THE DUTIES OF THE BANKERS IN RELATION TO BY HUSHAM …

THE DUTIES OF THE BANKERS IN RELATION TO

FORGED CHEQUES-A COMPARATIVE STUDY

BY

HUSHAM SAEED HASABALLAH ALAWSI

A dissertation submitted in fulfilment of the requirement

for the degree of Master of Comparative Laws

Kulliyyah of Laws

International Islamic University

Malaysia

JANUARY 2012

ii

ABSTRACT

A bank acts under the customer’s mandate in carrying out the instructions of the

customer. If they are altered by a third party without the customer’s authority, the

alteration negates the customer’s mandate and a banker who makes a payment is

doing so without the customer’s mandate. As a general principle, a bank has no

authority to pay a customer’s cheque or debit the account where the signature has been

forged or unauthorized. At the same time, the law imposes a duty on the customer to

exercise care when writing out his instruction to the bank so as not to mislead his

banker and not to facilitate fraud so that the third party has no opportunity to temper

his instruction. It would amount to a breach of duty of care to leave a blank cheque to

be filled up by a third party who will alter it in excess of the authority given by the

customer. In this case, the customer is liable to his negligence. He would be estopped

from asserting the third party was acting without his authority. When a person draws a

cheque it must be written in the correct way so that the third party would not be able

to alter it easily. The drawer should not leave any blank spaces. A drawer who had

signed a cheque written out by his clerk was negligent when he failed to notice that

the blank spaces had been left by the clerk. A banker who makes payment on a

materially altered cheque does so without the customer’s mandate. Therefore, if a

cheque is materially altered and the alteration is apparent on the face of the cheque, a

banker is put on inquiry as to whether the alteration is authorized. If he proceeds

without doing an inquiry, he is said to be committing a breach of duty. A customer of

a bank does not owe a duty to the bank to prevent the forging of his signature. While

acknowledging that there was a duty on the customer to exercise care in writing out

his cheque the court rejected the contention that there was a corresponding duty on the

part of the customer to take reasonable precaution to prevent his servant from forging

his signature. However the customer is under the duty to inform the bank immediately

the moment he is aware that somebody is forging his signature. This duty gives rise to

a plea of estoppel by the bank to assert that customer by choosing to remain silence is

amounting to a representation by conduct that his account is in order and correct.

Thus, it would constitute an estoppel preventing the customer from an action against

the bank that his signature is a forgery. The bank may invoke the defence of estoppel

if the bank can prove that the customer has knowledge about the forgery but yet did

not inform the bank as soon as possible. It is the main aim of this study to examine the

extent of banker’s duties in relation to forged cheques and to explore the statutory and

general defences accorded to the banks when it has committed the act of conversion. It

is the hypothesis of the dissertation that in banking law, customer’s signature

constitutes a mandate to the banker to act on his instruction. Once the signature of the

customer has been forged, the bank is said to be prima facie liable. Forged signature

of the customer is regarded as wholly inoperative and the bank is deemed to be liable

unless the bank can prove that the customer has knowledge about the forgery and he

negligently contributes to the forgery of the signature. The methodology used in the

study is mainly library-based with the focus on the examination of case law and

provisions of the relevant statutes from The Common law jurisdiction mainly

Malaysia and England and selected Arab countries such as Jordan, Egypt and United

Arab Emirates. The Islamic perspective of the study is limited to the contemporary

and modern position in various provisions of the law in the said Arab countries which

is representing the Civil law jurisdiction.

iii

iv

APPROVAL PAGE

I certify that I have supervised and read this study and that in my opinion it conforms

to acceptable standards of scholarly presentation and is fully adequate, in scope and

quality, as a dissertation for the degree of Master of Comparative Laws.

……………………………………………

Norhashimah Mohd Yasin

Supervisor

I certify that I have read this study and that in my opinion it conforms to acceptable

standards of scholarly presentation and is fully adequate, in scope and quality, as a

dissertation for the degree of Master of Comparative Laws.

……………………………....……………

Mahanoon Binti Yusoff

Examiner

This dissertation was submitted to the department of Civil Law and is accepted as a

fulfilment of the requirement for the degree of Master of Comparative Laws.

………………………………...….………

Aiman Hariman M. Sulaiman

Head, Department of Civil Law

This dissertation was submitted to the Kulliyyah of Laws and is accepted as a partial

fulfilment of the requirement for the degree of Master of Comparative Laws.

………………………………….....……...

Mohd Akram Shair Mohamed

Dean, Kulliyyah of Law

v

DECLARATION

I hereby declare that this dissertation is the result of my own investigations, except

where otherwise stated. I also declare that it has not been previously or concurrently

submitted as a whole for any other degrees at IIUM or other institutions.

Husham Saeed Hasaballah Alawsi

Signature ………………………………….. Date……………………………..

vi

INTERNATIONAL ISLAMIC UNIVERSITY MALAYSIA

DECLARATION OF COPYRIGHT AND AFFIRMATION

OF FAIR USE OF UNPUBLISHED RESEARCH

Copyright © 2012 by Husham Saeed Hasaballah Alawsi. All rights reserved.

ISLAMIC REAL ESTATE INVESTMENT TRUSTS IN MALAYSIA

I hereby affirm that The International Islamic University Malaysia (IIUM) holds all

rights in the copyright of this work and henceforth any reproduction or use in any

form or by means whatsoever is prohibited without the written consent of IIUM. No

part of this unpublished research may be reproduced, stored in a retrieval system, or

transmitted, in any form or by means, electronics, mechanical, photocopying,

recording or otherwise without prior written permission of the copyright holder.

Affirmed by Husham Saeed Hasaballah Alawsi.

………………………… …………………

Signature Date

vii

To My Dear Father, Mother,

Brothers and Sister and Friends

With Love

viii

ACKNOWLEDGEMENTS

Praise is to Allah the Almighty for the blessings He (S.W.T) bestowed upon us; and

peace is upon our prophet Muhammad and upon his household and companions.

Every individual belongs to a community where each member supports the other, and

that applies to the academic communities where students, lectures, colleagues and

friends provide assistance and support to each other. This thesis, like any other

academic work, could not have been completed without the help and support of many.

Above all, my utmost appreciation and gratitude goes to my beloved father, Prof Dr.

Saeed Hasaballah Abdul Allah Alawsi, for all the encouragement and support, both

mental and financial, that he has given me throughout my life and during my

pursuance of higher education in particular. My never ending respect, indebtedness

and appreciation also go to my supervisor, Prof. Dr. Norhashimah Mohd Yasin, for all

the time, effort, support and encouragement she spent and gave while reading this

thesis, correcting its errors and guiding me through its execution and procedures. My

gratitude also goes to Raziah Sultan Kabeer for commenting on this thesis and

continuous support and concern throughout my research period. Special thanks go to

Mr. Ali Abdullah Laing, for the fruitful information he had generously provided, and

which contributed much to findings of the research as well as proofreading the work.

Last but not least, my heartfelt appreciation and gratitude to all my friends and

colleagues who helped in the collection of research materials and provided the mental

support and encouragement I needed.

To all of them I convey my thanks.

ix

TABLE OF CONTENTS

Abstract .................................................................................................................... ii

Abstract in Arabic .................................................................................................... iii

Approval page ......................................................................................................... iv

Declaration page ...................................................................................................... v

Copyright page ......................................................................................................... vi

Dedication ................................................................................................................ vii

Acknowledgements .................................................................................................. viii

List of Cases .............................................................................................................

List of Statutes .........................................................................................................

CHAPTER 1: INTRODUCTION ......................................................................... 1 1.1 Background to the Study ........................................................................

1.2 Summary of the Dissertation .................................................................. 4

1.3 Statement of Problem ............................................................................. 8

1.4 Objectives of the Dissertation ................................................................ 9

1.5 Hypothesis ............................................................................................. 9

1.6 Literature Review ................................................................................... 10

1.7 Scope and Limitation of the Study ......................................................... 15

1.8 Methodology .......................................................................................... 16

CHAPTER 2: CHEQUES .................................................................................... 17

2.1 Definition of “Cheque” ......................................................................... 17

2.2 Types of Cheque: Open & Crossed ........................................................

2.2.1 General Crossing ..........................................................................

2.2.2 Special Crossing ...........................................................................

2.2.3 “Not Negotiable” Crossing ..........................................................

2.2.4 “Account Payee” Crossing ...........................................................

2.3 Brief Differences between Bills Of Exchange and Cheques .................

2.4 Rights, Duties and Obligations of Parties .............................................. 18

2.4.1 Parties ........................................................................................... 26

2.5 Dishonour of Cheques: Rights and Liabilities Of Parties ...................... 29

2.6 Matters Affecting Cheques .................................................................... 30

2.6.1 Altered Cheques ........................................................................... 30

2.6.2 Canceled of Cheques .................................................................... 33

2.6.3 Overdue Cheques ......................................................................... 34

2.6.4 Stale Cheques ............................................................................... 39

2.6.5 Un-dated, Ante-dated & Post-dated Cheques .............................. 40

2.6.5.1 Un-dated Cheques ................................................................ 40

2.6.5.2 Ante-dated & Post-dated Cheques ....................................... 41

2.7 Lost or Stolen Cheques & Duplicates ....................................................

2.8 Conclusion ............................................................................................. 43

x

CHAPTER 3: DEFINITION OF FORGERY .....................................................

3.1 INTRODUCTION ..................................................................................

3.2 Governing Law ...................................................................................... 47

3.2.1 Penal Code ................................................................................... 47

3.2.1.1 Section 463: Forgery ............................................................

3.2.1.2 Section 464: Making a False Document ...............................

3.2.1.3 Common Law .......................................................................

3.2.1.4 Bills of Exchange Act 1949 & Bills of Exchange [Amendment]

Act 1988 ........................................................................................... 48

3.3 Bases of Claims on Forged Cheques ...................................................... 55

3.3.1 Claims Based on Breached of Mandate ....................................... 55

3.3.2 Payments made Contrary to Mandate which Discharge a Customer’s

Debts ..................................................................................................... 57

3.3.2 Claims Based on Conversion ...................................................... 58

3.3.2.1 Claims Against the Collecting Bank .................................... 60

3.3.2.2 Claims Against the Paying Banker ....................................... 63

3.3.2.3 Claims in Conversion on ‘ Account Payee’ Cheque ............ 65

3.3.3 Claims Based on Negligence ......................................................

3.4 Conclusion .............................................................................................. 66

CHAPTER 4: FORGED CHEQUES AND STATUTORY PROTECTION FOR

BANKERS .......................................................................................................... 71

4.1 Protection for the Collecting Banker ...................................................... 71

4.1.1 The Meaning of Good Faith ........................................................ 72

4.1.2 The Meaning of Negligence ........................................................ 77

4.1.3 Collection of Cheques Payable to third Party .............................. 78

4.1.4 Defence of Estoppel ..................................................................... 80

4.1.5 Defence on Contributory Negligence........................................... 82

4.2 Statutory Protection of Paying Banker in Respect of Endorsement ...... 85

4.2.1 Protection Under Section 60 Bills of Exchange Act 1949 .......... 85

4.2.2 Protection Under Section 83 Bills of Exchange Act 1949 .......... 89

4.2.3 Protection for Banker Acting as Paying and collecting Banker ... 91

4.3 Banker’s Defence-Customer’s Failure to Exercise Reasonable Care ....

4.4 Conclusion .............................................................................................. 92

CHAPTER 5: EVIDENTIAL ISSUES ON FORGERY ..................................... 98

5.1 The Importance of Signature on Cheque ............................................... 98

5.2 Signature by Agents ............................................................................... 101

5.3 Forged Signature and Writings on Cheques ........................................... 104

5.4 Proof of Signature .................................................................................. 106

5.5 Case Study Showing How Forgery on Cheques is Proven ....................

5.6 Conclusion .............................................................................................. 110

CHAPTER 6: FORGED CHEQUES FROM THE PRACTICE OF SELECTED

ARAB COUNTRIES ............................................................................................ 119

6.1 Introduction ............................................................................................ 119

xi

6.2 Definition of Cheque .............................................................................. 121

6.2.1 Definition of Cheque in Arabic ................................................... 121

6.2.2 Definition of Cheque in Shāriʽ ah ............................................... 121

6.2.3 Legal definition of Cheque........................................................... 122

6.2.4 Forgery of cheque in Arab Countries ........................................... 123

6.3 Types of Forged Cheques ....................................................................... 124

6.3.1 Material Alteration ....................................................................... 124

6.3.1.1 Unathorized Signature or Forged Signature ......................... 121

6.3.1.2 Crossing Cheque ................................................................... 125

6.3.2 Fraud ........................................................................................... 126

6.4 Duties of Bankers in Relation to Forged Cheques ................................. 127

6.5 Lost or Stolen in Relation to Forged Cheques ....................................... 130

6.5.1 Lost Cheques from the Drawer .................................................... 130

6.5.2 Lost cheques form the Holder ...................................................... 131

6.5.3 Stolen Cheques ............................................................................. 131

6.5.4 Egyptian Law in Relation to stolen and Forged Cheques ............ 132

6.6 Legal Solutions in Relation to Forged Cheques ..................................... 133

6.6.1 Given Notice ............................................................................. 133

6.6.2 Stop Payments of Cheques (Countermand) ................................. 134

6.6.3 Limits to a Bank’s Liability .........................................................

6.7 Conclusion ..............................................................................................

CHAPTER 7: CONCLUDING REMARKS .......................................................

BIBLIOGRAPHY ..................................................................................................

xii

LIST OF CASES

Abbey National Pte. V. JSF Finance Currency Exchange Co. Ltd. [2006] E.W CA.

Civ. 328.

Abdul Rahim Abdul Hamid & Ors v. Perdana Merchant Bankers Bhd & Ors [2006] 3

CLJ 1.

Affin Bank Bhd v. Success com Enterprise Sdn Bhd [2009] 1MLJ 36.

Aktin LJ in Joachimson v. Swiss Bank Corporation [1921] 3 KB 110.

Algemene Bank Nederland NV v Happy Valley Restaurant Pte Ltd [1991] 2 MLJ 289.

Arab Bank Ltd. v. Ross [1952] 2.Q.B.216.

Bailey v Bodenham [1864] 16 C.B.N.S. 288.

Bank Bumiputra Malaysia Bhd v Hasbudin Haslin [1998] 2 CLJ Supp 332.

Bank of Montreal v. Tourangean [1980] 118 DLR (3D) 293.

Barclay’s Bank Ltd v. WJ Simms & Cooke (Southern) Ltd [1980] 1 QB 67.

Bintai Kindenko Pte Ltd v. The Sanwa Bank Ltd & Malayan Banking Bhd [1994] 3

SLR 459.

Blackburn Building Society V. Gunliffe, Books & Co [1882] 22 Ch D 61.

Brown v. Westminster Bank [1964] 2 Lloyd’s Rep. 187.

Burnett v. Westminister Bank Ltd [1966] 1 QB 742.

Carpenters’ Company V. British Mutual Banking Co. Ltd. [1938] 1 K.B. 511

Caswell v Powell Duffryn Associated Collieries Ltd [1940] AC 152.

Commissioner of Taxation v English Scottish and Australian Bank Ltd [1920] AC 683.

Commissioners of State Savings Bank v Permewan, Wright & Co [1914] 19 CLR 457.

Commonwealth Trading Bank of Australia v. Sydney Wide Stores Pty. Ltd. [1981] 148

CLR 304

Dey v. Pullinger Engineering Co. [1921] 1K B 77.

xiii

E.B. Savory v Lloyds Bank Ltd [1932] KB 122.

Ex p. Birmingham Banking Co. [1886] LR 3 CH 651, 654.

Far Eastern Bank Ltd v Bee Hong Finance Co. Ltd. [1971] 2 MLJ 6.

Foley v. Hill [1848] 2 HL Cas 28.

Globelink Container Line (M) Sdn Bhd v. Bumiputra Commerce Bank Berhad [2011].

Grane v. Lavoie [1912] 4 DLR 175; 22 Man R 330.

Great Western Railway Co v London and County Banking Co Ltd [1901] AC 414

Greenwood v. Martins Bank Ltd [1993] AC 51 HL.

Haywood v Pickering [1974] L.R.9Q.B.428.

Hollins v. Fowler [1875] LR 7 HL 757.

Importers Company Limited v Westminster Bank Limited [1927] 2 KB 297.

Ingham v. Primrose [1859] 7 CBNS 82.

Kana Pana Adeyappa Chity v. AM Abdulrahman & Ors [1900] 6 SSLR76.

Kepitigalla Rubber Estates Ltd V. National Bank Of India Ltd [1909] 2 KB 1010.

Kong Nen Siew v. Lim Siew Hong [1971] 1MLJ 262

Koster’s Permier Pottery Pty. Ltd. V. Bank of Adelaide [1981] 28 SASR 355.

Kum Wah Sdn Bhd v RHB Bank Bhd [2009] 9 MLJ 490.

Lawrie v. commonwealth Trading Bank of Australia [1970] QDR 373.

Leadbitter v. Farrow [1816]5M& S 345; Exp. Rayner [1868] 17 WR 64.

Leolaris (M) Sdn Bhd v. Bumiputera Commerce Bank Berhad [2009] 10 CLJ 234.

Lien Chung Credit & Leasing Sdn Bhd v Chang Chin Choi [1994] 3 MLJ 488.

Liggett (Liverpool) Ltd. v. Barclays Bank Ltd [1928] 1 K B 48.

Linklaters (a firm) v HSBC Bank PLC & Ors (Comm) [2003] ESHC 1113.

Lloyds Bank Ltd. v. Chartered Bank of India, Australia and China [1929] 1 KB 40.

xiv

Lloyds Bank Ltd v EB Savory & Co [1932] AC 201.

London and River Plate Bank Ltd v. Bank of Liverpool Ltd. [1896] 1Q B 7.

London Joint Stock Bank Ltd v. Macmillan and Arthur [1918] AC 777.

London Intercontinental Trust Ltd. v. Barclays Bank Ltd [1980] 1 Lloyd’s Rep 241.

Lumsden and Co. v London Trustee Saving Bank [1971] 1 LIyods Rep 114.

McDonald & Co. v. Nash & Co. [1922] WN 272, CA.

Midland Bank Ltd. v. Seymour [1955] 2 Lloyd’s Rep 147.

M’Kenzie v British Linen Co [1881] 6 App Cas 82.

Morison v. London County and Westminster Bank Ltd. [1932] 3KB 366.

National City Bank of New York v Ho Hong Bank Ltd [1932] MLJ 64.

Ogden v. Benas [1874] 3 L.R.9 C.P.513.

Orbit Miningand Trading Co.Ltd. V.Westminster Bank Ltd [1963] 1QB 794.

Prima Nova Sdn Bhd v. Affin Bank Bhd [2010] 9 CLJ 75.

Prince v. Oriental Bank Corpn(1878) 3 APP Cas 325at 332-333, PC; Rv. Lovitt[1912]

AC 212

Proven Development Sdn Bhd v HSBC [1998] 6 MLJ 150-161.

Prosperity Ltd v. Lloyds Bank Ltd [1923] 39 TLR 372.

Public Bank Berhad v. Anuar Hong & Anor [2005] 1 CLJ 289.

Public Prosecutor v. Muhamed Bin Sulaiman [1982] 2 MLJ 320.

Public Prosecutor v. Mohamed Kassim Bin Yatim [1977] 1 MLJ 64, 66.

Rahim Khan v. Kurshid Ad AIR [1975] SC 290.

Rama Corporation Ltd v. Proved Tin & General Investments Ltd [1952] 2 QB 147.

RHB Bank v Comax Sdn. Bhd. & Anor [1999] 3 CLJ 552-564

Richards v. Huff, 104 OK1.221, 231, P.76. [1930].

Robinson V. Midland Bank Ltd [1925] 41 TLR 402.

xv

Royal Bank of Scotland v Tottenham [1894] 2 QB 715.

Smith V. Union Bank of London [1875] 1QBD 31.

SPH de Silva v. Js David [1972] 2 MLJ22.

Syarikat Islamiyah v. Bank Bumiputra Malaysia Bhd.[1988] 3MLJ 218.

Syarikat Perkapalan Timur v. United Malayan Banking Corporation Bhd. [1982] 2

MLJ 193.

Tai Hing Cotton Mill Ltd v. Liu Chong Hing Bank Ltd & ORS [1985] 3 WLR 317;

[1986] AC 80.

Tina Motors Pty Ltd. V. Australia & New Zealand Banking Group Ltd [1977] VR 205.

Toor V. Bank of Montreal [1992] 2 Bank LR8.

UCO Bank v. HSBC Bank (Malaysia) Bhd [2010] 2 CLJ 754.

Underwood Ltd. V. Bank Of Liverpool and Martins [1924] 1KB 775, CA.

Ung Eng Huat & Anor v. Arab Malaysian Bank Berhad [2003] 3 CLJ 624.

United Asian Bank Bhd v. Tai Soon Heng Construction Sdn Bhd. [1993] 1MLJ 182.

United Commercial Bank Ltd v. Reliable Hire Purchase Company (p) Ltd [1976] (2)

MLJ 286.

United Malayan Banking Corp. Bhd. v. Kek Tek Huat [1998] 1 MLJ 83.

United Malayan Banking Corporation Bhd v. Kek Tek Huat [1990] 1 MLJ 83.

Walker & Anor v Manchester Liverpool Co Ltd [1913] 29 TLR 492.

Woodland Development Sdn. Bhd. v Chartered Bank [1986] 1 MLJ 84.

Write V. Teal [1840] 12 Ad & E1 106.

Yokohama Specie Bank Ltd v. Lee Kwock Jou, Wing Tai Loong & Co. [1933] MLJ

122.

High Court, case number 121, (25/4/ 1983) (Egypt)

High Court, case number1133/45, (10/6/1996) (Egypt)

High Court, case number (1133, 1985) (Egypt)

High Court, case number (1145, 1967) (Egypt)

xvi

Supreme Court, case number (82, 1999) (Egypt)

xvii

LIST OF STATUTES

Bills of Exchange Act 1949 (Malaysian)

Bills of Exchange (Amendment) Act 1998 (Act No.1012 of 1998)(Malaysian)

Bills of Exchange Act 1882 Amendment Act 1932(English)

Cheques Act 1992(English)

Cheques Act 1957(English)

Cheques Act 1986(Cth) (Australia)

Contract Act 1950 (Act 136) (Malaysian)

Evidence Ordinance No.11 of 1950(Malaysian)

Moneylenders Ordinance 1951

Penal Code FMS Cap 45(Malaysian)

Stamp Act (1853)

Qānūn al-Tijārah(Trade Law) No.12 of 1966 (Jordan)

Qānūn al-‘qwb t (Penal Code) Act 1984 (United Arab Emirates)

Qānūn al- ‘qwb t (Penal Code) (Act No.58. 1937) (Kuwait)

Qānūn al-‘qwb t (Penal Code) (Act No 16 .1960) (Jordan)

Qānūn al-‘qwb t (Penal Code) (Act No 111.1969) (Iraq)

Qānūn al-Sakuk (Cheque Law) (1992) (Egyptian)

1

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND TO THE STUDY

Cheques are the most widely used negotiable instruments in domestic transactions

because, to a certain extent, the use of cheques as a mode of payment is relatively

convenient. With the growing popularity of the use of cheques came a decline in the

use of other types of bills of exchange. Each month, millions of cheques worth billions

of Malaysian Ringgit move around the general cheque clearing system in Malaysia.

Even though it is opined that cheques are becoming less important as an

instrument of payment due to the emergence of more sophisticated and advanced

modes of payment such as e-banking, credit cards, automatic teller machine (ATM)

cards and so on, the fact that they still, nevertheless, play a major role in today’s

business world is undeniable. Due to its wide reach, cheque issuance remains popular

and their value constitutes 95.7% of total non-cash payments in 2004.1

The origin of cheques may be traced back to the golden era of Islam beginning

in the Seventeenth Century. It is believed that cheques may have actually originated

from the Arabic words, ‘sukuk’ (plural) and ‘sakk’ (singular). Hence the notion of

‘sukuk’ used to denote bonds in the current Islamic banking and financial industry.

Going back in history, Sayyidina Umar used cheques to pay the wages of his soldiers,

which was then written on a piece of wood. Therefore, a cheque in ancient times was

not confined to any particular form of material and was allowed in any form according

1 “The Payment and Settlement System,” Bank Negara Malaysia Publication (22

nd January, 2011), via

http://www.bnm.gov.my/files/publication/ar/en/2004/cp10.pdf.

2

to convenience.2 However, in modern times, the practical aspect comes in to play and

cheques are standardized in paper form. However, another version of the origin of

cheques can be traced back to England. It is believed that cheques originated with

Seventeenth Century goldsmiths.

The two main functions of a cheque are as follows; firstly it enables a

customer who maintains an account with a bank to effect withdrawals from that

account and secondly, it enables a customer to utilize funds lent by him to a bank in a

current account to make payments to third parties. The customer draws a cheque on

the bank payable to a third party. Originally cheques were normally drawn payable to

bearer. But nowadays most cheques are drawn payable to order and are crossed. They

are delivered by the payee to his bank for collection and are collected through the

clearing system. Even though a cheque is considered as a type of Bill of Exchange,

there are however some differences between cheques and other forms of bills of

exchange.

A cheque essentially acts as an instrument of payment. Being payable on

demand, it is also intended as an instrument which will immediately be paid. A bill of

exchange, on the other hand, is a credit instrument. It is frequently drawn payable at a

future date and is indorsed, discounted or sold to a third party by the payee. Cheques

are not, and are not intended to be, accepted in this way. A banker who has sufficient

funds of his customer to enable him to pay a cheque drawn on him will be liable to the

customer if he dishonours it. In contrast, the acceptor of a bill has engaged that he will

pay according to the tenor of his acceptance and he is the party who is primarily liable.

Thus, unlike in the case of a cheque, the drawer’s liability on an accepted bill is a

secondary liability; he promises that on due presentment it will be paid according to

2 Muslim Bin Al-hajaj Al-Nysabwry, Ṣ aḥ yḥ Muslim, Kitab Al-Byw‘, Egypt: Dar Bin Al-Hytham,

1422H- 2001, at 388.

3

its tenor, and that if it is dishonoured he will compensate the holder or any endorser

who is compelled to pay it, provided that the requisite proceedings on dishonouring

are taken.

One of the duties of the banker is to honour the customer’s cheques, and this is

also one of the greatest rights of the customer as far as banking law is concerned. This

banker’s duty is considered as a strict liability as the banker acts as an agent to the

principal, i.e. customer. The customer’s signature amounts to a mandate given to his

banker to act on his instruction. However, this duty is not absolute but subject to

certain conditions thereto3.

For example, on 23rd

November 2010, in New Delhi, a case was reported

whereby the Central Bureau of Investigation (CBI) had arrested 6 people in a case of

forgery and cheating in which a Punjab National Bank branch in Lucknow was

defrauded of Rs.1.46 Crore.4

The accused fraudulently cashed forged cheques

purportedly issued from their account in the bank through the Cheque Truncation

System (CTS) in Delhi and Lucknow. A banker's main challenge is in relation to

forged cheques. Very many cases have been brought against banks for honouring

forged or authorized cheques.

It is the researcher’s personal enthusiasm on this issue of forged cheques, with

the above case as an example of the reason that has created an interest to investigate

more about forged cheques. Forged cheques, therefore, covers the act of forgery –

which is the act of modifying an instrument in order that it may pass or be used as

3 A banker has an implied duty to honour his customer’s cheques provided that (i) the cheques are

drawn in the proper form (ii) there are sufficient funds to meet the payment of the cheque or if an

overdraft is granted, it must not exceed the agreed overdraft limit (iii) they are presented during

banking hours (iv) there are no legal proceedings against the customer, such as the service of a

garnishee order. 4

TNN, “CBI arrests six in forged cheque case,” The Times of India (15th

May 2009), via

http://articles.timesofindia.indiatimes.com/2009-05-15/india/28181595_1_cheque-case-cheque-

truncation-system-micr-code.

4

genuine.5 An instrument, thus, is false if the whole or a material part of it purports to

be made by, or with the authority of, a person who did not in fact make it or authorize

its making.

1.2 SUMMARY OF THE DISSERTATION

Forgery is one of the main areas of commercial crime. In banking operations, fraud

cases are on the increase and the most common occurrence of fraud cases appears to

be forgery involving cheques.

In Malaysia, the criminal enactment concerned is the Penal Code which has

been taken textually from the Indian Penal Code. Thus, forgery is statutorily defined

in Section 463 of the Penal Code.6 This matter is very crucial and relevant to

Malaysian bankers, as paying and collecting cheques represent an important and

essential function of banking operations in Malaysia.

This work covers the broad spectrum of the law on forged cheques,

particularly in Malaysia; this spectrum covers the rights, duties and obligations of

parties, the law of forgery and its development in commercial law, basis of claims on

forged cheques, forged cheques and statutory protection for bankers, evidential issues

on forgery and last, but not least, forged cheques from the practice of some Arab

countries.

Forged cheques are an alarming occupational hazard for bankers. It is a

relevant issue for all Malaysians who are customers of banks. This is because cheques

are used widely as an instrument in business transactions to develop the economic

5 By contrast a counterfeit cheque would be one that was completely fake.

6 Section 463 states “Whoever has the intention to make any false document or part of a document with

purpose to cause damage or grievance to the public or to any person, or to support any claim or title, or

to cause any person to part with property, or to enter into any express or implied contract, or with intent

to commit fraud or that fraud may be committed, that leads to commit forgery”.

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stability of the country. A study on the law of forgery and affects on the bankers

necessitates a thorough examination of Section 24 of the Malaysian Bills of Exchange

Act 1949 (BOEA).

The cheque is a type of bill of exchange and is the most commonly used

negotiable instrument around the world. Sections 3(1) and 73(1) of the BOEA read

together provide a definition of a cheque as:

An unconditional order in writing addressed by one person to another

(who must be a banker), signed by the person giving it, requiring the

banker to pay on demand, a sum certain in money to or to the order of a

specified person or to bearer.

From the above, the parties to a cheque involve three persons, namely a drawer

who draws a cheque, a drawee who is the paying banker and a payee who will be

receiving the proceeds of the cheque.

Without an analysis on the application and development of the doctrine of

estoppel, any study on the development of the law of forgery in commercial law,

particularly in the field of cheques, would not be complete. Therefore, the study will

also touch on the doctrine of estoppel since this doctrine is an exception to the

banker’s liability in most fields of commercial law. Section 24 of the Bills of

Exchange Act 1949 provides the defence of estoppel for the banker who paid a cheque

where the drawer’s signature was forged or unauthorized.

Generally, a cheque serves 2 functions. First and foremost, it constitutes a

negotiable instrument utilized to effect the payment of a sum due from the drawer.

Here, a cheque functions as an instrument which can be circulated instead of cash.

Secondly, in the view of the banker-customer relationship, a cheque constitutes an

order or an instruction issued by the customer to the bank. Therefore, a cheque is an

instrument where the customer acting as a principal, instructs the bank - his agent - to

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perform a specific act, being the payment of a definite sum of money to the order of

the payee or the bearer. In other words, this means that the contractual relationship

arising between the bank and the customer from the drawing of the cheque is

primarily governed by the principles of the law of agency.

Forgery is a cause for concern to both paying and collecting bankers. Thus, the

law concerning the duties and liabilities of bankers and the statutory protection

available to bankers is an important matter to be considered regarding payment and

collection of forged cheques. Therefore, the legal position of the collecting bank and

the statutory protection accorded to it when collecting the proceeds of cheques

deposited with it, and the legal position of the drawee or paying bank and the statutory

protection accorded to it is considered.

The most common defence pleaded by the bank is the statutory defence under

S85 of the Bills of Exchange Act 1949. However, when the customer has no title, or a

defective title, to the instrument, the banker does not incur any liability to the true

owner of the instrument by reason of only having received payment thereof.

Therefore, by virtue of S85 of the BOEA, it appears that the banker would be

protected when collecting such an instrument, provided that he has acted in good faith

and without negligence. A contrary view was taken by the Supreme Court of Ceylon

in the case of Bank of Ceylon7, where it was held that the banker is not protected

because the instrument is no longer a cheque within the meaning of the expression in

the section since the cheque was fraudulently raised. In that particular case the court

was of the view that the section applied to cheques which did not have the taint of

forgery or fraudulent alteration. The banker was therefore liable.

7 See Bank of Ceylon v Kulatilleke [1957] NLK 188.

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The various evidential issues in relation to forgery of cheques, in particular

forged signatures and writing on cheques, will also be discussed. Section 24 of the

Bills of Exchange Act 1949 would, except in limited situations, render a cheque where

the drawer’s signature is forged, inoperative. This requires special attention to the

proof of the signature, with critical analysis on testimonial evidence, non-expert and

expert opinion and comparison of handwriting

The Islamic perspective in relation to forged cheques will be discussed in

relation to the practice of Muslim countries in the Arab world.

1.3 STATEMENT OF PROBLEM

It is apparent that forged cheques are a real problem in Malaysia and is an alarming

occupational hazard for bankers. It must be borne in mind that in reality not all cases

of forgery of cheques are reported to Bank Negara Malaysia (BNM). It is common

practice that bank officers may elect to settle claims amicably out of court and quietly

pay out on forged cheques instead of reporting such losses to the banks' management,

much less to BNM. The bank officer who might have paid on a forged cheque may

well settle with the customer if it is within his or her financial capacity to do so. This

is to avoid reprimand or disciplinary action for negligence.

1.4 OBJECTIVES OF THE DISSERTATION

1- To examine and analyze the duties of the banker in relation to forged

cheques.

2- To determine the statutory protection for bankers.

3- To explore the evidential issues related to forged cheques.