The Madras High Court has held that where a depositor has validly created fixed deposits and the bank fails to prove that loans secured against those deposits were authorised by the depositor, the bank remains bound to honour the deposits. Resultantly, fraudulent loans obtained through impersonation cannot be treated as a defence against the genuine depositor’s claim for repayment of the fixed deposit amounts and accrued interest.
Emphasising that a bank cannot refuse repayment of a genuine fixed deposit merely because fraudsters obtained loans against it through impersonation, the Court held that Indian Overseas Bank remains liable to honour fixed deposits after failing to prove that loans raised against the deposits were authorised by the depositor, Sree Gokulam Chit & Finance Company.
Once the depositor proves the existence of the fixed deposits and non-payment on maturity, the burden shifts to the bank to justify withholding the money. The bank must establish that the loans were obtained by duly authorised representatives of the depositor if it seeks to set off deposit amounts against such loans, added the Court.
The High Court also held that evidence of fraud by third parties, including criminal proceedings and the involvement of bank officials, does not extinguish the bank’s contractual liability towards the genuine depositor. Hence, failure to maintain proper loan documentation and prove valid authorisation can result in the bank being directed to repay the entire deposit amount with interest.
Briefly, the dispute arose after Indian Overseas Bank vs Sree Gokulam Chit and Finance Company involved three fixed deposits worth Rs. 6 crores created by Sree Gokulam Chit and Finance Company Pvt Ltd. with Indian Overseas Bank through crossed account-payee cheques. The bank issued fixed deposit receipts (FDRs) in the company’s name. Later, the company discovered that loans aggregating Rs. 2.70 crores had been sanctioned against two of those FDRs to third parties without its knowledge or authorization.
The company immediately lodged complaints and asserted that fraudsters had impersonated its representatives to obtain the loans. While the bank paid the maturity proceeds of the third FDR, it refused to release the maturity amounts of the first two deposits, citing the outstanding loans. Consequently, the company filed a civil suit seeking recovery of the deposit amounts and interest.
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The Division Bench comprising Justice P. Velmurugan and Justice Gk. Muthukumaar observed that the company had successfully proved, through documentary evidence, that it had deposited Rs. 3 crore under the first two fixed deposits and that the bank had received and encashed its cheques. The Court noted that once the depositor established the existence of the deposits and non-payment of the maturity proceeds, the burden shifted to the bank to prove that the loans had been validly obtained on behalf of the company through authorized persons.
The Court further noted serious deficiencies in the bank’s case. The investigation had revealed that loans were obtained through impersonation, and significantly, a bank official had been convicted in the criminal proceedings arising out of the fraudulent transactions. The Court found that the bank failed to produce satisfactory evidence showing that the company had authorized anyone to obtain loans against the FDRs. It also noticed that the loan documentation itself was not in proper order.
The Court rejected the bank’s argument that the depositor’s alleged negligence or the pendency of criminal proceedings relieved it from liability. It held that merely because fraudsters had obtained loans against the deposits did not extinguish the bank’s obligation to repay the genuine depositor whose funds had been accepted and for whom the deposits had been created.
