Negotiable Instruments - Forged Endorsement, Collecting Bank and Paying Bank
On 5 January, Ramesh issues a cheque for ₹2,50,000 on Bank X, payable to 'Suresh or order' and crossed 'account payee'. Suresh signs a blank endorsement on the back and hands the cheque to his clerk for deposit into Suresh's account. The clerk steals it, forges Suresh's signature as endorser in favour of 'Priya', and gives it to Priya, who runs a boutique. Priya deposits the cheque in her account with Bank Y. Bank Y presents it to Bank X and collects ₹2,50,000 without verifying the endorsement. Priya withdraws ₹2,00,000. Ten days later Suresh discovers the theft and reports the forgery to both banks. Bank X has already paid. Suresh demands that Bank X recredit his account; Bank X says it paid a crossed cheque to a collecting bank and is protected. Bank Y says it acted in good faith and is protected as a collecting banker. Priya says she is a holder in due course because she took the cheque for value and without notice of the theft.
1. Is Priya a holder in due course? Explain the effect of the forged endorsement.
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Priya is not a holder in due course. Section 9 requires the holder to have obtained the instrument for value, before maturity, in good faith and without notice of any defect in title. Priya satisfies value and good faith, but she is not a 'holder' at all. A holder must claim under a valid chain of endorsements. Suresh's endorsement was blank; the later endorsement in Priya's favour was forged. Under Section 24, a forged signature is wholly inoperative, and a forged endorsement transfers no title. Good faith cannot cure a forged signature. Therefore Priya acquired no legal title and cannot be a holder in due course. Her position would be different only if the cheque had been payable to bearer and transferred by delivery without a forged endorsement, which is not the case.
2. Can Bank Y claim the protection of Section 131 of the Negotiable Instruments Act? Can Bank X claim protection under Section 85?
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Bank Y. Section 131 protects a collecting banker who receives payment in good faith and without negligence. The protection is not automatic. Bank Y collected an 'account payee' cheque and failed to verify the endorsement chain. A reasonable collecting banker should compare the payee's name with the endorsement and, where the endorsement is irregular, make enquiries. The forged endorsement was a red flag. Bank Y is therefore likely to be found negligent and cannot rely on Section 131.
Bank X. Section 85 protects a drawee bank that pays a cheque payable to bearer in good faith and in the ordinary course. This cheque was payable to order and crossed 'account payee'. Bank X paid the collecting bank without verifying the forged endorsement. The statutory protection for bearer cheques does not apply. Bank X has paid on an invalid endorsement and remains liable to the true owner, Suresh. Bank X may have a claim against Bank Y.
3. What is the liability of the clerk and Priya? Can Suresh recover the ₹2,00,000 already withdrawn?
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The clerk is liable for forgery, cheating and civil wrongs; he must make good the loss. Priya, although she acted in good faith, acquired no title and must restore the proceeds or account for them to the person entitled. Suresh can require Bank X to recredit his account because the drawee paid on a forged endorsement. Bank X can recover from Bank Y, and Bank Y can recover from Priya. Suresh is not limited to suing Priya; he may proceed against the paying bank. The fact that Priya withdrew ₹2,00,000 does not reduce Bank X's liability to Suresh, though it affects the banks' recovery. If Suresh's own negligence contributed (for example, by signing a blank endorsement and handing the cheque to the clerk), that may be relevant to contributory negligence or estoppel, but it does not validate the forgery.