Application of Section 73 A by the Courts.

Section 73A affords complete defence to the Bank if the bank can prove that the customer
had negligently facilitate the forgery.

Knowingly or negligently facilitating forgery

73A. Notwithstanding section 24, where a signature on a cheque is forged or placed thereon
without the authority of the person whose signature it purports to be, and that person
whose signature it purports to be knowingly or negligently contributes to the forgery
or the making of the unauthorized signature, the signature shall operate and shall be
deemed to be the signature of the person it purports to be in favour of any person
who in good faith pays the cheque or takes the cheque for value.

The Courts have given a wide interpretation on Section 73A.

(i) Burden of Proof in 73A

The burden of proving negligence on part of the customer lies on the Bank. This was held in
ML BREADWORKS SDN BHD v. MALAYAN BANKING BHD [2013] 1 CLJ 833 , where the Court
held,

“[54] … unless estoppel under s. 24 could be established, s. 73A provides a clear and
complete defence if the bank can prove that the customer was complicit or negligent
in facilitating the forgery. Earlier under the Macmillan and Greenwood tests, the duty
of the customer, it will be recalled, was confined narrowly to firstly, a duty to exercise
care in drawing a cheque and secondly to inform the bank upon discovery of the
forgery. With the advent of s. 73A it is evident that a new and complete statutory
defence was made available to banks. However the burden remains on the bank
to prove such complicity or negligence. (see also Globelink Container Line (M) Sdn
Bhd v. Bumiputra Commerce Bank Berhad [2011] 1 LNS 414; and Melewar Apex Sdn
Bhd v. Malayan Banking Bhd [2007] 8 CLJ 579).”

(ii) Wide Duty of Care of Customer

The highest authority on the interpretation of Section 73A. In the Court of Appeal case of
PRIMA NOVA SDN BHD v. AFFIN BANK BHD [2014] 9 CLJ 442 , the Court of Appeal affirmed
the position taken by previous judgments that the legislative intent behind the introduction
of s. 73A was to impose a wider duty of care on customers of a bank.

“[22] At the outset we wish to highlight that under the 'Macmillan' rule, the customer
is only required to exercise care with the way he draws a cheque. In our judgment,
the words "negligently contributes to the forgery or the making of the
unauthorized signature" in s. 73A whether construed literally or by way of
purposive construction, can only have one meaning. That is this. So long as the
 forgery or the incorporation of the unauthorised signature of the mandatory
signatories was caused by the negligence of the authorised signatories, then,
the bank is protected provided the payment of the cheque was effected "in
good faith". By reason of the absence of any qualifying words in s. 73A,
whichever construction is adopted, in our respectful view, there is no basis to
limit the protection enjoyed by the bank under s. 73A to negligence in the
drawing of the cheque only. In our opinion if it was the intention of the legislature
to limit the protection afforded by this section to the 'Macmilla n duty', nothing
would have been easier than to qualify the word "negligence" with the words "in the
drawing of the cheque". In this respect, our opinion to this effect is reinforced by the
statements made by the Deputy Finance Minister when introducing this amendment
in Parliament.

[23] Accordingly, in our judgment, the effect of s. 73A is to afford protection to a

bank paying "in good faith" in all cases in which there was negligence on the part of
the drawer and which negligence afforded the opportunity for the forgery or
fraud in circumstances that were the immediate cause of the payment by the
banker. Failure to report the stolen cheques in a timely manner and thereby causing
the bank to honour the cheques could amount to fraud within s. 73A in cases where
the forgery was an 'inside job' but would in any event amount to a breach of the
'Greenwood duty'. In other words, the effect of the amendment is that our courts
should no longer determine the liability of a bank on a claim on forged cheques
based on whether the customer observed the 'Macmillan' and 'Greenwood' duties
approved by the Supreme Court in United Asian Bank Bhd v. Tai Soon Heng
Construction Sdn Bhd (supra) but the wider duty of care considered but rejected by
the Privy Council in Tai Hing Cotton Mill Ltd. v. Liu Chong Hing Bank Ltd & Ors
(supra).”

The Court of Appeal has affirmed the position that the bank owes a wider duty than setforth
in McMillan and Greewood which extends to the duty of the customer to proper control and
supervision of critical staff. This was affirmed in the Court of Appeal in CIMB BANK BHD v.
PANARON CONTROL SDN BHD [2015] 1 CLJ 1056 ,

“ [64] That the duty of care expected of a customer of a bank did extend to
cover proper control and supervision of critical staff, to put in place appropriate
procedures as to access to cheque books and also entailed periodic checking of
one's account with the bank was commented upon by the court in Public Bank Bhd
v. Anuar Hong & Ong (supra ) …”
Similarly in the High Court trial in LEOLARIS (M) SDN BHD v. BUMIPUTRA COMMERCE BANK
BHD [2009] 10 CLJ 248 , the Court held that lax in supervision amounts to a breach of duty
by the customer.

“[22] Juliana Siew, the person who is alleged to have committed the forgery/fraud
was at all material times an employee/officer of the plaintiff. The court is of the view
that the said forgery/fraud (if at all) was contributed by the plaintiff's own negligence.
It was the duty of the plaintiff to do the following in respect of the account and
Julianna Siew:

(a) to supervise Siew and monitor her duties as the plaintiff's accountant/corporate
administrator;

(b) to conduct checks on the plaintiff's cheque books which was issued by the
defendant and check all the banking transactions carried out with the defendant on a
regular basis.

[23] The court is also of the view that the plaintiff was in breach of the above
mentioned duties and therefore was negligent in that:

(a) failing to supervise or properly supervise Siew at all material times;

(b) failing to ensure that Siew carried out her duties honestly and in good faith;

(c) failing to conduct check or any regular checks on the utilization of the issued
cheque books;

(d) entrusting the custody of issued cheque books to Siew and entrusting the
operation of the banking transaction entirely to Siew; and

(e) failing to take any care and caution or any proper care and caution as regards to
their monies.

[25] In this regard, the court is in full agreement with the decision of the High Court
in Public Bank Bhd. v. Anuar Hong & Ong [2005] 1 CLJ 289, where it was held:

The customer clearly owes a duty not to facilitate fraud... the Respondent as
employer appeared to have been rather lax in exercising its supervision in
respect of its financial affairs... the Respondent has clearly failed to exercise due
care in protecting their own interest from any misconduct of their own
employees.

Further it also held that:

 The Bank cannot reasonably be required with their own legitimate commercial
pressure and concerns to attend to, to be more vigilant in the Respondent's
interest than the Respondent himself. A Bank dealing with hundreds or thousands
of customers who have their own practice and habits... it is extremely onerous to
impose on every officer a duty to communicate with every customer before
they bona fide honour a cheque in the sums represented by the cheques in
issue in this case.”

(iii) Good Faith on the part of the Bank

The Threshold for “Good Faith” under Section 73A is low. This is affirmed in the High Court
case in LEOLARIS (M) SDN BHD v. BUMIPUTRA COMMERCE BANK BHD [2012] 6 CLJ 423 ,

(j) ... In respect of the other part relating to good faith in paying out the cheque, I am
satisfied that the defendant has a system in place and has conducted themselves
as a reasonable and prudent banker dealing with the day-to-day affairs of the
operation of the accounts of the plaintiff taking into account all the circumstances
of the case and also the fact that villain, Juliana Siew, is not an unknown person to
the plaintiff or the defendant in the day-to-day operation and conduct of the
plaintiff's business. And also the fact that the Act itself places a low threshold for
the defendant to satisfy when relying on the term good faith. This is so because
s. 95 of of BEA 1949 defines good faith as follows:

A thing is deemed to be done in good faith, within the meaning of this Act, where it
is in fact done honestly whether it is done negligently or not.”

(k) It must be noted that when it relates to instruments relating to Bills of

Exchange the threshold requirement for good faith in English Law is very low,
that is to say, once it is established that the holder took the instrument in good
faith, he is entitled to all the rights of a holder in due cause notwithstanding
that he was careless, that he made no enquiry, and that he was informed of
facts which would have led a reasonable man to make further inquiry, provided,
however, that he had no notice of any defect in the transferor's title (see Jones v.
Gordon (1877) 2 App Cas 616; Auchteroni & Co v. Midland Bank, Ltd [1928] All ER
Rep 627).

(iv) “Negligently Contribute” is not equated with “Contributory Negligence”

In LEOLARIS (M) SDN BHD v. BUMIPUTRA COMMERCE BANK BHD [2012] 6 CLJ 423, the
Court differentiated the elements between negligent contribution and contributory
negligence,

“(f) Section 73A totally does not oust the common law position. If Parliament
intended that it would have expressly stated so. The protection afforded to the
customer at common law is still sustainable but with some restrictions. For example:
(i) if a cheque has been forged the bank is liable (this part may relate to negligence);
(ii) if the bank sends statement on monthly basis and the customer does not identify
the discrepancy in the 1st, 2nd or 3rd month etc. (this is where the phrase
'negligently contributes' becomes operative), and allow the state of affairs to
continue depending on the facts of each case, the bank may be able to rely on the
statutory defence in respect of the relevant transaction provided it can satisfy the
requirement set out in the section. It is not negligence per se that attaches liability
but negligent contribution which causes the loss provides the defence reversing
the common law position. In essence, a customer who is vigilant in checking the
bank statement regularly need not fear if the cheque has been forged provided he
complains within a reasonable time to arrest the continuing forgery.

(g) For purpose of clarity in respect of the above examples, it must be said that if the
customer has been taken ill such as stroke or coma and is not in a position to check
the monthly statement and inform the bank of any forgeries and even if it has been
happening for a number of years, the bank may be liable as negligent contribution
will not become operative on such facts even though there may be negligence in the
conduct of the business affairs of the customer. In essence, it is a question of fact for
the court to decide. I must say here again the Act says 'negligently contributes'
and it must not be taken to read as contributory negligence. The difference is
like apple and orange. Contributory negligence relates to sharing of liability. On
the other hand, 'negligently contributes' relates to promoting a negligent act,
or its like. If the bank can show that there was in fact negligent contribution on
the part of the customers taking into consideration the circumstances of the
case and the bank had paid out in good faith, the section will provide an
absolute defence to a customer's claim in respect of the relevant transaction.”

(v) Must it be after payment? What about before payment?

Cases reported are after the execution of payment/honouring of cheques. The only case that
discusses this position is in ML BREADWORKS SDN BHD v. MALAYAN BANKING BHD [2013]
1 CLJ 833 , where the court held if the customer negligently contributed to the forgery, the
cheques will be deemed to have been made by him and the bank need not make good to
that person. However, the Court stressed that the Bank is in the position to act in good faith,

“[52] What then is the effect of s. 73A? Does it have the effect of altering the
common law position? A perusal of s. 73A discloses that it provides that despite the
effect of s. 24 which stipulates that no effective discharge or payment can be made
under a bill containing a forged or unauthorised signature save where estoppel
comes into play, such a bill may yet be honoured and will in fact be deemed to
be the signature of the person whose signature was forged, where that same
person contributes to the forgery knowingly or negligently. The section also
requires the bank to pay out on the cheque in good faith. Put another way, where
the person whose signature is alleged to be forged is found to have knowingly
or negligently contributed to the act of forgery, the cheque will be deemed to
have been made by him and the bank will not have to make good to that
person, any payment made out on that instrument. However the bank should
act in good faith.”

(vi) If the Bank is a Holder Due Course, it may enforce the payment

In this regard, the Courts also recognises the ability of a holder due course (See Section 29
BEA) to enforcement payments regardless of falsification/forgery. This was discussed in
Barclays Bank Plc v Malaysian Sea Best Sdn Bhd & Anor [2013] 9 MLJ 333,

“[23] The plaintiff's claim against the second defendant as an endorser of the said
PN, is in the capacity of the plaintiff as a holder for value of the said PN. The plaintiff
accepted the said PN in good faith and for value with no notice of defect of title to
the same by HSBC USA assigning and transferring without recourse all its rights, title
and interest in the said PN by way of a transfer power dated 15 March 2006 which
was duly endorsed by HSBC USA for value it received from the plaintiff.

[24] Section 38(b) of the Act provides:

b) where he is a holder due course, he holds the bill free from any defect of title
of prior parties, as well as from mere personal defences available to prior
parties among themselves, and may enforce payment against all parties liable
on the bill; ….

[25] Therefore the issue of falsification/forgery, any defect of title or other

personal defences which are issues (if any) that maybe available to the second
defendant may have with the first defendant and/or HSBC USA being the prior
parties to the plaintiff is not available to the second defendant as a defence
against the plaintiff's claim herein where the plaintiff is a holder in due course
of the said PN.
[26] The Federal Court in Mercantile Bank Ltd, Ipoh v Yoon Siew Kang [1969] 1
MLJ 174; [1969] 1 LNS 107 held the bank being a holder in due course, who
took the cheques in good faith and for value and had no notice of any defect in
the title of the party who negotiated them to the bank is entitled to recover the
amount on the cheques despite the cheques being given fraudulently by the
defendant to a third party before being negotiated to the bank:

“Negligence on the part of the defendant in letting these cheques loose on the
public would make no difference to his liability to an honest holder for value. Even if
it is true (as found by the judge) that there was no consideration for these cheques
which were handed over to MacPhail simply to deceive the bank with no intention
that they be used or negotiated by MacPhail and that they were negotiated by
MacPhail contrary to the intention of the conspirators, still the defendant would be
liable — provided that bank took them for value in good faith without notice of
MacPhail defect in title. If Mr Braine's gross negligence had prevented him from
acquiring such notice, the defendant would still be liable. Equally Mr Braine's
carelessness or foolishness in not suspecting that there was something wrong about
these cheques would not in any way affect the defendant's liability. But if there were
circumstances in the transactions that might have led Mr Braine to suspect that there
was something wrong and yet because he was honestly blundering and careless he
took the cheques without further inquiry, the bank would still be entitled to recover.
On the other hand, if he was not honestly blundering and careless but thought in his
own secret mind there was something wrong and if he asked questions and made
further inquiry it would no longer be his suspecting it but his knowing it, then that
would be dishonesty and the bank would not be able to recover. If he had shut his
eyes to the facts presented to him and put his suspicions aside without further
inquiry he had not acted in good faith. The existence of suspicion or doubt is
inconsistent with good faith.”