Court rules Indian Overseas Bank must pay maturity proceeds to Sree Gokulam Chit & Finance Co. Pvt. Ltd., rejecting bank's plea of impersonation fraud by unauthorized loan borrowers
In a significant judgment delivered on October 28, 2026, the Division Bench of the Madras High Court dismissed the appeal filed by Indian Overseas Bank (IOB) and upheld the decree in favor of Sree Gokulam Chit and Finance Company (Private) Limited, directing the bank to pay Rs. 3 crore along with accrued interest on fixed deposits (FDs) that matured but were dishonored by the bank. The case arises from a dispute over three fixed deposit receipts (FDRs) issued by IOB after encashment of crossed account payee cheques drawn by the plaintiff company.
The facts reveal that the plaintiff company issued three crossed account payee cheques totaling Rs. 6 crore to the bank for issuance of FDRs. The bank encashed these cheques by debiting the company's account with Catholic Syrian Bank and issued three FDRs in favor of the plaintiff. However, upon maturity of the first two FDRs amounting to Rs. 3 crore, IOB refused to pay the maturity proceeds alleging that third parties had fraudulently obtained loans against these FDRs by impersonating authorized representatives of the plaintiff company.
The plaintiff vehemently denied authorizing any loan against the fixed deposits and contended that the bank, having encashed their cheques and issued the FDRs, was duty-bound to pay the maturity value. The plaintiff further pointed out that the bank failed to prove the validity of the loans or authorization by the company. Investigation by the Central Bureau of Investigation (CBI) confirmed impersonation fraud by third parties and also led to the conviction of a bank official involved in the fraudulent transactions.
The trial court decreed the suit filed by the plaintiff for recovery of the amounts due under the first two FDRs with 24% interest per annum. On appeal, the Division Bench re-examined the oral and documentary evidence, including bank statements, the issuance of cheques and FDRs, and the CBI investigation reports. The court held that once the plaintiff established the deposit and issuance of FDRs, the onus shifted to the bank to prove lawful discharge of its liability through valid authority or repayment of loans. The bank failed to discharge this burden as the loan documents were incomplete and the implicated bank official was convicted.
Rejecting the bank's defense that loans availed by impersonators absolved it of liability, the court emphasized that the bank, which encashed the plaintiff's crossed account payee cheques and issued FDRs, is liable to repay the maturity proceeds to the depositor. The court also noted that the pendency of criminal proceedings could not be a ground for denying repayment. The judgment reaffirms the principle that banks cannot avoid liability to depositors by merely alleging fraud by third parties, especially when they fail to prove valid authorization or lawful discharge of obligations.
The appeal filed by Indian Overseas Bank was dismissed, and the plaintiff's entitlement to the maturity amounts along with interest was upheld, delivering a strong message on the protection of depositor rights and bank accountability.
Bottom Line:
Banking - Fixed deposit - Bank which encashed depositor's crossed account payee cheques and issued FDRs is bound to repay maturity proceeds to depositor - Mere plea that third parties, by impersonation, availed loan against FDRs cannot defeat depositor's claim, especially when depositor had not authorised such borrowing and bank failed to prove valid authority.
Statutory provision(s):
Indian Companies Act, 1956; Central Chit Funds Act; Negotiable Instruments Act (implied); Relevant banking regulations governing fixed deposits and loans (implied)
