A bank has no right to make payment on a forged or unauthorised signature on a cheque under s 24 of the Bills of Exchange Act 1949 (“BEA 1949”).1 The bank is liable for conversion, a strict liability tort, notwithstanding that the forgery may be a perfect one.2
In Marfani & Co Ltd v Midland Bank Ltd,3 Diplock LJ observed that:
“A banker’s business, of its very nature, exposes him daily to this peril. His contract with his customer requires him to accept possession of cheques delivered to him by his customer, to present them for payment to the banks on which the cheques are drawn, to receive payment of them and to credit the amount thereof to his own customer’s account, either on receipt of the cheques themselves from the customer, or on receipt of actual payment of the cheques from the banks on which they are drawn. If the customer is not entitled to the cheque which he delivers to his banker for collection, the banker, however innocent and careful he might have been, would at common law be liable to the true owner of the cheque for the amount of which he receives payment, either as damages for conversion or under the cognate cause of action, based historically on assumpsit, for money had and received.”
In Tai Soon Heng,4 the bank was held liable for honouring 97 forged cheques totalling some RM1.5 million that were cleared over a period of three years. The bank sought to argue that the customer was under a duty to ensure that its cheques were not forged by its employee and that it had acted in breach of this duty on the facts of the case. Following a line of settled Commonwealth authorities, the then Supreme Court held that there is no duty on the customer to take precautions in the general course of its business to prevent forgeries on the part of its servants.
The court further held that a customer owes only two principal duties to its banker:
- to refrain from drawing a cheque in such a manner as may facilitate fraud or forgery; and
- to notify the bank immediately upon being apprised of any forgery.
These are sometimes referred to as the Macmillan duty and Greenwood duty.5 A customer who fails to discharge those duties will be estopped from claiming that the banker wrongfully honoured a forged cheque under s 24 of the BEA 1949.
This section was inserted into the BEA 1949 by virtue of the Bills of Exchange (Amendment) Act 1998. It came into effect on 1 July 1998.6 The section reads:
Knowingly or negligently facilitating forgery
Notwithstanding section 24, where a signature on a cheque is forged or placed thereon without the authority of the person whose signature it purports to be, and that person whose signature it purports to be knowingly or negligently contributes to the forgery or the making of the unauthorized signature, the signature shall operate and shall be deemed to be the signature of the person it purports to be in favour of any person who in good faith pays the cheque or takes the cheque for value.
Under s 73A, the bank bears the burden of proving that it is entitled to the defence.7 The bank needs to prove that:
- the signature on the cheque was forged;
- the person whose signature was allegedly forged knowingly or negligently contributed to the forgery; and
- it paid the cheque in good faith.
The signature was a forgery
Section 73A applies only when the signature on the cheque was forged. In a case of a corporate account holder (who acts through authorised signatories), the words “person whose signature it purports to be” refer to the customer of the bank.8
Knowingly or negligently contributed to the forgery
There is no reported decision as yet in which the court has found a bank customer knowingly contributed to the making of the forged signature on a cheque. But the defence is obviously intended to protect the bank from instances where the customer is complicit in facilitating the forgery.9
Most reported decisions on s 73A are centred on whether displayed differing judicial opinion as to whether it is a mere codification of the Greenwood and Macmillan duties: see Globelink Container Line10 and Trolli Master.11
In Malaysia Plastics,12 Nallini Pathmanathan J (now JCA) held that in determining whether the customer had “negligently contributed” to the forgery, the court is not limited to looking into breaches of the Macmillan duty and the Greenwood duty. Her Ladyship pointed out that s 73A speaks specifically of a “negligent contribution to forgery”, which envisages that someone other than the customer has effected a forgery, and the customer has negligently contributed to that act of forgery.13
The Court of Appeal in Chairman Sarawak Housing Developers Association14 approved that finding of law in Malaysia Plastics. Anantham Kasinather JCA held that the effect of s 73A was to impose a duty of care upon a customer to be not negligent in the overall management of its account with the bank.15
In Prima Nova,16 the Court of Appeal held that so long as the forgery or the incorporation of the unauthorised signature of the mandatory signatories was caused by the negligence of the authorised signatories, then the bank is protected provided the payment of the cheque is effected in good faith. The Court of Appeal also made it clear that with the introduction of s 73A, the courts would no longer determine the liability of the bank on a claim on forged cheques based on whether the customer observed the Macmillan or the Greenwood duties.
In Bumiputra-Commerce Bank Ltd v Globelink Container a customer has negligently contributed to the making of Line (M) Sdn Bhd,17 the bank could not rely on the defence the forged signature. Early decisions on the provision under s 73A. The fraudster in this case was one of the signatories of the customer’s account who was appointed as a signatory after four years of employment. Apart from the fraudster, two other employees were authorised to sign cheques and operate the current account. In its decision, the Court of Appeal recognised that a customer of a bank has a duty to ensure that there must be some level of corporate governance in place; however, misplacing or misjudging the trustworthiness of its employees by itself cannot be equated to the customer’s failure to supervise staff.
In Panaron Control,18 the bank’s client was a company based in Kuala Lumpur. It appointed a manager who solely oversaw the company’s administrative and financial matters in its Bintulu branch. The customer alleged that the bank had unlawfully and without mandate or authority honoured 196 forged cheques drawn on the client’s current account. Although it was not established on evidence who had perpetrated the forgery of the cheques and the alteration of the cheque book requisition slips, strong suspicion fell on the manager who had since absconded from his employment. The customer’s statement of account had been doctored to hamper the detection of the forgery.
In allowing the bank’s defence under s 73A, the Court of Appeal made these findings:
- The duty of care expected of a customer did extend to cover proper control and supervision of critical staff and to put in place appropriate procedures relating to the access to cheque books and also entailed the customer’s periodic checking of its account with the bank.
- The forgeries of the 196 disputed cheques took place over more than four years (2002 to 2006). These cheques were encashed through the customer’s account and went undetected over that prolonged period.
- There was no system in place on the customer’s end to protect its monies in the account. Specifically, there was no one else to manage accounts besides the manager and the statements of account were directly sent to Bintulu, and not the customer’s Kuala Lumpur branch.
- In December 2005, the customer discovered some discrepancy in the account but let operations continue until August 2006.
In Malaysia Plastics, the judge explained that:
“… the requirement of good faith must have a nexus with the payment out on the cheque. It envisages that the bank acted in accordance with prescribed procedure and with bona fides in honouring the cheque, such that it was in no way complicit in the act of forgery.”19
The test seems to require the bank to prove as a prerequisite that it acted in accordance with prescribed procedure. It suggests that a lapse in the bank’s procedure disentitles it to the defence. This, in our view, is contrary to s 95 of the BEA 1949.20
In Leolaris,21 it did not go unnoticed by the court “… the fact that the Act itself [i.e. s 95] places a low threshold for the defendant to satisfy when relying on the term good faith”.
The court further held:
“It must be noted that when it relates to instruments relating to Bills of Exchange the threshold requirement for good faith in English law is very low, that is to say, once it is established that the holder took the instrument in good faith, he is entitled to all the rights of a holder in due cause notwithstanding that he was careless, that he made no enquiry, and that he was informed of facts which would have led a reasonable man to make further inquiry, provided, however, that he had no notice of any defect in the transferor’s title (see Jones v Gordon (1877) 2 App Cas 616; Auchteroni & Co v Midland Bank Ltd  All ER Rep 627).”22
From the above, the jury is still out on how the court would determine a bank cleared a cheque in good faith under s 95 of the BEA 1949.
Although it has been judicially recognised that s 73A of the BEA 1949 imposes a duty of care on a customer, the courts appear to be sympathetic but unclear in their approach as to when a customer has been negligent in the overall management of its account. In our view, the best way forward is for the bank to enter an express and clear agreement that imposes an obligation on the customer to promptly verify its monthly statement of account and notify the bank of any irregularities, including suspicion of forgeries, in order to exclude liability. LH-AG