Bank Liable For Negligently Encashing Cheques With Forged Signatures: Kerala High Court

A Division Bench of Justice Sathish Ninan and Justice P. Krishna Kumar said, "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."

The Court overturned a trial court’s dismissal of money suits filed against Bank of Baroda (formerly Vijaya Bank).

The Court made it clear that a bank can be exempted from such liability only if it proves that the customer had prior knowledge of the forgery, which was not established in the present case.

Background

The plaintiffs comprising individuals and companies maintaining various types of accounts, including current, cash credit, and savings accounts discovered that 47 cheques bearing forged signatures of their authorised signatories had been wrongfully honoured by the bank. Notably, funds from 32 of these cheques were disbursed to third parties, leading to substantial financial losses.

Upon uncovering the fraudulent transactions, the plaintiffs promptly reported the matter and initiated money recovery suits against the bank, alleging gross negligence in failing to verify the authenticity of signatures before encashing the cheques.

However, the trial court dismissed their suits, reasoning that the plaintiffs had failed to make adequate pleadings of fraud or prove negligence on the part of the bank. The trial court also wrongly treated the matter primarily as a case of fraud, rather than one concerning the bank’s negligence.

Analysis & Findings

Setting aside the lower court's decision, the High Court found that the trial court had misconstrued the nature of the dispute and wrongly placed the burden of proof on the plaintiffs. It clarified that the core issue was not fraud, but the bank’s failure to exercise due diligence in detecting forged signatures, which is a matter of negligence.

"We have no hesitation in finding that the Bank was negligent in having encashed the plaintiffs’ cheques with the forged signatures of its authorised signatories," the Bench observed.

The bank’s own Vigilance Officer, in two separate reports, confirmed that the forged signatures did not match the genuine specimen signatures held by the bank.

Given these facts, the Court held that the bank’s conduct amounted to negligence and ruled that the plaintiffs were entitled to recover the amounts wrongfully paid out.

The Court relied on the Supreme Court’s decision in Canara Bank v. Canara Sales Corporation (1987), which clearly established that a bank cannot claim immunity by blaming the customer for poor cheque book security if the cheque contains a forged signature. The only exception would be if the bank could prove that the customer was negligent or complicit, which the bank failed to do in the present case.

The High Court further emphasized that a bank’s duty includes ensuring that signatures on cheques match those on record, and any failure in this regard, absent customer negligence or knowledge, will make the bank liable.

In view of the above findings, the Court set aside the trial court’s dismissal of the suits, allowed the plaintiffs to recover the amounts claimed in the suits and awarded interest at 6% per annum from the date of the filing of the suit until the date of realization.

Cause Title: R. Ramesh & Ors. v. Vijaya Bank & Anr., [2025:KER:41684]

Appearance:

Plaintiffs: Advocates Biju Abraham and B.G. Bhaskar.

Respondents: Advocate Latha Anand assisted by Advocate Vishnu S

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