What is a forged instrument? (Cheque/bill/Promissory note)

A negotiable instrument like a cheque,  bill of exchange, or promissory note is called a forged instrument when forgery takes place in the signature of the drawer, the signature of the endorser, alteration in name of the payee, alteration in amount, alteration in date, etc. If the forged endorsement is a nullity, then it will follow that the holder has no title to the instrument.
A forged instrument is meaningless as far as the drawer/endorser whose signature is forged is concerned because the holder of such instruments is not protected under the law. Forgery is void ab initio and confers no title to the holders. Therefore, the transferee will not be able to enforce payment from parties to the bill, cheque, and promissory note. In case such transferee gets payment by mistake such payment can be claimed back from him/her.

Truncated Cheque:

Notwithstanding anything contained in section 6, where an electronic image of a truncated cheque is presented for payment, the drawee bank is entitled to demand any further information regarding the truncated cheque from the bank holding the truncated cheque in case of any reasonable suspicion about the genuineness of the apparent tenor of the instrument, and if the suspicion is that of any fraud, forgery, tampering or destruction of the instrument, it is entitled to further demand the presentment of the truncated cheque itself for verification:
Provided that the truncated cheque so demanded by the drawee bank shall be retained by it if the payment is made accordingly.

Protection to paying banks under section 10 of the NI Act:

However, according to Section 10 of the Negotiable Instruments Act of 1881, “payment in due course” means a payment that is made in good faith and without negligence, in accordance with the instrument’s apparent tenor, and under circumstances that don’t provide a reasonable basis to believe the recipient isn’t entitled to the payment. Payment in due course also discharges the drawee on behalf of the payee.

But if it is proved that the drawee bank was negligent while making the payment of the forged cheque, then the drawee bank will be held responsible for passing such cheque and has to credit back the amount to the drawer’s account. Similarly, a bank that collected the cheque based on a forged endorsement will be held responsible and may have to return the proceeds collected by it.

Protection of collecting bank:

Section 131 of the Negotiable Instrument Act, of 1889 states that  “A banker who has in good faith and without negligence received payment for a customer of a cheque crossed generally or specially to himself shall not, in case the title to the cheque proves defective, incur any liability to, the true owner of the cheque by reason only of having received such payment”.

Forged Endorsement:

An acceptor of a bill of exchange that has already been endorsed is not relieved from liability if they knew or had reason to believe the endorsement was forged when they accepted the bill.
Section 89

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CLICK here to know ‘10 parties’ to a negotiable instrument viz. maker/drawer, drawee, payee, holder, holder in due course, endorser, endorsee, endorsement, drawee in the case of need, Acceptor for honour.