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Malaysian Banking Law – Customers’ Rights, Customers’ Duties, the Macmillan Duty and Greenwood Duty, and Bank Liability for Forged Cheques
Case Scenario
ABC Construction Sdn Bhd maintains a current account with XYZ Bank. Over a period of three years, the company’s accounts clerk, who is not an authorised signatory, forges numerous company cheques and successfully withdraws substantial sums from the account. The bank honours all the forged cheques and debits the company’s account accordingly.
The fraud is eventually discovered during an internal audit. ABC Construction immediately informs the bank and claims reimbursement of RM500,000 paid out on the forged cheques.
The bank argues that the company was negligent in supervising its employee, failed to detect the fraud earlier, and did not regularly inspect its bank statements. Consequently, the bank contends that the loss should be borne by the customer.
The issue is whether the bank or the customer bears liability for losses arising from forged cheques and what duties each party owes under the banker-customer relationship.
Customers’ Rights
The banker-customer relationship confers several important contractual rights upon customers.
1. Right to Repayment
A customer has the right to demand repayment of funds deposited with the bank. Once money is deposited, the bank becomes a debtor and undertakes an implied contractual obligation to repay an equivalent amount upon a valid demand.
This right forms the foundation of the banker-customer relationship and enables customers to access their funds whenever legally entitled to do so.
2. Right to Draw Cheques
A customer who maintains sufficient funds in a current account has the right to issue cheques against the available credit balance.
Correspondingly, the bank owes a duty to honour properly drawn cheques provided:
3. Right to Interest
Customers holding savings or deposit accounts are generally entitled to receive interest or returns according to the contractual terms governing the account.
The applicable rate may vary depending on market conditions and bank policy. Ordinary current accounts generally do not earn interest unless expressly agreed.
Customers’ Duties
While customers enjoy important rights, common law also imposes certain duties upon them.
The courts have consistently recognised that a customer owes only two principal duties to his banker:
The Macmillan Duty
The first duty is commonly known as the Macmillan Duty, derived from London Joint Stock Bank v Macmillan and Arthur.
Under this duty, a customer must exercise reasonable care when drawing cheques and executing written instructions so as not to facilitate fraud or forgery.
A customer is expected to:
This principle was also recognised in Joachimson v Swiss Bank Corporation, where the court stated that a customer must exercise reasonable care when issuing written instructions to the bank.
The Greenwood Duty
The second duty is known as the Greenwood Duty, originating from Greenwood v Martins Bank.
Under this duty, a customer who discovers that cheques purporting to bear his signature have been forged must notify the bank promptly.
The purpose of this duty is to allow the bank to:
Malaysian Position: United Asian Bank Bhd v Tai Soon Heng Construction Sdn Bhd
A leading Malaysian authority on forged cheques is United Asian Bank Bhd v Tai Soon Heng Construction Sdn Bhd.
Facts
The respondent company maintained a current account with the appellant bank.
Between 1979 and 1982, the respondent’s accounts clerk, who was not authorised to sign company cheques, forged numerous cheques drawn on the account. The bank honoured the forged cheques and debited the company’s account.
The fraud was discovered in December 1982. The company sued the bank to recover approximately RM397,660 paid out on the forged cheques.
The High Court ruled in favour of the company, and the bank appealed to the Supreme Court.
Held
1. Forgery Need Only Be Proven on a Balance of Probabilities
A customer alleging that forged cheques were honoured by the bank need only prove the forgery on the civil standard of proof, namely the balance of probabilities.
The customer is not required to establish forgery beyond reasonable doubt.
2. Bank Liability for Paying Forged Cheques
The Supreme Court held that a bank that pays on a forged cheque is liable under the tort of conversion.
This liability is one of strict liability.
Consequently:
3. Customers Owe Only Two Duties at Common Law
The Supreme Court expressly confirmed that customers owe only two duties to their bankers:
(a) Macmillan Duty
The duty not to draw cheques in a manner that facilitates fraud or forgery.
(b) Greenwood Duty
The duty to inform the bank promptly upon becoming aware of forged cheques.
The court further clarified that customers do not owe the following duties at common law:
Obiter Dictum
The Supreme Court observed that whether a signature has been forged is ultimately a question of fact.
The trial court must determine the issue after considering:
Critical Analysis
The decision in United Asian Bank Bhd v Tai Soon Heng Construction Sdn Bhd strongly protects customers from losses arising from forged cheques.
The Supreme Court emphasised that banks possess specialised expertise in verifying signatures and processing payment instruments. Since a forged cheque is legally void, the bank acts without authority when it honours such a cheque.
The judgment also prevents banks from shifting responsibility to customers through broad allegations of negligence. The court limited customer duties to the Macmillan Duty and Greenwood Duty, thereby rejecting any broader obligation requiring customers to continuously monitor employees or scrutinise bank statements.
At the same time, the decision preserves fairness by recognising that customers who facilitate fraud through careless cheque preparation or who fail to report known forgeries may themselves bear responsibility for resulting losses.
The case therefore establishes an appropriate balance between customer protection and customer responsibility.
Solution to the Case Scenario
ABC Construction would likely succeed in recovering the RM500,000 from XYZ Bank.
Liability of the Bank
The forged cheques are legally null and void.
The bank had no authority to honour them and therefore acted wrongfully by debiting the customer’s account.
The bank’s liability arises regardless of whether it acted honestly or exercised reasonable care.
Customer’s Duties
The bank cannot rely solely on the argument that:
Possible Exceptions
The bank may only reduce or avoid liability if it can establish that:
Practical Application
For Customers
Customers should:
For Banks
Banks should:
Conclusion
Under Malaysian banking law, customers possess important rights including the right to repayment, the right to draw cheques against available funds, and the right to receive interest where contractually agreed. In return, customers owe only two recognised common law duties: the Macmillan Duty, requiring reasonable care when drawing cheques so as not to facilitate fraud or forgery, and the Greenwood Duty, requiring prompt notification to the bank once forgery becomes known. The Supreme Court decision in United Asian Bank Bhd v Tai Soon Heng Construction Sdn Bhd confirms that banks are generally strictly liable when they honour forged cheques because a forged instrument is a nullity and provides no authority for payment. Unless a customer breaches the Macmillan Duty or Greenwood Duty, the loss arising from forged cheques will ordinarily fall upon the bank rather than the customer.
Case Scenario
ABC Construction Sdn Bhd maintains a current account with XYZ Bank. Over a period of three years, the company’s accounts clerk, who is not an authorised signatory, forges numerous company cheques and successfully withdraws substantial sums from the account. The bank honours all the forged cheques and debits the company’s account accordingly.
The fraud is eventually discovered during an internal audit. ABC Construction immediately informs the bank and claims reimbursement of RM500,000 paid out on the forged cheques.
The bank argues that the company was negligent in supervising its employee, failed to detect the fraud earlier, and did not regularly inspect its bank statements. Consequently, the bank contends that the loss should be borne by the customer.
The issue is whether the bank or the customer bears liability for losses arising from forged cheques and what duties each party owes under the banker-customer relationship.
Customers’ Rights
The banker-customer relationship confers several important contractual rights upon customers.
1. Right to Repayment
A customer has the right to demand repayment of funds deposited with the bank. Once money is deposited, the bank becomes a debtor and undertakes an implied contractual obligation to repay an equivalent amount upon a valid demand.
This right forms the foundation of the banker-customer relationship and enables customers to access their funds whenever legally entitled to do so.
2. Right to Draw Cheques
A customer who maintains sufficient funds in a current account has the right to issue cheques against the available credit balance.
Correspondingly, the bank owes a duty to honour properly drawn cheques provided:
- sufficient funds exist;
- the cheque is valid and regular;
- no legal restriction prevents payment; and
- the account remains operative.
3. Right to Interest
Customers holding savings or deposit accounts are generally entitled to receive interest or returns according to the contractual terms governing the account.
The applicable rate may vary depending on market conditions and bank policy. Ordinary current accounts generally do not earn interest unless expressly agreed.
Customers’ Duties
While customers enjoy important rights, common law also imposes certain duties upon them.
The courts have consistently recognised that a customer owes only two principal duties to his banker:
- The Macmillan Duty.
- The Greenwood Duty.
The Macmillan Duty
The first duty is commonly known as the Macmillan Duty, derived from London Joint Stock Bank v Macmillan and Arthur.
Under this duty, a customer must exercise reasonable care when drawing cheques and executing written instructions so as not to facilitate fraud or forgery.
A customer is expected to:
- complete cheques clearly and accurately;
- avoid leaving blank spaces;
- ensure figures and words cannot easily be altered;
- safeguard cheque books; and
- avoid creating ambiguity that may mislead the bank.
This principle was also recognised in Joachimson v Swiss Bank Corporation, where the court stated that a customer must exercise reasonable care when issuing written instructions to the bank.
The Greenwood Duty
The second duty is known as the Greenwood Duty, originating from Greenwood v Martins Bank.
Under this duty, a customer who discovers that cheques purporting to bear his signature have been forged must notify the bank promptly.
The purpose of this duty is to allow the bank to:
- stop further fraudulent payments;
- investigate suspicious transactions;
- protect the customer’s account; and
- minimise losses.
Malaysian Position: United Asian Bank Bhd v Tai Soon Heng Construction Sdn Bhd
A leading Malaysian authority on forged cheques is United Asian Bank Bhd v Tai Soon Heng Construction Sdn Bhd.
Facts
The respondent company maintained a current account with the appellant bank.
Between 1979 and 1982, the respondent’s accounts clerk, who was not authorised to sign company cheques, forged numerous cheques drawn on the account. The bank honoured the forged cheques and debited the company’s account.
The fraud was discovered in December 1982. The company sued the bank to recover approximately RM397,660 paid out on the forged cheques.
The High Court ruled in favour of the company, and the bank appealed to the Supreme Court.
Held
1. Forgery Need Only Be Proven on a Balance of Probabilities
A customer alleging that forged cheques were honoured by the bank need only prove the forgery on the civil standard of proof, namely the balance of probabilities.
The customer is not required to establish forgery beyond reasonable doubt.
2. Bank Liability for Paying Forged Cheques
The Supreme Court held that a bank that pays on a forged cheque is liable under the tort of conversion.
This liability is one of strict liability.
Consequently:
- the bank cannot escape liability by claiming ignorance of the forgery;
- the bank cannot rely on the fact that it exercised reasonable care;
- a forged cheque is legally a nullity; and
- the bank has no authority from its customer to act on a forged instrument.
3. Customers Owe Only Two Duties at Common Law
The Supreme Court expressly confirmed that customers owe only two duties to their bankers:
(a) Macmillan Duty
The duty not to draw cheques in a manner that facilitates fraud or forgery.
(b) Greenwood Duty
The duty to inform the bank promptly upon becoming aware of forged cheques.
The court further clarified that customers do not owe the following duties at common law:
- there is no general duty to supervise employees to prevent forgery;
- there is no general duty to organise business affairs to detect fraud;
- there is no duty to inspect periodic bank statements for forged transactions;
- there is no duty to audit the bank’s work unless specifically agreed by contract.
Obiter Dictum
The Supreme Court observed that whether a signature has been forged is ultimately a question of fact.
The trial court must determine the issue after considering:
- witness credibility;
- surrounding circumstances; and
- expert evidence relating to handwriting or signatures.
Critical Analysis
The decision in United Asian Bank Bhd v Tai Soon Heng Construction Sdn Bhd strongly protects customers from losses arising from forged cheques.
The Supreme Court emphasised that banks possess specialised expertise in verifying signatures and processing payment instruments. Since a forged cheque is legally void, the bank acts without authority when it honours such a cheque.
The judgment also prevents banks from shifting responsibility to customers through broad allegations of negligence. The court limited customer duties to the Macmillan Duty and Greenwood Duty, thereby rejecting any broader obligation requiring customers to continuously monitor employees or scrutinise bank statements.
At the same time, the decision preserves fairness by recognising that customers who facilitate fraud through careless cheque preparation or who fail to report known forgeries may themselves bear responsibility for resulting losses.
The case therefore establishes an appropriate balance between customer protection and customer responsibility.
Solution to the Case Scenario
ABC Construction would likely succeed in recovering the RM500,000 from XYZ Bank.
Liability of the Bank
The forged cheques are legally null and void.
The bank had no authority to honour them and therefore acted wrongfully by debiting the customer’s account.
The bank’s liability arises regardless of whether it acted honestly or exercised reasonable care.
Customer’s Duties
The bank cannot rely solely on the argument that:
- the company failed to supervise its employee adequately;
- the company did not conduct regular audits; or
- the company failed to examine bank statements.
Possible Exceptions
The bank may only reduce or avoid liability if it can establish that:
- the customer breached the Macmillan Duty by facilitating the forgery through careless cheque preparation; or
- the customer breached the Greenwood Duty by failing to notify the bank after becoming aware of the forgery and thereby allowing further forged cheques to be paid.
Practical Application
For Customers
Customers should:
- draw cheques clearly and carefully;
- avoid leaving blank spaces on cheques;
- protect cheque books and payment instruments;
- report suspected forgery immediately;
- maintain internal controls against fraud.
For Banks
Banks should:
- verify signatures carefully;
- implement effective fraud-detection systems;
- investigate suspicious transactions promptly;
- maintain strong internal controls;
- understand that payment on forged cheques generally exposes the bank to strict liability.
Conclusion
Under Malaysian banking law, customers possess important rights including the right to repayment, the right to draw cheques against available funds, and the right to receive interest where contractually agreed. In return, customers owe only two recognised common law duties: the Macmillan Duty, requiring reasonable care when drawing cheques so as not to facilitate fraud or forgery, and the Greenwood Duty, requiring prompt notification to the bank once forgery becomes known. The Supreme Court decision in United Asian Bank Bhd v Tai Soon Heng Construction Sdn Bhd confirms that banks are generally strictly liable when they honour forged cheques because a forged instrument is a nullity and provides no authority for payment. Unless a customer breaches the Macmillan Duty or Greenwood Duty, the loss arising from forged cheques will ordinarily fall upon the bank rather than the customer.
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