Forged demand drafts on stolen leaves cannot create valid credit, and banks may recover amounts paid on presentation.

Demand drafts prepared on stolen draft leaves were held to be void instruments that could not create a valid credit in favour of the recipients or fasten liability on the bank merely because they had been honoured on presentation. The Court rejected reliance on Section 72 of the Indian Contract Act and applied the rule reflected in Section 118 of the Negotiable Instruments Act, treating bona fide acceptance of a forged instrument as incapable of legalising it once fraud was discovered. The sums paid on such drafts were recoverable as a debt under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, so the bank's recovery claim was maintainable and the challenge to the recovery orders failed.

---

---

Issues: (i) Whether demand drafts prepared on stolen draft leaves and honoured on presentation could confer a valid credit in favour of the recipients or create liability on the bank to honour them. (ii) Whether the debt claimed by the bank was recoverable under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993.

Issue (i): Whether demand drafts prepared on stolen draft leaves and honoured on presentation could confer a valid credit in favour of the recipients or create liability on the bank to honour them.

Analysis: The demand drafts were found to have been fraudulently prepared on stolen bank draft leaves. Such instruments were not valid instruments in law and could not give rise to a lawful credit merely because they had been acted upon and credited by the collecting banks. The Court rejected reliance on Section 72 of the Indian Contract Act, 1872 and the equitable approach urged from earlier authority, and held that the burden in such circumstances was displaced by the rule embodied in Section 118 of the Negotiable Instruments Act, 1881. The analogy drawn from fake currency was accepted: bona fide acceptance of a forged or fake instrument does not validate it once the fraud is discovered.

Conclusion: The bank was not liable to honour the demand drafts, and the recipients could not retain the benefit of the fraudulent credits.

Issue (ii): Whether the debt claimed by the bank was recoverable under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993.

Analysis: Since the amounts paid against the forged demand drafts constituted recoverable sums, the claim fell within the meaning of debt under Section 2(g) of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. The Tribunal and Appellate Tribunal had therefore correctly upheld the bank's entitlement to recover the principal amount, with the modified interest direction as granted by the DRT.

Conclusion: The bank's recovery claim was maintainable and correctly allowed.

Final Conclusion: The challenge to the recovery orders failed, and the petitions were liable to be dismissed as the respondents were entitled to recover the claimed amounts.

Ratio Decidendi: A forged or fraudulent demand draft prepared on stolen leaves is void and cannot create a valid credit or defeat the bank's right to recover the amount paid on its presentation; bona fide receipt or encashment does not legalise the instrument.

---