Author: Kainaat Afreen
To the Point
The 1987 Supreme Court decision in Canara Bank v. Canara Sales Corporation & Ors. is a cornerstone in Indian banking law on the subject of forged cheques and the banker–customer relationship. The Court ruled that a bank cannot lawfully withdraw funds from a customer’s account if the cheque in question contains a forged signature. Since a forged document is considered void from the outset, it is treated as though it never came into existence. The ruling reaffirmed the principle that a banker’s mandate must be genuine; the bank acts only within the authority conferred by the customer’s valid instructions. Even if the customer’s negligence in detecting the forgery is alleged, it does not by itself absolve the bank from liability unless such negligence occurred before the payment and directly contributed to the forgery being possible. This case, therefore, clarified the scope of Section 85 of the Negotiable Instruments Act, 1881, and reiterated fundamental contractual principles from the Indian Contract Act, 1872, particularly regarding consent and authority.
Use of Legal Jargon
The decision revolves around several key legal concepts:
Mandate principle – A bank’s authority to disburse funds derives strictly from the customer’s instructions. When a signature is forged, no valid authority exists for the transaction, making the bank’s action beyond its legal powers.
Void ab initio – A forged signature produces no legal effect from the outset. No rights or obligations can arise from it.
Doctrine of estoppel – This doctrine, which can preclude a party from asserting a fact contrary to previous conduct, is inapplicable when the underlying instrument is void.
Negligence – In banking law, the relevant negligence is that which precedes and facilitates the wrongful payment. Post-payment negligence, such as delay in informing the bank, does not ratify the transaction.
Ultra vires – It refers to actions taken that exceed the limits of one’s legal authority.
Honouring a forged cheque is ultra vires the bank’s contractual and statutory authority.
Strict liability – The bank is liable for debiting an account without a valid mandate, irrespective of intent or good faith.
Forgery – It is the intentional creation or modification of a document with the aim of deceiving, resulting in harm to another person’s legal rights, under both criminal and civil law.
The Proof
Facts: Canara Sales Corporation maintained an account with Canara Bank. According to the company’s board resolution, all cheques had to bear the signatures of two authorised signatories, who were both directors.
Over a period, a series of cheques were presented to the bank with one genuine signature and one forged signature. The bank honoured these cheques and debited the company’s account accordingly. The forgeries came to light much later, after substantial sums had been paid out.
Contentions:
The company claimed that the bank acted without authority and was obliged to re-credit the amounts. The bank raised three defences:
1. The company’s negligence in supervising its cheque issuance process and its delay in reporting the forgeries amounted to acquiescence.
2. The company was estopped from denying the genuineness of the cheques.
3. Payments were made in good faith in the ordinary course of business.
Statutory backdrop:
Section 85 of the Negotiable Instruments Act protects a paying banker if payment is made in due course on a genuine instrument. Section 10 defines “payment in due course” as payment made in accordance with the apparent tenor of the instrument, in good faith and without negligence, to a person in possession thereof. Section 10 of the Indian Contract Act stipulates that a valid contract must be based on free consent, and forgery completely nullifies such consent. A forged signature is not the signature of the person purported to sign; thus, the instrument is not the customer’s order to pay.
Judicial reasoning:
The Supreme Court held that a forged signature is wholly inoperative. No mandate can be inferred from it. Even if the bank acted in good faith, it cannot debit the customer’s account without actual authority. Negligence by the customer after payment cannot cure the absence of authority. Estoppel requires a representation by conduct before the payment, which was not present. The bank, therefore, must bear the loss.
Comparative perspective:
English law, as seen in London Joint Stock Bank v. Macmillan & Arthur and Greenwood v. Martins Bank, imposes a similar duty on banks to verify signatures. U.S. law under the Uniform Commercial Code follows the same principle: a forged signature is ineffective unless the customer’s pre-payment negligence substantially contributed to it. The Supreme Court’s approach aligns with these international norms.
Impact on banking practice:
The case underscores the necessity for banks to employ robust signature verification mechanisms, training staff to detect forgeries, and ensuring compliance with the customer’s mandate. It also alerts customers to maintain secure custody of cheque books and supervise their accounts, though ultimate responsibility for wrongful payment lies with the bank.
Abstract
This judgment firmly established that in the banker–customer relationship, the bank’s obligation to honour cheques is confined to those bearing a genuine mandate. A bank has no authority to make payments on forged instruments, and such amounts cannot be debited from the customer’s account. The Court rejected arguments based on estoppel and post-payment negligence, clarifying that statutory protection under Section 85 of the Negotiable Instruments Act applies only to genuine instruments. Aligning with common law jurisdictions, the ruling promotes financial discipline and protects depositors from losses arising from forgery, placing the risk squarely on the institution best positioned to prevent it the bank.
Case Laws
Brahma Shum Shere Jung Bahadur v. Chartered Bank (1956 SCR 143) – The Court held that estoppel does not apply to forgery; there is no mandate to the bank.
Ladbroke & Co. v. Todd (1914 30 TLR 433) – Established that post-payment negligence does not validate payment on a forged instrument.
Indian Overseas Bank v. Industrial Chain Concern (1990 1 SCC 484) – Reiterated bank’s liability for payments made without customer’s authority.
London Joint Stock Bank v. Macmillan & Arthur (1918 AC 777) – UK House of Lords emphasised customer’s duty to avoid facilitating forgery but placed primary liability on the bank.
Greenwood v. Martins Bank Ltd (1933 AC 51) – Limited circumstances where a customer’s conduct can estop them from denying a forgery, primarily where they knowingly allow the bank to pay.
Price v. Neal (1762 3 Burr 1354) – An early English case establishing that a drawee who pays a bill with a forged drawer’s signature cannot recover the money from an innocent holder.
Conclusion
Canara Bank v. Canara Sales Corporation & Ors. remains a definitive statement of Indian law on forged cheques. The Court reinforced that the mandate principle is absolute: without a genuine signature, the bank has no authority to debit the account. This approach balances equities by placing loss on the party best able to prevent it the bank while preserving scope for contributory negligence where the customer’s pre-payment conduct facilitates the forgery. The judgment harmonises Indian law with established common law principles and strengthens depositor confidence in the banking system. Its practical legacy is the heightened vigilance in banking operations, stricter verification procedures, and a clarified legal position that enhances financial stability.
FAQs
Q1: Can a bank lawfully deduct funds from my account if the cheque is forged?
No. A forged cheque is void from inception, giving the bank no authority to debit your account.
Q2: What if I delay in reporting the forgery?
Delay after payment does not ratify the transaction, though negligence before payment that facilitates forgery may affect liability.
Q3: Does good faith protect the bank?
Not in cases of forgery. Good faith alone cannot validate an unauthorised payment.
Q4: How can customers protect themselves?
By safeguarding cheque books, promptly reconciling statements, and informing the bank immediately upon detecting irregularities.
