Canara Bank vs Canara Sales Corporation & Ors

Citations: 1987 AIR 1603

Case Summary :

1. The case comes with a broad meaning in defining the relationship in the law of equity between the banker and its customer about each others duty and point out the negligence in performing the duty. This case describes actions to be played by both the parties in matter of fraud and whom to blame for negligence. This could be understood from the facts of the case below.
2. In this case the respondent company had a current account in the appealant bank. The Managing Director of the company and the General Manager of a sister concern of the company had been authorised to operate the said current account and the second defendant had the responsibility to maintain the accounts of the respondent company and was also the holder of the cheque book of the said company. It was later noticed that the company accounts had some irregularities and on verification it was found out that cheques purporting to bear the signature of the Managing Director were encashed, though they did not bear his signature. A complaint was lodged by the respondent Company with the police and a special audit of the company's accounts for the years 1957-58 to 1960-61 by a firm of Chartered Accountants disclosed that the second defendant had withdrawn a sum of Rs.3,26.047.92 (approx 4500 $) under 42 cheques. A suit was filed for the recovery of the amount on the plea that the amounts as per the forged cheques were not utilised for the purpose of the respondent company. The respondent also contended they were unaware of the fraud happening until discovered by the new accountant.
3. The bank approaced in with three important defense : (i) That the cheques were not forged ones (ii) that even if they were forged ones. the company was not entitled to recover the amount on account of its own negligence (3) that there was settlement of accounts between the parties from time to time and as such. the company was not entitled to reopen the same and claim the sums paidunder the cheques. The second defendant Y.V Bhat  pleaded that the cheques were utilised for the purpose of the company. The trial Court negatived the contentions of the bank and passed adecree for the sum claimed with interest at 6%. The case then further taken to the Division Bench of High Court but the decision of the trail court was upheld with a certification of appeal to Supreme Court.
4. In the first aspect it was identified by the court that the signature on the cheques were forged one when presented as evidence and the plea of second defendant was defeated. The second aspect of the case is with 'the settled account of the appellant with the company'. In this context the appellant pleaded that 42 forged cheques were presented within various dates from year 1957 to 1961 and these the bank used to send its credit and debit statements to the company every month and during the half year period that is on June 30th and Dec 31st. Till March. 1961 the correctness of the entries was not questioned by the plaintiff. So if their is a misappropriation in the accounts it would have detected by the charted accountants of the company.  The Managing Director of the plaintiff-company himself admitted that he had received the periodical statements and that he did not at any time intimate the Bank about the incorrect- ness. At this the principle of estoppel is operated against the plantiff from claiming from the settled accounts as the bank described.
5. It is a act of negligence of the respondent in reviewing the statement letters and if considerable awareness would be used the mischief could be came early to knowledge of the company. But the court in explaining the above fact that is avoiding the negligence of the respondent it stressed more upon the relationship of the banker and customer. This relationship is like a creditor and debtor. When a cheque which presented for encashment contains a forged signature the bank has no authority honor such payment. It would be illegal act in honor such cheques. An honour cheque is such that a customer having an account with the bank and  there is a mandate on the bank to pay the amount covered by the cheque. However. if the signature on the cheque is not genuine. there is no mandate on the bank to pay. The bank, when it makes payment on such a cheque, cannot resist the claim of the customer with the defence of negligence on his part such as leaving the cheque book carelessly so that third parties would easily get hold of it. 
6. Banks had their own benefits in business as well as the customer affiliated with the bank. They have mutual relationship of trust with each other. So an entry in the pass book or the statement of letter would not deviate the trust that comes when the customer negligently misses some errors in his account. The banks business depends upon this trust. 
7. The fact that the "settled account" by the bank is appropriate in describing the negligence in the action of the customer in reviewing their accounts and if the such forged cheques were presented the knowledge of such would have prevented from such mischief. So such accounts though held up by the negligence of a party can be considered as a fact for Estoppel ?.
8. To know about negligence which is derived from a duty in between two or more person and one knowing of such duty neglects to act upon the action it would have taken in performing of such duty. But the duty of the banker is to dishonor such presentation of forged check consequently comprise the act of negligence of the Bank though how negligently the customer has in reviewing his pass book statements, it is well known fact under the law the bank has the duty to check the presentation of such instruments. So mere negligence would not prevent a customer from suing a bank for recovery of amount.
9. So the contention made under this appeal is defeated and the court under this case upheld the view of the High Court and Trial Court in this case. The case was then dismissed.

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