Forgery, Forged Indorsements and Fictitious Parties (Sections 41 and 42)

Negotiability protects honest transferees against defects in title, but it cannot manufacture a title that never existed. A forged signature is not a defective signature; it is no signature at all. This note explains the general rule on forgery, the two special provisions in Sections 41 and 42, the protections that soften the rule for banks and later holders, and the position of instruments involving fictitious parties.

1. The General Rule: Forgery Is a Nullity

• No liability on the forged signature: a person whose signature is forged is not a party to the instrument and is not liable on it, even to a holder in due course.
• No title through a forged indorsement: where an order instrument is transferred by forging the payee's or an indorsee's indorsement, no later transferee becomes a holder, let alone a holder in due course. The true owner can recover the instrument or its value from whoever holds it or has received payment.
• Bearer instruments: a bearer instrument passes by delivery, so an indorsement on it is not needed for title. A forged indorsement on a bearer instrument does not affect the title of a holder in due course, though the forger is of course liable.

2. Acceptor and Forged Indorsement (Section 41)

An acceptor who accepts a bill knowing, or having reason to believe, that an indorsement on it is forged cannot later rely on the forgery to escape liability. By accepting with that knowledge, he is treated as having adopted the instrument as it stands.

3. Bill in a Fictitious Name (Section 42)

Suppose X draws a bill in the fictitious name "Y", payable to Y's order, on B, who accepts it. X then indorses it in the same name "Y" to C, a holder in due course. B cannot avoid liability by showing that Y does not exist: the drawer's signature and the indorsement are in the same hand, and B, by accepting, vouched for the drawer's signature.

4. Fictitious or Non-existing Payee

Under Section 7(3) of the English Bills of Exchange Act, 1882, where the payee is a fictitious or non-existing person, the bill may be treated as payable to bearer. In Bank of England v. Vagliano Brothers (House of Lords, 1891), a clerk forged bills naming a real firm as payee that was never intended to receive payment; the payee was held fictitious and the bills payable to bearer, so the bank that paid them was protected. The Indian Act contains no corresponding provision. Indian courts therefore deal with such cases under the general rules on forgery, the banker's statutory protections and the conduct of the parties.

5. Protections That Soften the Rule

For later holders: estoppel

Under Section 122, no indorser may, in a suit by a subsequent holder, deny the signature or capacity of any prior party. A person who indorses an instrument bearing a forged signature is therefore liable on his own indorsement to those who take after him (Topic 38).

For paying banks

• Forged indorsement on an order cheque: under Section 85(1), a bank that pays a cheque payable to order which purports to be indorsed by or on behalf of the payee is discharged by payment in due course, even if the indorsement is forged (Topic 35).
• Drafts: Section 85A gives the same protection for drafts drawn by one office of a bank on another.
• Forged drawer's signature: there is no protection for paying a cheque on which the customer's own signature is forged. Such a cheque is no mandate at all, and the bank cannot debit the customer's account.

For collecting banks

Under Section 131, a collecting bank that in good faith and without negligence collects a crossed cheque for a customer incurs no liability to the true owner merely because the customer's title proves defective, including where an indorsement was forged (Topic 36).

6. Related Topics and Provisions

• Holder in due course (Topic 13)
• Paying banker (Topic 35)
• Collecting banker (Topic 36)
• Presumptions and estoppels (Topic 38)