MODEL EXAMINATION - BANKING LAW

MADHU MANJARI LAKSHMANAN (131601066)

1. FACTS
● Two directors of the company were authorised to issue cheques as per the memorandum
of association.
● They were regularly drawing the cash from the defendants bank.
● The company secretary stole two cheques and withdrew the amount by signing forgery
signatures of the directors
● The banker did not detect and paid amount to secretary
ISSUES
Whether the bank is liable for the act of negligence ?
LEGISLATION
Companies Act
PRECEDENTS
Om Prakash Jhunjhunwala & Ors vs Uco Bank & Anr on 2 August, 2013
ARGUMENTS
Arguments for plaintiff
● The defendant failed to scrutinize the cheque of such high denomination before its
encashment and failed in its duty in scrutinizing and verifying the signatures and the
rubber stamp appearing on the cheque with that of the Specimen Signature Card and the
specimen rubber stamp of the company that was kept with the Bank.
● In ​Bihata Co-operative (supra),​ the learned Solicitor General in respect of the judgment
of the High Court, submitted in substance that even though there was negligence on the
part of the bank and its employees, the plaintiff society was not altogether free from
blame or negligence in that but for the part played by at least one of its employees in the
matter of encashment of the cheque for Rs.11,000/- the fraud could not have been
perpetrated.
● The learned Solicitor General relied upon House of Lords in ​London Joint Stock Bank
Ltd. v. Macmillan and Arther, 1918 AC 777 and the observations of Lord Finlay L.C.
which are reproduced hereinbelow:- "As the customer and the banker are under a
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contractual relation in this matter, it appears obvious that in drawing a cheque the
customer is bound to take usual and reasonable precautions to prevent forgery. Crime, is
indeed, a very serious matter, but every one knows that crime is not uncommon. If the
cheque is drawn in such a way as to facilitate or almost invite an increase in the amount
by forgery if the cheque should get into the hands of a dishonest person, forgery is not a
remote but a very natural consequence of negligence of this description."

Arguments for Defendant

● The Bank acted negligently and acted in collusion and conspiracy with some person
and/or persons unknown to the plaintiffs in facilitating encashment of such forged
cheque.In this age of fraud,bank must protect its own interest and also the interest of its
customers which can only be ensured if the bank is vigilant and careful of its duties and
obligations.
● The signature of the bearer on the reverse of the cheque in case of a bearer cheque is one
of the checks and balances and measures to be adopted by the bank to avoid fraud.The
signature of the bearer along with proper identification would enable the bank to protect
its own interest and safeguard the interest of the customer. The correct and proper
identification of signatures is the responsibility of the banker. The bank is supposed to
detect forgery and refuse payment.
● If the bank is unable to do so, it is responsible for the consequent loss.The production of
foreged signatures has acquired the status of an art and science and the master forgers
have perfected the techniques so well that it can easily mislead the layman and can
hoodwink most of the bankers who have to deal with signatures and who are not
handwriting experts.In this world of banking transactions involving voluminous
documents, the bank sometimes acts in a hurry.
● The bank is required to exercise due safeguard in order to protect that forgery of
signatures which are committed in a number of ways, namely,similitude signatures which
is also known as imitation forgery, stress signatures, transplanted signatures, forgery of
contents, other genuine signatures obtained by tricking or otherwise.However, it did not
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MADHU MANJARI LAKSHMANAN (131601066)

verify and/or scrutinize the signatures and/or the initials of the payee before making any
payment against the cheque.
● The Bank was, thus, further negligent in making payment against the cheque to some
unknown person and/or persons without verification of the signatures and/or initials of
the plaintiffs on the reverse side of the cheque before making payment against the 'Self'
drawn cheque in violation of the Current Account Rules and/or of the Banking Rules
and/or practice.
● If the signatures on the cheque had been genuine so that there was a mandate by the
customer to the banker but the cheque was somehow got hold of by an unauthorized
person and encashed by him, the bank might have had a good defence. If the signatures
on the cheque or at least that of one of the joint signatories to the cheque are not or is not
genuine, there is no mandate on the bank to pay and the question of any negligence on the
part of the customer, such as, leaving the cheque book carelessly so that a third party
could easily get hold of it would afford no defence to the bank.
● According to ​Halsbury's Laws of England (3rd Edition), Vol. 2 Art.380​: ​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. Unless the banker can establish
adoption or estoppel, he can not debit the customer with any payment made on such
document.
● In this case, the finding is that one of the signatures was forged so that there never was
any mandate by the customer at all to the banker and the question of negligence of the
customer in between the signature and the presentation of the cheque never arose. Not
only was there negligence on the part of the banker in not ascertaining whether the
signatures on the cheque were genuine, the circumstances attending the encashment of
the cheque show conclusively that the banker was negligent and some of its officers
fraudulent right from the beginning. The cheque form did not come out of the customer's
cheque book."
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MADHU MANJARI LAKSHMANAN (131601066)

JUDGEMENT
Hence, it is understood that the Bank is Liable Contractually as there exist a contractual
relationship established between the banker and a customer. In order to escape its liability the
Bank has to establish that the customer had knowledge of the forgery in the cheques and it was a
duty of the customer to inform the bank of irregularities when he comes to know of them but
such a duty will not exist in case where the customer is unaware of such fraudulent transactions.
In this case the bank is liable for the Act of negligence because of the fact that only two directors
are allowed to issue cheque as per the memorandum of association and they were regularly
withdrawing money from the defendants bank.
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2. FACTS
● A cheque issued by the respondent in favour of appellant was dishonored
● In an action for offence u/s 138 for dishonour of the cheque.
● The respondent contended that he had received no consideration and there was no
existing debt or liability and wanted that the appellant should prove that he has paid
consideration
ISSUE
Whether the respondent can be held liable under section 138 of Negotiable Instruments Act?
LEGISLATION
Negotiable Instrument Act
PRECEDENTS
K.N BEENA V/S Muntyappan
ARGUMENTS
Arguments for petitioners
● The Supreme Court in the case of ​P. Venugopal vs Madan P. Sarathi,​ held that the
presumption does not absolve the complainant of the burden of proving the details of the
existing debts or liabilities. What were the background transactions, what amount of debt
or liability it created, what was the due date of pay,net. All such details cannot be left to
care for presumptions . There was a concurrent finding that the requisite notice was
served and also the fact of grant of loan. Therefore, unless the proper factual background
is built it can be presumed for liability and debt.

● Also, in the case of ​K. Bhaskaran vs. Sankaran Vaidhyan Balan [1999 (4) RCR
(Criminal) 309], it has been held by the Hon'ble Supreme Court as under: "As the
signature in the cheque is admitted to be that of the accused, the presumption envisaged
in Section 118 of the Act can legally be inferred that the cheque was made or drawn for
consideration on the date which the cheque bears. Section 139 of the Act enjoins on the
court to presume that the holder of the cheque received it for the discharge of any debt or
liability."
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● In the case of ​Rangappa Vs. Sri Mohan AIR 2010 SC 1898,​ where it was held that the
presumptions mandated by Section 139 of N.I.Act thus, indeed include the existence of a
legally enforceable debt or liability and there can be no doubt that there is a initial
presumption, which favours the complainant. Section 139 of N.I.Act is an example of a
reverse onus clause that has been included in furtherance of the legislative objective of
improving the credibility of Negotiable Instruments. The implication of the said judgment
is that the presumption includes the existence of legally enforceable debt or liability and
once the accused had admitted the signatures on the cheque in question, the statutory
presumption would come into play and the accused has to raise a probable defence U/s.
138 N.I.Act leading cogent evidence, in which the accused has categorically failed in the
present matter. Hence, it is submitted that, the complainant has been successful in
establishing the basic facts and circumstances in his favour with respect to the cheques in
dispute and the accused has failed miserably to substantiate his defence and the edifice of
the present complaint is built upon strong fundamentals, therefore, Therefore, it is
submitted that, the respondent is indeed liable for the dishonour of cheque u/s 138 of NI,
Act.
Arguments for respondents
● In this instant case the respondent have made a cheque in favour of the appellants which
was dishonoured by the bank due to reasons, for which to attract liability and to ascertain
whether the accused has committed the offence under Section 138 of the NI Act, it is
deemed fit to examine separately as to whether all the indispensable ingredients
constituting the offence have been proved by the complainant. The offence under Section
138 of the NI Act has the following ingredients:-
a) Existence of legally enforceable debt or liability and issuance of cheque in discharge of
said debt or liability;
b) Dishonor of cheque in question which must have been drawn on an account drawn on
an account maintained by the accused;
c) Service of demand notice seeking payment of cheque amount within fifteen days
from the date of service;
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d) Non-payment of cheque amount within fifteen days from the date of service of
notice; and
e) Filing of complaint within one month from the date on which cause of action arises.
● It is pertinent that in ​Kumar Exports vs. Sharma Carpets [(2009) 2 SCC 513], the
Hon'ble Supreme Court, in this regard held as under:"The accused in a trial under Section
138 of the Act has two options. He can either show that consideration and debt did not
exist or that under the particular circumstances of the case the non-existence of
consideration and debt is so probable that a prudent man ought to suppose that no
consideration and debt existed. To rebut the statutory presumptions an accused is not
expected to prove his defence beyond reasonable doubt as is expected of the complainant
in a criminal trial. The accused may adduce direct evidence to prove that the note in
question was not supported by consideration and that there was no debt or lia- bility to be
discharged by him. However, the court need not insist in every case that the accused
should disprove the non-existence of consideration and debt by leading direct evidence
because the existence of negative evidence is neither possible nor contem- plated. At the
same time, it is clear that bare denial of the passing of the consideration and existence of
debt, apparently would not serve the purpose of the accused.
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3. FACTS
● The plaintiff firm pledged certain goods with the ABC office before partition of the
country
● After the partition of country in August 1947 the area where the branch of the bank was
situated became part of the pakistan.
● The plaintiff firm brought and action for the recovery of more than Rs.2 lakshs being the
value of the goods pledged to the plaintiff firm, who migrated to India
ISSUES
Whether the bank is guilty of negligence and liable to account for the goods and to pay their
price ?
INTERPRETATION
Contract act
PRECEDENT
Gopal singh hira singh, merchants vs Punjab national bank and Anr.
ARGUMENTS
Arguments for plaintiff
● The onus of all the three issues was on the bank and no attempt was made on behalf of
the bank to support any of these.The claim for set off is also barred by time because the
claim relates to a period prior to 1947 and no attempt has been made to show that there
has been any acceptance of liability or any acknowledgement by the plaintiff.
● However, unable to agree with the learned counsel for the defendant that the claim of the
bank, it any, based on the credit account got merged in the decree obtained by the bank
from the Pakistan Court .
● If the decree obtained by the bank from the Pakistan Court was a nullity, as contended, on
behalf of the plaintiff, because the plaintiff, being a foreigner in that Court, never
submitted to its jurisdiction, no question of the merger of the cause of action with the
decree arose .
● Even otherwise, according to Private International law a foreign judgment only creates a
new obligation to pay but does not distinguish the original cause of action for the debt. A
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foreign judgment involves no merger of the original cause of action and a creditor who
obtains a foreign judgment has two remedies open to him, that is, either to bring an action
in a domestic Tribunal on the foreign judgment or to bring an action in the domestic
Tribunal on the original cause of action. Reference may be made in this connection.
● Thus has, however, no impact on the result of the three issues, which must be found
against the bank. The bank's counter claim must also fad for another reason, which
appears to me to be more fundamental, Section 17 of the Displaced Persons (Debts
Adjustment) Act, 1951, lays down rules with regard to debts secured on moveable,
property. Clause (b) of sub-section (1) of S. 17 is in the following terms :​(b) The creditor
shall not be entitled, in any case where the pledged property is no longer in his
possession or is not available for redemption by the debtor to recover' from the debtor
the debt or any part thereof for which the pledged property was secured.-
● The claim of the bank for the amount said to be due under the cash credit agreement is
barred by the aforesaid provision obviously because it is the common case of the parties
that the bank is no longer in possession of the pledged goods and the same are, therefore,
not available for redemption by the plaintiff. In the circumstances it is unnecessary to
determine if there is a claim, which could form, subject-matter of a set off or a
counter-claim or as to the quantification in respect thereof. In the view that I have taken
of the issues, these questions do not survive.
Arguments for Defendant
● To absolve the bank from all liability in case the said pledged goods were destroyed or
lost by theft or by any other means and had agreed that the bank would not be liable in
case the same were damaged or lost by force major, that is, by an act of God, for
example, by rainfall, storm, or by enemy action, internal commotion etc. etc."
● With regard to the allegation of the responsibility of the bank to take care of the goods, it
was contended that the possession of the goods was that of the plaint and the
guarantee-broker as much as of the bank and that in any event, in the state of complete
law , that prevailed in the whole of West Punjab with the consequent threat to life and
property, the property of the bank as also the property pledged with it, "had to be left
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behind, in properly locked godowns and after having taken as much care as was possible
under the circumstances."
● It was further contended that the bank had no control over the circumstances and
"according to law and agreement, the answering defendant is immune from all liability in
this matter and is not answerable to the plaintiff for the pledged stock even if it had been
destroyed by the rioters or looted (although according to the information the plaintiff
were not the subject of loot or plunder)."
● It was further alleged that by giving up its claim against the insurers, the -plaintiff had
absolved the bank from all liabilities and that in any event no claim could be made
against the bank "unless he makes good the amount due to the answering defendant on
account of advances made by the answering defendant to the plaintiff on the security of
the pledged goods" and that even in the impossible event of any claim being decreed in
favor of the plaintiff, "the same must, in equity, be set off against the amount which
would be due from the defendant to the plaintiff on the basis of the above-said loaning
documents".
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MADHU MANJARI LAKSHMANAN (131601066)

4. FACTS
● The bank gave overdraft facility to a partnership firm and his partners for granting
overdraft facility
● The partners and the firm made a default in payment of loan in spite of notices given by
the bank
ISSUES
Whether the partnership firm is liable for the default in payment of loan ?

LEGISLATION
Indian partnership Act, 1932
Banking regulation ACT, 1949- u/s 35A

PRECEDENTS
Shivam construction corporation v/s Vijaya bank and Ors.

ARGUMENTS
Arguments of Appellants
● The partners of the defendant No. 1 firm cannot be bound by the acknowledgment made
by the partner defendant No. 2. The attention of this Court is invited to a mandate given
by the defendant No. 1 firm to the plaintiff Bank with regard to the operation of the
current account.
● It is true that as per the mandate the current account was required to be operated jointly
by one partner defendant no.2, on one hand, and any one of the rest of the seven partners
on the other hand.
● There is a specific provision in clause (11) of the Partnership Deed Exh. 105. Thus, the
account of the Bank in the name of the firm was required to be operated by its partner
defendant 2 jointly with any one of the remaining seven partners.
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● Relying on the aforesaid clause (11) of the Partnership Deed, it has been contended that
the acknowledgment made by defendant No. 2, one of the partners of the firm is not
binding on the firm and other partners

Arguments of Defendants
● Clause (11) of the Partnership Deed, it has been contended that the acknowledgment
made by defendant No. 2, one of the partners of the firm is not binding on the firm and
other partners. Thus, the submission, prima facie, may, appear to be captivating, but not
convincing; subtle, but not legally sustainable. What is provided in clause (11) of the
Partnership Deed is the operational instructions to the plaintiff Bank. It does not contain
that the general authority or implied authority of the partner to act as an agent of the firm
is circumscribed. A partner undertaking to allow the Bank in getting the acknowledgment
executed could not be said to be unauthorised or illegal action of the partner rendering the
firm and other partners immune from the said liability. On the contrary, a partner is an
agent of the firm for the purpose of business of the firm. There is an implied authority of
the partner to act as an agent of the firm.
● SECTION 18 of the Indian Partnership Act, 1932, in Chapter IV makes it clear that
subject to the provisions of the Partnership Act, a partner is an agent of the firm for the
purpose of business of the firm. In Chapter IV, various provisions are enumerated and
prescribed with regard to the relations of partners to the third parties. A conspectus of
Secs. 18, 19 and 26 of the Partnership Act, would go to show that unless contrary
provision is made in the Partnership Deed a partner of the firm is an agent of the firm for
the purpose of business of the firm and he has an implied authority.
● SECTION 19 of the Partnership Act provides an implied authority of the partner as an
agent of the firm. It is very clear from the aforesaid provision of Sec. 19 that the act of a
partner which is done to carry on, in the usual way, business of the kind carried on by the
firm, binds the firm. The authority of a partner to bind the firm conferred by this section
is called his "implied authority". Sub-sec. (2) of Sec. 19 provides eight circumstances
wherein the implied authority of the partner cannot be exercised. In the absence of any
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usage or custom of trade to the contrary, the implied authority of a partner does not
empower him to do as many as following eight actions. The acknowledgment for and on
behalf of the firm is not covered in any one of the clauses (a) to (h) under sub-sec. (2) of
Sec. 19. Therefore, the contention that clause (11) of the Partnership Deed related to the
operational instructions prohibits one of the partners to acknowledge a debt, is meritless
and is, rightly and cannot accepted.
● IN a Division Bench decision of this Court in ​M/s. Sarabhai Hathisingh and Anr. v.
Shah Ratilal Nathalal Share Broker and Ors. , (1979) XX GLR 484​, ​this Court has held
that the partner is an agent of the firm and has an authority to do all things necessary for
the benefit of the firm. Acknowledgment of liability in respect of subsisting debt by a
partner is binding on the firm as the same is not falling within the exception of Sec. 19
(2) of the Partnership Actually .

JUDGEMENT
In the present case, it is beyond any doubt that the appellants who had enjoyed overdraft
facilities on the securities of the FDRs, failed to discharge their duties and committed defaults,
went on for overdrawals. Therefore, under the terms of loan as well as under the right of "set-off"
and also under the general Banker's lien, the defendant was empowered and entitled to transfer
and appropriate even by liquidating the FDs towards over-draft account of the defendants, for the
purpose of appropriation towards Bank's dues was, in any way, unjust, improper or illegal.
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5. FACTS
● The plaintiffs husband gave some cash and cheques to his friend who was an employee in
the defendant bank, for being desposited in the plaintiffs account.
● The amount and the cheques were given to him in his private capacity as a friend.

ISSUES
Whether the plaintiff misappropriated the money in course of employment of the bank?

LEGISLATION
Vicarious Liability

PRECEDENTS
Shyama Devi v/s State Bank of India

ARGUMENTS
Arguments for plaintiff
● The plaintiff is the employee used to get passbook signed fraudulently, and the bank
reacted to his actions with negligence. Thus relying on the principle of vicarious liability
and said that the plaintiff was the employee of the bank, the bank was also responsible for
his misdemeanour.
● The first of the principles which govern the vicarious liability of the employer for the loss
caused to a customer through the misdemeanour or negligence of an employee is that the
employer is not liable for the act of the servant if the cause of the loss or damages arose
without his actual fault or privity and without the fault or neglect of his agents or servants
in the course of their employment.
● Thus a master is liable for his servant’s fault perpetrated in the course of master’s
business whether the fraud was for master’s benefit or not if it was committed in the
course of his employment.
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● There is no difference in the liability of a master for wrong whether for fraud or any other
wrong committed by a servant in the course of his employment, and it is a question of
fact in each case whether it was committed in the course of his employment.

Arguments for Defendant

● Where a client of the bank paid certain amount to an employee of the bank for crediting it
to her account, the onus was on the client to show that she paid the amount to the
employee of the bank which was received by that employee in the course of his
employment with the bank. In such a case the false and fraudulent entry about the deposit
of the amount in the pass book, of the client, could not shift the onus on the bank to prove
the contrary.
● In such a case, the fact, the false and fictitious entries to cover up his fraud were made by
the employee in the pass book of the client and in the ledger account of the husband
could not make the embezzlement committed by the employee an act committed in the
course of his employment with the bank. Consequently, the bank was not liable to make
good the loss caused to the client by the act of the employee because the latter in such a
case would be deemed to have acted as an agent of the client and not within the scope of
his employment with the bank.
● In ​Leesh River Tea Co. Ltd. & Ors. v. British India Steam Navigation Co.​ , Ltd,​"For an
employee to, be liable, however, it is not enough that the employment merely afforded
the servant or agent an opportunity of committing the crime."It must be shown that, the
damage complained of was caused any wrongful act of his servant or agent done within
the scope or course of the servant's or a s employment,even if the wrongful act amounted
to a crime. For this proposition, Salmon, L.J. referred to Lloyd V. Grace, Smith & Co.
● In ​Llyod V. Grace, Smith & Co ,I​ t was held that since the agent was acting in the course
of his apparent or ostensible authority, the principal was liable for fraud.
● Also in ​United Africa Company Ltd. v. Saka Owoade, t​ he Privy Council laid down that a
master is liable for his servant's fraud perpetrated in the course of master's business,
whether the fraud was for the master's benefit or not, if it was committed by the servant
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in the course of his employment. The principle used in the above two cases can be
applied in the present case also. The plaintiff was that the various amounts had been
handed over in cash or in cheque by her to , an employee of the Bank for crediting in her
Savings Bank- account with the defendant- Bank. But plaintiff fraudulently
misappropriated or converted the same to his own use.

JUDGEMENT
The rule in Leesh River Tea Co.'s case, squarely applies to this situation. The defendant as
therefore, not liable to make good the loss caused to the appellant, by the act of the employee,
while the latter was acting as an agent of the customer and not within the scope of his
employment with the Bank. Nor could the fact that false and fictitious entries to cover up his
fraud, were made by employee in the Pass Book of the respondent and in the Ledger Account of
Bhagwati Prasad & Sons, make the embezzlement committed by Shukla an act committed in the
course of his employment with the Bank.