Clearing-house managers cannot debit member banks for forged instruments; recovery lies against the defaulting bank.

The appeals arose from a common judgment dated 19.08.2013 passed by the learned Single Judge in two writ petitions concerning debits made by the State Bank of India (“SBI”), acting as manager of the clearing house, in the accounts of Bank of Baroda (erstwhile Vijaya Bank) in relation to disputed fake, forged or lost instruments presented through clearing.

SBI had debited approximately ₹40 lakhs, along with interest, from the accounts maintained by the petitioner bank and thereby created an overdraft.

The Single Judge quashed the debit entries, directed SBI to reverse them by crediting the concerned amount, and permitted SBI to debit the amount from Veraval Ratnakar Co-operative Bank, identified as respondent No. 2, in accordance with law.

SBI challenged that judgment in the present Letters Patent Appeals, contending that Rule 11 of the Uniform Regulations and Rules for Bankers Clearing House (“URR-BCH”) required it, as clearing-house manager, to settle the accounts.

Whether SBI, acting as manager of the clearing house, was entitled or obliged under Rule 11 of the URR-BCH to debit the account of a member bank, namely Bank of Baroda, for amounts relating to fake, forged or lost instruments presented in clearing.

Whether the Single Judge was justified in quashing SBI’s debit entries and directing SBI to restore the amount, while permitting recovery from Veraval Ratnakar Co-operative Bank in accordance with law.

The Court applied Rule 11 of the URR-BCH, holding that the provision concerns the liability of a defaulting bank and the action permissible against that defaulting bank; it does not authorise action against another member bank such as Bank of Baroda.

The Court also relied upon the RBI’s communication dated 08.09.2003 concerning disputes between banks over recovery of amounts involved in fake, forged or lost instruments presented in clearing, treating the RBI’s position as supporting the conclusion reached by the Single Judge.

The Court rejected SBI’s interpretation of Rule 11 because the rule addressed remedies against the defaulting bank and could not be used to impose liability upon Bank of Baroda merely because it was a member bank of the clearing house.

The RBI’s response on the mechanism for resolving disputes concerning forged or otherwise invalid instruments supported the conclusion that SBI could not unilaterally debit Bank of Baroda’s account in its capacity as clearing-house manager.

Consequently, the debit of ₹40 lakhs plus interest and the resulting overdraft were legally unsustainable.

The directions to restore the amount to Bank of Baroda, while preserving SBI’s liberty to debit and recover the amount from the bank responsible for the transaction, were therefore found to contain no error of law.

Both Letters Patent Appeals were dismissed, the Single Judge’s directions to reverse the debit entries and credit the amounts with applicable bank-rate interest were upheld, and SBI’s liberty to recover the amount from Veraval Ratnakar Co-operative Bank in accordance with law was maintained.

No order was made as to costs, and any interim order was vacated forthwith.