Allahabad Bank Ltd. v Kul Bhushan and Ors. (1961)

When a bank pays a cheque on which the customer's signature is forged, whose loss is it? This short judgment gives the orthodox answer: the bank's. A forged cheque is not the customer's mandate, so the bank cannot debit his account, and payment on it is not "payment in due course". The bank escapes only if it proves the customer adopted the payment or is estopped — and neither a later confirmation of balance nor suing the forgers does that.

Dr. Nand Lal had a current account with the Allahabad Bank, Jullundur, from July 1948, with ample funds. In December 1950 three cheques of Rs. 500 each, drawn in his name, were cashed. He alleged his signatures were forged and the cheques cashed by defendants 4 and 5 through the connivance of two bank employees (defendants 2 and 3).

He discovered the fraud on 13 February 1951 on reading the statement of account the bank sent him. He lodged a first information report against Karam Vir (defendant 5), who was convicted by the Magistrate but acquitted in appeal. The same day he wrote to the bank to stop payment of the three cheques.

Later the bank obtained confirmation slips from him (30 June 1951 and 31 December 1951) accepting balances struck after the three debits; he also sent objection memos in 1952 and 1953 disputing those cheques.

He sued on 2 December 1953 for Rs. 1,500 and interest. The trial judge dismissed the suit: though he found the cheques were not issued by Dr. Nand Lal, he held forgery not established. The lower appellate court, relying on a handwriting expert, held the signatures forged and decreed the suit against the bank alone. The bank brought a second appeal. Dr. Nand Lal's legal representatives were substituted as respondents.

1. Could the finding that the signatures were forged be disturbed in second appeal?
2. Was the customer precluded by the confirmation slips from challenging the debits?
3. By suing the alleged forgers, had the customer adopted the payments and exonerated the bank?
4. Was the customer negligent?
5. Could the bank claim protection for a payment in due course under s. 10?

The appeal was dismissed; the decree against the bank stood, with no order as to costs.

Forgery finding. The lower appellate court's finding, "based as it is on evidence of the expert witness together with the other evidence adduced on behalf of the plaintiff", was not open to challenge in second appeal.

Confirmation slips. "In my opinion, the confirmation slips are valueless as the plaintiff admittedly lodged a report immediately after he had discovered the forgery on 13th of February 1951." He had also written to the bank that very day to stop payment.

Adoption and estoppel. Both sides relied on the Madras High Court's single-judge decision in K.M. Abbu Chettiar v Hyderabad State Bank (AIR 1954 Mad 1001), which the court quoted: "the banker cannot charge his customer with any money with which he has parted without the customer's authority." Where the drawer's signature is forged, the banker is not protected, because such a document "is not a cheque at all, and is not drawn on a banker." The banker can debit the customer only if it "establishes adoption or estoppel", and "The banker cannot set up either estoppel or adoption if his own conduct or negligence has occasioned or contributed to the loss".

Applying this, the court held: "I do not think that the pleas of adoption or estoppel to which reference was made by Ramaswami J. are available to the appellant in the present case." Suing defendants 4 and 5 was not adoption: "I fail to see how the impleadment of defendants Nos. 4 and 5 can be said to be in pursuance of a policy of adoption to justify the Court in exonerating the Bank altogether."

Negligence. The bank's suggestion that the customer let his cheque book fall into the forgers' hands "is pure conjecture and no evidence has been adduced to come to this conclusion."

Section 10. Section 10 "cannot be pressed into service by the appellant to show that the encashment of the cheques constituted payments in due course". Following Abbu Chettiar, "where payment is made on forged cheques this cannot be regarded as payment in due course." The court added: "It may be that the Bank was an innocent victim of the fraud but so was Dr. Nand Lal. If there are two innocent parties, the one whose negligence led to the ultimate loss is primarily responsible."

A bank that pays a cheque on which the customer's signature as drawer is forged pays without the customer's mandate and cannot debit his account; such payment is not payment in due course under s. 10. The bank can avoid liability only by proving adoption or estoppel, and a customer who promptly reports the forgery and objects does not adopt the payments by later signing confirmation-of-balance slips or by suing the forgers.

• Direct question: Is a banker entitled to debit the customer's account with the amount of a forged cheque? State the mandate principle, s. 10, and the adoption/estoppel exceptions, using this case and Abbu Chettiar.
• Problem question: a customer signs a year-end balance confirmation after complaining about forged debits. Apply this case: the confirmation does not bar him if he reported the forgery promptly.
• Sub-point worth marks: the "two innocent parties" principle — the loss falls on the one whose negligence led to it — and why it did not help the bank here.