The Supreme Court ruled in favor of the respondent company in its case against Canara Bank. The company had filed a suit to recover amounts withdrawn via 42 forged cheques totaling Rs. 3,26,047.92. The Court held that the bank acted unlawfully in debiting the company for forged cheques and had a duty to repay the amounts. Further, mere negligence by the customer does not prevent recovering amounts from forged cheques unless the customer's actions facilitated the forgeries. The bank was ordered to repay the full amount to the company with interest.

1. Case Law : Canara Bank v/s Canara Sales
Corporation
Submitted by: Shreyansh Jain
MBA-1

2. Case Name: Canara Bank vs Canara Sales
Corporation & Ors.
(Case Summary)
• The Supreme Court while analyzing the District Court’s role in the case
stated that:
• “When a cheque which is presented for encashment contains a forged
signature the bank has no authority to make payment against such a
cheque.The bank would be acting against law in debiting the customer with
the amounts covered by such cheques.”

3. Introduction to Case
• PETITIONER: CANARA BANK
Vs.
• RESPONDENT: CANARA SALES CORPORATION & ORS.
• DATE OF JUDGMENT-22/04/1987
• BENCH: -KHALID, V. (J)
-OZA, G.L. (J)
• CITATIONS:
• 1987 AIR 1603,
• 1987 SCR (2)1138
• 1987 SCC (2) 666 JT
• 1987 (2) 491
• 1987 SCALE (1)924

4. Negotiable Instruments Act, 1881
Sections
Involved
(6)- A “cheque” is a bill of exchange drawn on a specified banker and not expressed to be payable
otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque
in the electronic form.
31- Liability of drawee of cheque.—The drawee of a cheque having sufficient funds of the drawer
in his hands properly applicable to the payment of such cheque must pay the cheque when duly
required so to do, and , in default of such payment, must compensate the drawer for any loss or
damage caused by such default.
Section 77- Liability of banker for negligently dealing with bill presented for payment.—When a
bill of exchange, accepted payable at a specified bank, has been duly presented there for payment
and dishonoured, if the banker so negligently or improperly keeps, deals with or delivers back
such bill as to cause loss to the holder, he must compensate the holder for such loss.
85- Cheque payable to order.— Where a cheque payable to order purports to be endorsed by or on
behalf of the payee, the drawee is discharged by payment in due course.
117- Rules as to compensation.—The compensation payable in case of dishonour of a promissory
note, bill of exchange or cheque, by any party liable to the holder or any indorsee.

5. The Bank Argued:
• That the cheques were not forged ones;
• That even if they were forged ones. the company was not entitled to recover the
amount on account of its own 1139 negligence;
• 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 paid
under the cheques; and
• That the suit was barred by limitation. The second defendant pleaded that the
cheques were utilized for the purpose of the company.

6. Case Summary
• The respondent-company had a current account with the lant-bank in its Mangalore Builder
Branch.
• 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. .
• During the process of bringing the accounts upto date certain irregularities were noticed in
the account and on verification it was found 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
under 42 cheques.
• A suit was filed for the recovery of the said amount on the plea that the amounts as per the
forged cheques (1)were not utilised for the purpose of the respondent company. (2)that
they were not authorised ones. (3)that there was no acquiescence or ratification open or
tacit on the part of the respondent company (4)and that the respondent was unaware of
the fraud till the new accountant discovered it.

7. Points Held by Court
1. When a cheque duly signed by a customer is presented before a bank with whom he has an account 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
defense of negligence on his part such as leaving the cheque book carelessly so that third parties would
easily get hold of it.This is because a document in cheque form. on which the customer’s name as drawer is
forged. is a mere nullity.
2. The relationship between the customer of a bank and the bank is that of a creditor and debtor.-When a
cheque presented for encashment contains a forged signature the bank has no authority to make
payment against such a cheque.
• The bank would be acting against law 1140 in debiting the customer with the amounts covered by such
cheques.When a customer demands payment for the amount covered by such cheques, the bank would be
liable to pay the payment to the customer.
• The bank can succeed in denying payment only when it establishes that the customer is disentitled to make
a claim either on account of adoption, estoppel or ratification.
3. For negligence to constitute an estoppel. it is necessary to imply the existence of some duty which the
party against whom estoppel is alleged owes to the other party.There is a duty of sorts on the part of the
customer to inform the bank of the irregularities when he comes to know of it. But by mere negligence.
one cannot presume that there has been a breach of duty by the customer to the bank.The customer
should not by his conduct facilitate payment of money on forged cheques. In the absence of such
circumstances. mere negligence will not prevent a customer from successfully suing the bank for recovery
of the amount.

8. Judgement
• The bank was suppose to pay the total amount of Rs.3,26.047.92 with 6% interest
• The judgement remained the same as in this case the bank was at fault of accepting payment on
forged cheques
• It was also stated that its not mandate for a customer to maintain the pass book
• If banks are to insist upon extreme care by the customers in minutely looking into the pass book
and the statements sent by them, no bank perhaps can do profitable business.
• It is common knowledge that the entries in the pass books and the statements of account sent
by the bank are either not readable. decipherable or legible.
• There is always an element of trust between the bank and its customer.The bank’s business
depends upon this trust.