suits, thereby upholding the customers’ claim for loss caused by negligent payment.
The High Court, in a batch of appeals filed by sister concerns against a nationalised bank, reversed the dismissal of suits for recovery of amounts lost due to the alleged negligent encashment of cheques containing forged signatures. The trial court had dismissed the suits on the ground that the plaintiffs failed to prove forgery or negligence and noted the lack of specific pleadings on fraud. However, the High Court held that the plaintiffs’ case was premised on negligence and not fraud, and the trial court erred in its approach and findings.
The plaintiffs contended that 47 cheques were encashed by the bank, out of which 32 were paid to third parties, causing them actual loss. These cheques, they claimed, bore forged signatures of the authorised signatories. Although the defendant bank denied negligence and procedural lapses, it failed to specifically deny the allegation that the cheques were not signed by the authorised signatories. The testimony of PW1, coupled with unchallenged RTI-obtained vigilance reports (Exts. A1 and A2) indicating signature mismatches, was found sufficient to establish the plaintiffs’ case. The Court observed that the burden to disprove the findings in the bank’s own vigilance reports rested on the bank, which it failed to discharge.
Further, the Court held that the defendant bank’s attempt to blame the plaintiffs' employees for the forgery was not a valid defence. Relying on the settled law in Canara Bank v. Canara Sales Corporation and Others, REEDLAW 1987 SC 04001 and Bihta Co-Operative Development Cane Marketing Union Limited v. The Bank of Bihar and Others, REEDLAW 1966 SC 10001, the Court reiterated that where a cheque bears a forged signature, there is no mandate to the bank to honour it, and the bank is liable unless it proves estoppel or adoption by the customer. The bank’s failure to detect the forgery and its omission to produce the original cheques and specimen signatures were held to be significant lapses.
The argument that some funds were routed back to the plaintiffs' account was rejected as the suits clearly pertained only to losses from cheques paid to third parties. On the question of interest, the Court allowed 6% interest per annum from the date of suit till recovery, modifying the plaintiffs’ claim for 9%. Accordingly, the High Court allowed the appeals, set aside the trial court's judgment, and decreed the suits in favour of the plaintiffs with costs throughout.
Mr. Biju Abraham and Mr. B.G. Bhaskar, Advocates, represented the Appellant.
Smt. Latha Anand, SC, appeared for the Respondents.
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