A gets hold of B's Cheque book and forges B's name on a cheque. A obtains money from B's Bankers by presenting the forged cheque and then disappears. Who bears the loss, B or the Bank?

The Forged Cheque: A Nullity from the Outset

The moment A forged B's signature on the cheque and presented it to B's bankers, the die was cast — the bank must bear the loss. A forged cheque is not a cheque in the legal sense at all. As Halsbury's Laws of England states with unfailing clarity, "a document in cheque form to which the customer's name as drawer is forged or placed thereon without authority is not a cheque, but a mere nullity." The consequences of this principle, as applied under the Negotiable Instruments Act, 1881, flow naturally and inexorably from there.

Why the Bank Cannot Debit B's Account

The relationship between a banker and his customer is one of debtor and creditor, and the banker's authority to pay rests entirely on the customer's mandate — his genuine instruction to pay. A cheque is that mandate. Where the signature is forged, there is no mandate, and there never was one. A banker who pays without a mandate has not paid on behalf of his customer; he has paid on his own account.

Section 31 of the Act imposes on the drawee bank the duty to honour a cheque when the drawer has sufficient funds in his account. But underlying that duty is an assumption so obvious that the statute does not even articulate it — the cheque must be the genuine act of the drawer. A forged cheque defeats the very premise of section 31. The bank, therefore, cannot debit B's account with the amount so paid. If it could, as the courts have observed, any person who knew that B had a banking account could forge B's signature and drain his account. The law does not permit such an absurdity.

The Supreme Court of India settled this question authoritatively in Canara Bank v. Canara Sales Corporation (AIR 1987 SC 1603). The Chief Accounts Officer of the company had forged 42 cheques over several years, and the bank sought to escape liability by arguing that the company had not objected to the monthly statements of accounts — a plea amounting to acquiescence. The Supreme Court rejected this defence with characteristic firmness. The Court held that when a cheque bearing a forged signature is presented, there is simply no mandate from the customer. The bank can escape liability only if it proves actual knowledge of the forgery on the customer's part — or an unequivocal ratification. Silence on statements of account, without knowledge of the forgery, does not amount to ratification, and the customer cannot be estopped merely because he could have discovered the forgeries had he been more diligent.

This view was confirmed in Bihta Co-operative Development and Cane Marketing Union Ltd. v. Bank of Bihar (AIR 1967 SC 389), where the Supreme Court rejected the contention that a customer's failure to take ordinary precautions — such as keeping his cheque book safely — could shift the loss to him. The Court drew a clear line: negligence in keeping the cheque book may be imprudent, but it is not the proximate cause of the bank's payment on a forged instrument. The bank's duty to verify the drawer's signature is non-delegable.

The One Exception: Negligence as the Proximate Cause

The law, however, is not entirely indifferent to B's conduct. If B's negligence was the proximate cause of the bank's payment — that is, if B, by his own careless act in drawing the cheque, enabled the forger to operate — the loss may shift to B. The classic illustration comes from Young v. Grote (1827 4 Bing 253), where a drawer gave his wife blank signed cheques, and her carelessness in having them filled up enabled a clerk to alter the amount. The bank was held entitled to debit the customer. Similarly, in London Joint Stock Bank v. Macmillan and Arthur (1918 AC 777), the House of Lords held that a customer who draws a cheque so carelessly as to facilitate fraudulent alteration must bear the loss, because the negligence in the mode of drawing — not merely in keeping the cheque book — created the opportunity for fraud.

In the present problem, however, A stole the cheque book and forged B's signature afresh. There is no question of B having drawn a carelessly worded cheque. B's only conduct was that he did not lock away the cheque book with sufficient care. On the facts as stated, and following the ratio of the Allahabad High Court in L. Pirbhu Dayal v. Jwala Bank (AIR 1938 All 634), such negligence in custody of the cheque book is not the proximate cause of the loss — the proximate cause is the bank's failure to detect the forged signature. The Allahabad High Court put it well: "It was the duty of the employees of the bank to be able to identify the signatures of their customers and if they failed to discharge their duty and thereby suffered the loss, there is no reason why the plaintiff should make good that loss."

The Bank's Remedy Against A

The law does not leave the bank entirely without remedy. A banker who has paid on a forged cheque has paid under a mistake, and he may seek to recover that money from A, the forger, on the principles of unjust enrichment and under section 72 of the Indian Contract Act, 1872, which requires that money paid under a mistake be refunded. Unfortunately, in the present facts, A has disappeared. The bank's practical remedy is thus lost, even though the legal remedy theoretically exists.

The Unequivocal Answer

The bank bears the loss. B is not liable to be debited, for the forged instrument was no cheque at all and carried no mandate from him to the bank. The bank, by paying on a forged signature, acted without authority and must suffer the consequences of that act. Only if B had so conducted himself — by drawing or delivering the instrument in a negligent manner that directly facilitated the forgery — could the result be otherwise. On the facts given, where A merely stole the cheque book and forged the signature entirely on his own, B stands protected and the bank stands exposed.