Gross Dereliction of Duty That Traverses Beyond Negligence Into the Arena of Palpable Fraud: Calcutta High Court Fixes Bank’s Liability for Premature FD Encashment

“Bank Cannot Escape Liability for Acts of Its Agent Done in the Regular Course of Business” – Calcutta High Court upheld a trial court decree against the bank, finding it liable for the fraudulent premature encashment of two Fixed Deposit Receipts (FDRs) belonging to the respondent-firm. The Division Bench held that the bank’s gross negligence, which enabled the siphoning of nearly ₹30 lakhs by unauthorized persons, amounted to fraud, and affirmed the decree for compensation and interest.

FDRs Discharged Without Instruction, Funds Diverted to Fraudulent Account

The respondent-firm had placed two fixed deposits—₹25 lakhs and ₹5 lakhs—with Punjab & Sind Bank in May 1997, both maturing in six months. However, within mere days of opening, the bank discharged the deposits and credited the proceeds to a current account allegedly opened in the firm’s name—without any written instruction, authority, or identity verification.

“The FD of Rs.25,00,000/- was allegedly discharged on May 19, 1997, only two days after its opening… the FD of Rs.5,00,000/- was also prematurely discounted within five days… without any written instruction from the plaintiff,” the Court noted, calling the sequence of events “evidently suspect.”

The siphoning of funds occurred through a current account opened in the name of the firm, falsely naming a “proprietor” despite the firm being a registered partnership. The bank failed to verify signatures or credentials against its own records.

“The Entire Circumstances… Is Ample Justification to Prove Not Only Negligence but Palpable Fraud”

The High Court held that the bank’s conduct went far beyond mere negligence. The failure to raise any suspicion, verify identity, or obtain authorization amounted to active facilitation of fraud.

“Instead of doing so, the Bank merrily proceeded to prematurely discount the FDs… on the basis of the purported signature and seal of someone pretending to be a proprietor of a partnership firm,” the Court observed.

Rejecting the bank’s argument that fraud must be proved beyond reasonable doubt, the Court clarified: “The test to be applied in a civil proceeding would be preponderance of probability… which overwhelmingly indicate the complicity of the Bank officials and the Bank itself.”

Branch Manager’s Role: Bank Cannot Disown Acts Done in Course of Business

The bank argued that its Branch Manager acted in contravention of internal service rules, and therefore, it bore no vicarious liability. The Court rejected this argument:

“Opening of FD Accounts, prematurely discounting and discharging the same, opening current account… are all within the regular course of business… for which the Branch Manager is empowered by the Bank.”

“The Bank cannot avoid its liability for the acts of its agent… If the Bank suffers a decree due to the unlawful acts of any of its employees, it is for the Bank to seek recovery from the employee—but that cannot bind third parties.”

The Court dismissed the plea that the Branch Manager was a necessary party, holding that the plaintiff’s relationship and claim were strictly against the bank.

The High Court upheld the trial court’s decree directing the bank to pay ₹39.67 lakhs with interest, rejecting the appeal. It ordered the invocation of a bank guarantee furnished during appeal and directed additional interest to be paid within 90 days.

“The learned Trial Judge rightly fixed liability on the bank… There is no scope of interference in the present appeal and accordingly, the present appeal fails.”

Date of Decision: April 9, 2025