Banks always warn customers that cheque books must be kept "in a secure place." Usually, these words are printed prominently in the cheque book itself.
But what happens if the cheque book itself, or a few cheques out of it, are stolen and presented to the bank by someone who has forged the signatures of the account holder?
Invariably, banks plead that when a cheque duly signed by a customer is presented before a bank, it carries a mandate to the bank to pay. But are banks not liable if they encash forged cheques or do not take steps to ascertain forgery?
The Supreme Court of India had considered the above question in the case of Canara Bank vs Canara Sales Corporation AIR 1987 SC 1603.
In this case the chief accounts officer of the company (the account holder), who maintained the company's accounts and had custody of the cheque books, forged 42 cheques for a total amount of Rs 326,047.92 between 1957 and 1961. A suit was filed against the bank for wrongfully encashing the aforesaid cheques.
The bank contended that the company was stopped from claiming the amount because of its own negligence and also because it acquiesced in and ratified the payments. It pointed out that the company had not raised any objection over a period of four years even though it received monthly statements.
The Supreme Court, however, turned down this argument and held that the bank could escape liability only if it could establish that the company knew of the forgery. The court observed that inaction of the customer does not by itself afford satisfactory grounds for the bank to escape its liability.
Recently, Jammu & Kashmir High Court was confronted with a similar situation. In Citizen Co-operative Bank Limited vs Ritesh Mittal, four cheques issued on different dates -- the total amount being Rs 152,100 -- were encashed by the bank. It turned out that the cheques had been forged.
The account holder, Vijay Kumar Mittal, filed a consumer complaint against the bank before the Jammu & Kashmir State Consumer Disputes Redressal Commission.
The bank denied its liability and pleaded that it was a negligent act on the part of the complainant himself as he had not taken due precautions and kept his cheque book safely. It was also argued that the difference in the handwriting, which had been pointed out was such that it could not be easily detected through visual comparison.
The commission did not agree with the bank's defence and held it liable to make good the loss to the complainant. It categorically held that "in case of forged signatures not with the connivance of the depositor, the bank is not free of liability". The commission directed the bank to make the payment of Rs 152,100 to the complainant, along with 6 per cent interest.
An appeal was filed against the above order before the Jammu & Kashmir High Court. After relying upon the Supreme Court's decision in the case of Canara Bank, the High Court by its judgement dated December 10, 2002 dismissed the appeal and directed Citizen Co-operative Bank to comply with the order of the state commission.
While the account holder must certainly take all precautions to ensure that the cheque book issued by his bank is kept in proper custody, this does not exonerate the bank from its liability. The account holder's failure to inform the bank about stolen cheques or forgery committed is not a valid defence to ward off the banks' liability.
Nor can delay on the part of the account holder to take up the matter be a mitigating factor. The Jammu & Kashmir High Court has, in the latest judgement, gone to the extent of observing that in case of slightest doubt the bank must apply high-tech methods to detect misuse of the cheques.
The only defence, which the banker can successfully make in this behalf is that the fraud on the bank was committed with the knowledge of the customer concerned.
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