Bank Liable for Loss from Encashing Forged Cheques | Kerala HC Says Drawer’s Staff Negligence No Defence When Signature Is Forged
Sanchayita Lahkar
The High Court of Kerala Division Bench of Justice Sathish Ninan and Justice P. Krishna Kumar held that the defendant bank was liable for the negligent encashment of cheques containing forged signatures, resulting in loss to the plaintiffs. The Court set aside the judgment of the trial court that had dismissed the suits and decreed the suits in favour of the appellants. It directed the defendant to pay the amounts as claimed in the plaints, with interest at the rate of 6% per annum from the date of the suit till the date of recovery. The Court further awarded costs throughout in favour of the plaintiffs.
The appeals were filed by the plaintiffs in five suits originally instituted before the I Additional Sub Court, Kozhikode, seeking damages from the defendant bank. The plaintiffs, all sister concerns, had filed separate suits for recovery of money alleging negligent encashment of their cheques by the bank. According to the plaints, cheques with forged signatures were processed and honoured by the bank, resulting in financial loss.
The plaintiffs maintained several accounts with the defendant bank, including current, cash credit, and savings accounts. It was alleged that a total of 47 cheques bearing forged signatures had been encashed, of which the proceeds of 32 cheques had gone to third parties, thereby occasioning a claim for the amounts corresponding to those cheques.
The suits were founded on the allegation that the bank had encashed cheques which did not bear the genuine signature of the authorised signatories. It was asserted that the bank’s negligence in verifying signatures led to the loss.
The defendant bank denied all allegations of negligence. It contended that all procedural requirements were followed before processing the cheques. Additionally, the bank submitted that the suits were barred by limitation and that the plaintiffs had failed to implead necessary parties—specifically, their own employees alleged to have committed the fraud.
The trial court rejected the bank’s contentions on limitation and non-joinder of parties but dismissed the suits on the ground of insufficient pleadings regarding fraud and failure to establish the claims.
In appeal, the plaintiffs contended that the trial court had misconstrued the nature of the case and had erred in both fact and law. They argued that the suits were based solely on negligence, not fraud, and that the burden of proving forgery had been discharged. The plaintiffs also relied on internal vigilance reports of the bank, which were produced as exhibits, to support their claim that the signatures on the cheques varied from the specimen signatures.
The plaintiffs submitted the reports marked as Exts.A1 and A2, which were obtained under the Right to Information Act and were part of the pleadings. The reports contained findings that the signatures on the disputed cheques did not match the bank’s records and, in some cases, specimen signatures were not even available.
The defendant, while challenging the admissibility and reliability of the reports, did not produce any contradictory evidence or deny the forgery in cross-examination. The bank’s principal argument was that the plaintiffs failed to prove the claim by examining the author of the vigilance reports and that the fraud was committed by the plaintiffs’ own staff.
The High Court proceeded to determine three principal issues: the burden of proof, discharge of that burden, and the sustainability of the trial court's findings.
The suit was based on the alleged negligence of the bank in encashing cheques belonging to the plaintiffs that contained forged signatures of their authorised signatories. It was not a suit alleging fraud against the defendant. The claim made was that the cheques, which lacked the true signature of the authorised signatory, were negligently processed by the bank, resulting in payment of the amounts to third parties and consequent loss to the plaintiffs.
The Court noted that when the plaintiffs allege forgery of signatures on the cheques, the initial burden lies on them to prove the allegation. However, there was no denial of the allegation in the plaint that the cheques did not bear the genuine signatures of the authorised signatories. As such, the Court found that the plaintiffs’ assertion that the signatures on the cheques were forged and not those of their authorised signatories remained unchallenged.
The reports marked as Exts.A1 and A2 indicated that the signatures on the disputed cheques differed from the specimen signatures available with the bank, and in some instances, the bank did not have any specimen signatures at all. The genuineness of these reports was not disputed, and the originals were with the defendant.
Since the bank argued that the findings in the reports could not be relied upon, it was for the bank to substantiate that claim. The Court held that the bank ought to have proved that the conclusions in Exts.A1 and A2 were incorrect. It found no hesitation in concluding that the bank was negligent in encashing cheques bearing forged signatures of the plaintiffs’ authorised signatories.
The Court held that such a contention by the bank could not withstand the legal principle laid down by the Supreme Court regarding a banker’s liability in cases of forged cheques. The Apex Court had held that when a cheque duly signed by a customer is presented to a bank with which the customer maintains an account, the bank is under a mandate to pay the amount. However, if the signature on the cheque is not genuine, there is no mandate to pay.
In such situations, mere negligence does not absolve the bank from liability, and it does not bar a customer from recovering the amount through legal action. The Court also observed that it was neither proved nor attempted to be proved that the plaintiffs had knowledge of the forgery before the cheques were encashed. Therefore, that line of argument failed.
Based on the above reasoning, the Court concluded that the judgment of the trial court required interference and that the plaintiffs were entitled to a decree as sought.
In its final judgment, the Court allowed the appeals and set aside the decree and judgment passed by the trial court.
It directed that the suits be decreed, enabling the plaintiffs to recover the amounts claimed in the plaints along with interest at the rate of 6% per annum from the date of the suit until the date of recovery. The Court also awarded costs throughout in favour of the plaintiffs-appellants.
Advocates Representing the Parties
For the Appellants/Plaintiffs: Shri Biju Abraham and Sri B.G. Bhaskar, Advocates
For the Respondent/Defendant: Smt. Latha Anand, Standing Counsel, assisted by Adv. Vishnu S.
Case Title: R.F.A. Nos. 401, 399, 402, 404 & 406 of 2015 – R. Ramesh & Ors. v. Bank of Baroda & Ors.
Neutral Citation: 2025: KER:41684
Case Number: RFA Nos. 401, 399, 402, 404 & 406 of 2015
Bench: Justice Sathish Ninan and Justice P. Krishna Kumar
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