- Published on
Malaysian Banking Law – Customers’ Rights, Customers’ Duties, the Macmillan Duty, Greenwood Duty, Estoppel, and Bank Liability for Forged Cheques
Case Scenario
Mega Builders Sdn Bhd maintains a current account with ABC Bank. Over several years, the company’s accounts manager forges numerous company cheques and fraudulently withdraws RM800,000 from the account. The bank honours the cheques and debits the company’s account accordingly.
In addition, one of the company’s directors orally instructs the bank to transfer funds from the company’s account on several occasions. These transactions appear in the company’s bank statements. The directors become aware of these transactions and certain irregularities but do not raise any complaint with the bank for almost eight years.
Eventually, an audit uncovers both the forged cheques and disputed debit transactions. Mega Builders commences legal proceedings against the bank seeking recovery of all monies withdrawn.
The bank argues that the company failed to report the irregularities promptly and should therefore be prevented from challenging the transactions. The bank further contends that the company failed to maintain adequate internal controls to prevent employee fraud.
The dispute raises issues concerning customers’ rights, customers’ duties, forged cheques, estoppel, and the extent of bank liability under Malaysian banking law.
Nature of the Banker-Customer Relationship
The banker-customer relationship is fundamentally contractual in nature.
As explained by Joachimson v Swiss Bank Corporation, a bank receives money from its customer not as trustee but as borrower. The money deposited becomes the bank’s property, and the bank undertakes to repay an equivalent amount upon demand by the customer.
The bank also undertakes:
Customers’ Rights
1. Right to Repayment
The customer has a contractual right to repayment of funds standing to the credit of the account.
The bank’s obligation is not to return the exact money deposited but to repay an equivalent amount upon a valid demand at the branch where the account is maintained.
2. Right to Draw Cheques
A customer with sufficient funds has the right to issue cheques against the available balance.
The bank owes a corresponding duty to honour properly drawn cheques unless:
3. Right to Interest
Customers maintaining savings or deposit accounts are generally entitled to interest or returns in accordance with the terms governing the account.
Current accounts ordinarily do not attract interest unless specifically agreed.
Customers’ Duties at Common Law
A significant principle of banking law is that customers owe only limited duties to their bankers.
The Malaysian Supreme Court in United Asian Bank Bhd v Tai Soon Heng Construction Sdn Bhd confirmed that, at common law, customers owe only two recognised duties:
The Macmillan Duty
The first duty originates from London Joint Stock Bank v Macmillan and Arthur.
Under this duty, the customer must exercise reasonable care when drawing cheques and issuing written instructions.
The customer must not prepare a cheque in a manner that facilitates fraud or forgery.
Examples include:
The Greenwood Duty
The second duty originates from Greenwood v Martins Bank.
Once a customer becomes aware that forged cheques or unauthorised transactions have occurred, the customer must promptly notify the bank.
Failure to provide timely notice may result in the customer being unable to recover losses that could have been prevented had the bank been informed earlier.
The duty arises only after the customer acquires knowledge of the forgery or unauthorised transaction.
No General Duty to Prevent Employee Fraud
The law does not impose a wider obligation on customers to organise their business affairs so as to prevent forgery by employees.
This principle was firmly established by the Privy Council in Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd.
In that case, an accounts clerk forged approximately 300 cheques amounting to HK$5.5 million. The Privy Council held that customers owe only the Macmillan Duty and Greenwood Duty.
There is no implied duty requiring customers to:
No General Duty to Inspect Bank Statements
Another important principle established in Tai Hing Cotton Mill and reaffirmed in United Asian Bank is that customers are not under a common law duty to inspect periodic bank statements merely to protect the bank.
Accordingly, absent an express contractual provision:
Duty to Inform the Bank of Known Irregularities and Estoppel
Although there is no general duty to inspect statements, a different principle applies once the customer becomes aware of irregularities.
A customer who discovers an unauthorised transaction, forged cheque, or suspicious debit must notify the bank within a reasonable time.
Failure to do so may give rise to estoppel.
Estoppel prevents a person from asserting a legal claim where his conduct has induced another party to act to its detriment.
In banking law, where a customer remains silent despite knowing of unauthorised transactions, and the bank is prejudiced by the delay, the customer may be estopped from later challenging the transactions.
Proven Development Sdn Bhd v Hongkong and Shanghai Banking Corporation
Facts
In Proven Development Sdn Bhd v Hongkong and Shanghai Banking Corporation, the plaintiff company maintained a current account with the defendant bank.
One of the company’s directors gave oral instructions to the bank to debit the account on three occasions between 1976 and 1977 amounting to RM115,000.
Years later, the company challenged the debits on the basis that they lacked proper authority under the directors’ resolution.
However, the company had failed to raise any complaint concerning the transactions for approximately nine years.
Held
The High Court held that oral instructions given to the bank were capable of subsequent ratification by the directors.
More importantly, the court emphasised that once the company became aware of any alleged irregularity, it was incumbent upon the company to notify the bank promptly.
By waiting nine years before bringing legal proceedings, the company caused substantial prejudice to the bank, which could no longer produce certain documentary evidence because of the passage of time.
Accordingly, the company was estopped from asserting its claim against the bank.
Liability of Banks for Forged Cheques
Under common law, a forged cheque is legally void.
A bank has no authority to honour a forged instrument because the customer’s mandate is absent.
In United Asian Bank Bhd v Tai Soon Heng Construction Sdn Bhd, the Supreme Court held that:
New Ace Digital Print Sdn Bhd v Public Bank Bhd
The Malaysian courts have continued to uphold this principle.
In New Ace Digital Print Sdn Bhd v Public Bank Bhd, the bank was held liable in damages for making payment based on a forged cheque.
The case reinforces the principle that the responsibility for verifying signatures and mandates generally rests with the bank.
Critical Analysis
The modern law seeks to balance customer protection with customer responsibility.
On one hand, banks are professional financial institutions entrusted with verifying payment instructions. Since forged cheques are nullities, the law places primary responsibility on banks that honour them.
On the other hand, customers cannot remain passive once they become aware of fraud or irregularities. The Macmillan Duty and Greenwood Duty ensure that customers do not contribute to losses through carelessness or silence.
The doctrine of estoppel further promotes fairness by preventing customers from delaying complaints until evidence has disappeared or the bank’s ability to defend itself has been prejudiced.
The combined effect of Macmillan, Greenwood, Tai Hing Cotton Mill, United Asian Bank, and Proven Development creates a balanced framework that protects both parties while preserving confidence in the banking system.
Solution to the Case Scenario
Forged Cheques
Mega Builders would likely succeed in recovering losses arising from the forged cheques.
The forged instruments are legally void, and the bank had no authority to honour them.
The bank remains primarily liable under the tort of conversion.
Employee Fraud
The bank cannot avoid liability merely by arguing that the company failed to maintain adequate internal controls.
Following Tai Hing Cotton Mill and United Asian Bank, customers owe no general duty to organise their business affairs to prevent employee fraud.
Delayed Complaint Regarding Debit Transactions
The position differs regarding the disputed debit transactions.
The directors became aware of the transactions but waited several years before raising any complaint.
Applying Proven Development, the company’s delay may create an estoppel if the bank has suffered prejudice because relevant records or evidence are no longer available.
The company may therefore be prevented from challenging those transactions.
Practical Application
For Customers
Customers should:
For Banks
Banks should:
Conclusion
Under Malaysian banking law, customers possess the rights to repayment, cheque facilities, and interest where contractually provided. In return, customers owe only two recognised common law duties: the Macmillan Duty, requiring reasonable care when drawing cheques, and the Greenwood Duty, requiring prompt notification of known forgeries or unauthorised transactions. Neither Malaysian nor English law imposes a general duty upon customers to supervise employees, prevent internal fraud, or routinely inspect bank statements for the bank’s benefit. Nevertheless, once a customer becomes aware of an irregularity, he must inform the bank within a reasonable time. Failure to do so may give rise to estoppel, preventing the customer from later challenging the transaction if the delay prejudices the bank. Accordingly, while banks generally bear strict liability for paying forged cheques, customers who knowingly remain silent about irregularities may lose their right to recover losses arising from those transactions.
Case Scenario
Mega Builders Sdn Bhd maintains a current account with ABC Bank. Over several years, the company’s accounts manager forges numerous company cheques and fraudulently withdraws RM800,000 from the account. The bank honours the cheques and debits the company’s account accordingly.
In addition, one of the company’s directors orally instructs the bank to transfer funds from the company’s account on several occasions. These transactions appear in the company’s bank statements. The directors become aware of these transactions and certain irregularities but do not raise any complaint with the bank for almost eight years.
Eventually, an audit uncovers both the forged cheques and disputed debit transactions. Mega Builders commences legal proceedings against the bank seeking recovery of all monies withdrawn.
The bank argues that the company failed to report the irregularities promptly and should therefore be prevented from challenging the transactions. The bank further contends that the company failed to maintain adequate internal controls to prevent employee fraud.
The dispute raises issues concerning customers’ rights, customers’ duties, forged cheques, estoppel, and the extent of bank liability under Malaysian banking law.
Nature of the Banker-Customer Relationship
The banker-customer relationship is fundamentally contractual in nature.
As explained by Joachimson v Swiss Bank Corporation, a bank receives money from its customer not as trustee but as borrower. The money deposited becomes the bank’s property, and the bank undertakes to repay an equivalent amount upon demand by the customer.
The bank also undertakes:
- to receive deposits;
- to collect bills and other instruments for the customer;
- to honour valid payment instructions;
- to honour properly drawn cheques where sufficient funds exist; and
- not to terminate the banking relationship without reasonable notice.
Customers’ Rights
1. Right to Repayment
The customer has a contractual right to repayment of funds standing to the credit of the account.
The bank’s obligation is not to return the exact money deposited but to repay an equivalent amount upon a valid demand at the branch where the account is maintained.
2. Right to Draw Cheques
A customer with sufficient funds has the right to issue cheques against the available balance.
The bank owes a corresponding duty to honour properly drawn cheques unless:
- there are insufficient funds;
- the cheque is irregular;
- payment is prohibited by law; or
- the account has been lawfully restricted.
3. Right to Interest
Customers maintaining savings or deposit accounts are generally entitled to interest or returns in accordance with the terms governing the account.
Current accounts ordinarily do not attract interest unless specifically agreed.
Customers’ Duties at Common Law
A significant principle of banking law is that customers owe only limited duties to their bankers.
The Malaysian Supreme Court in United Asian Bank Bhd v Tai Soon Heng Construction Sdn Bhd confirmed that, at common law, customers owe only two recognised duties:
- The Macmillan Duty.
- The Greenwood Duty.
The Macmillan Duty
The first duty originates from London Joint Stock Bank v Macmillan and Arthur.
Under this duty, the customer must exercise reasonable care when drawing cheques and issuing written instructions.
The customer must not prepare a cheque in a manner that facilitates fraud or forgery.
Examples include:
- leaving large blank spaces;
- writing ambiguous amounts;
- signing incomplete cheques; and
- issuing instructions capable of easy alteration.
The Greenwood Duty
The second duty originates from Greenwood v Martins Bank.
Once a customer becomes aware that forged cheques or unauthorised transactions have occurred, the customer must promptly notify the bank.
Failure to provide timely notice may result in the customer being unable to recover losses that could have been prevented had the bank been informed earlier.
The duty arises only after the customer acquires knowledge of the forgery or unauthorised transaction.
No General Duty to Prevent Employee Fraud
The law does not impose a wider obligation on customers to organise their business affairs so as to prevent forgery by employees.
This principle was firmly established by the Privy Council in Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd.
In that case, an accounts clerk forged approximately 300 cheques amounting to HK$5.5 million. The Privy Council held that customers owe only the Macmillan Duty and Greenwood Duty.
There is no implied duty requiring customers to:
- establish fraud-proof internal controls;
- supervise employees to prevent forgery;
- conduct audits specifically for the bank’s protection; or
- take general precautions in the management of their business to prevent forged cheques.
No General Duty to Inspect Bank Statements
Another important principle established in Tai Hing Cotton Mill and reaffirmed in United Asian Bank is that customers are not under a common law duty to inspect periodic bank statements merely to protect the bank.
Accordingly, absent an express contractual provision:
- customers are not obliged to examine every statement;
- customers are not required to verify every debit entry;
- customers are not responsible for detecting forged signatures through statement review.
Duty to Inform the Bank of Known Irregularities and Estoppel
Although there is no general duty to inspect statements, a different principle applies once the customer becomes aware of irregularities.
A customer who discovers an unauthorised transaction, forged cheque, or suspicious debit must notify the bank within a reasonable time.
Failure to do so may give rise to estoppel.
Estoppel prevents a person from asserting a legal claim where his conduct has induced another party to act to its detriment.
In banking law, where a customer remains silent despite knowing of unauthorised transactions, and the bank is prejudiced by the delay, the customer may be estopped from later challenging the transactions.
Proven Development Sdn Bhd v Hongkong and Shanghai Banking Corporation
Facts
In Proven Development Sdn Bhd v Hongkong and Shanghai Banking Corporation, the plaintiff company maintained a current account with the defendant bank.
One of the company’s directors gave oral instructions to the bank to debit the account on three occasions between 1976 and 1977 amounting to RM115,000.
Years later, the company challenged the debits on the basis that they lacked proper authority under the directors’ resolution.
However, the company had failed to raise any complaint concerning the transactions for approximately nine years.
Held
The High Court held that oral instructions given to the bank were capable of subsequent ratification by the directors.
More importantly, the court emphasised that once the company became aware of any alleged irregularity, it was incumbent upon the company to notify the bank promptly.
By waiting nine years before bringing legal proceedings, the company caused substantial prejudice to the bank, which could no longer produce certain documentary evidence because of the passage of time.
Accordingly, the company was estopped from asserting its claim against the bank.
Liability of Banks for Forged Cheques
Under common law, a forged cheque is legally void.
A bank has no authority to honour a forged instrument because the customer’s mandate is absent.
In United Asian Bank Bhd v Tai Soon Heng Construction Sdn Bhd, the Supreme Court held that:
- liability for paying forged cheques arises under the tort of conversion;
- conversion is a tort of strict liability;
- the bank is liable even if it acted honestly;
- the bank is liable even if it exercised reasonable care.
New Ace Digital Print Sdn Bhd v Public Bank Bhd
The Malaysian courts have continued to uphold this principle.
In New Ace Digital Print Sdn Bhd v Public Bank Bhd, the bank was held liable in damages for making payment based on a forged cheque.
The case reinforces the principle that the responsibility for verifying signatures and mandates generally rests with the bank.
Critical Analysis
The modern law seeks to balance customer protection with customer responsibility.
On one hand, banks are professional financial institutions entrusted with verifying payment instructions. Since forged cheques are nullities, the law places primary responsibility on banks that honour them.
On the other hand, customers cannot remain passive once they become aware of fraud or irregularities. The Macmillan Duty and Greenwood Duty ensure that customers do not contribute to losses through carelessness or silence.
The doctrine of estoppel further promotes fairness by preventing customers from delaying complaints until evidence has disappeared or the bank’s ability to defend itself has been prejudiced.
The combined effect of Macmillan, Greenwood, Tai Hing Cotton Mill, United Asian Bank, and Proven Development creates a balanced framework that protects both parties while preserving confidence in the banking system.
Solution to the Case Scenario
Forged Cheques
Mega Builders would likely succeed in recovering losses arising from the forged cheques.
The forged instruments are legally void, and the bank had no authority to honour them.
The bank remains primarily liable under the tort of conversion.
Employee Fraud
The bank cannot avoid liability merely by arguing that the company failed to maintain adequate internal controls.
Following Tai Hing Cotton Mill and United Asian Bank, customers owe no general duty to organise their business affairs to prevent employee fraud.
Delayed Complaint Regarding Debit Transactions
The position differs regarding the disputed debit transactions.
The directors became aware of the transactions but waited several years before raising any complaint.
Applying Proven Development, the company’s delay may create an estoppel if the bank has suffered prejudice because relevant records or evidence are no longer available.
The company may therefore be prevented from challenging those transactions.
Practical Application
For Customers
Customers should:
- draw cheques carefully and clearly;
- immediately report forged signatures;
- notify the bank promptly upon discovering irregular transactions;
- maintain reasonable internal controls;
- retain banking records and supporting documents.
For Banks
Banks should:
- verify signatures rigorously;
- maintain effective fraud detection systems;
- retain transaction records for appropriate periods;
- investigate reported irregularities promptly;
- recognise that payment on forged instruments generally attracts strict liability.
Conclusion
Under Malaysian banking law, customers possess the rights to repayment, cheque facilities, and interest where contractually provided. In return, customers owe only two recognised common law duties: the Macmillan Duty, requiring reasonable care when drawing cheques, and the Greenwood Duty, requiring prompt notification of known forgeries or unauthorised transactions. Neither Malaysian nor English law imposes a general duty upon customers to supervise employees, prevent internal fraud, or routinely inspect bank statements for the bank’s benefit. Nevertheless, once a customer becomes aware of an irregularity, he must inform the bank within a reasonable time. Failure to do so may give rise to estoppel, preventing the customer from later challenging the transaction if the delay prejudices the bank. Accordingly, while banks generally bear strict liability for paying forged cheques, customers who knowingly remain silent about irregularities may lose their right to recover losses arising from those transactions.
0 Comments