1. Court’s decision
The Bombay High Court dismissed three criminal applications seeking quashing of process issued for offences under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881. The applicants argued that cheques drawn on a bank that had merged years earlier were “invalid” when presented, so the statutory condition in proviso clause (a) to Section 138 was not met. The Court held that while “validity” under clause (a) can, in principle, be affected by events like acquisition or merger of the drawee bank, the present cases could not be terminated at the Section 482 stage because the cheques were dishonoured with the endorsement “Funds Insufficient”. That endorsement attracts the mandatory presumption under Section 146, shifting the burden to the accused to rebut it at trial.
2. Facts
The complaints were filed by the original complainants alleging loan transactions in which they advanced amounts through cheques drawn in favour of a partnership firm, and asserted that the applicants were partners responsible for the conduct of business. The loan transaction was stated to have occurred in 2014, with interest allegedly paid until 2019. Towards repayment, cheques were issued drawn on State Bank of Patiala, Bandra Branch, and were stated to be payable on 17 March 2021.
The complainants presented the cheques for encashment on 28 March 2021 through their banker, Union Bank of India. The cheques were returned unpaid on the same date with cheque return memos stating “Funds Insufficient”. Statutory demand notices were issued on 30 March 2021, and upon alleged non-payment within the statutory period, complaints were lodged. The Magistrate issued process for offences under Section 138 read with Section 141. Revisions challenging issuance of process were dismissed by the Sessions Court. The applicants then invoked the High Court’s inherent jurisdiction to quash proceedings.
3. Issues
The legal dispute centred on the “presentation within validity” requirement under clause (a) of the proviso to Section 138. The Court considered whether the phrase “within the period of its validity” is limited only to the time endorsement printed on a cheque, or whether “validity” is broader and can be curtailed by external events like a bank merger that renders old cheque leaves unusable.
A second issue was procedural and evidentiary: whether the accused can seek quashing under Section 482 on the basis of government and central bank documents not produced before the trial court or revisional court, and whether such an argument raises disputed questions of fact that must be tried.
A third, practical issue was the effect of the bank return memo stating “Funds Insufficient”. The Court had to determine whether this memo triggers the statutory presumption under Section 146 and thereby pushes the controversy into the arena of trial rather than summary quashing.
4. Petitioner’s arguments
The applicants narrowed their challenge to one ground: non-compliance with clause (a) of the proviso to Section 138 because the cheques were allegedly invalid on the date of presentation. They relied on the amalgamation of State Bank of Patiala with State Bank of India effective 1 April 2017 pursuant to a central acquisition order. They asserted that old cheque leaves of State Bank of Patiala were valid only up to 31 December 2017 (after extensions). Since the cheques in the complaints were presented on 28 March 2021, the applicants claimed the cheques were not “presented to the bank within the period of its validity”, dismantling the foundational statutory requirement for prosecution. They relied heavily on two decisions—one from the Allahabad High Court and another from the Andhra Pradesh High Court—where prosecutions were entertained in a context of cheque invalidity post-merger, and argued those rulings supported the proposition that dishonour of an invalid cheque cannot attract Section 138 liability.
5. Respondent’s arguments
The complainants opposed quashing on both procedural and substantive grounds. Procedurally, they argued that the applicants’ foundation—government orders and Reserve Bank communications—was not part of the record before the trial court and revisional court, and therefore could not be used to terminate proceedings at the High Court stage. They further submitted that the pleas raised disputed factual questions not suitable for determination under Section 482, particularly when trial had commenced and the accused’s plea had been recorded.
On merits, the complainants emphasised that the cheques were returned with the endorsement “Funds Insufficient”, not “invalid cheque”. This, they argued, attracted the statutory presumption under Section 146, which requires the court to presume dishonour as indicated by the bank’s slip unless disproved. They asserted that rebutting this presumption and proving that the cheque could not have been honoured due to invalidity is a matter of evidence, best left to trial. They cited multiple High Court decisions where similar merger-based invalidity defences were treated as trial issues rather than grounds for quashing.
6. Analysis of the law
The judgment carefully dissects clause (a) of the proviso to Section 138, which requires that the cheque be presented “within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier.” The Court explains that clause (a) has two limbs: one based on time from the date of drawing, and another based on “validity”. The phrase “whichever is earlier” makes clear that if the cheque’s validity is shorter than six months, the shorter period governs.
The key doctrinal move is the Court’s interpretation of “within the period of its validity.” It holds that “validity” need not be confined to the explicit duration printed or endorsed on the cheque. “Validity” can also be affected by incidents that render the cheque instrument unusable—such as acquisition or merger of the drawee bank—thereby curtailing the effective validity even if the printed time period has not expired. The Court notes that the word “period” may not control the meaning of “validity”; the legislative emphasis is on the cheque being valid at the time of presentation, and that validity can be impacted by external factors.
At the same time, the Court stresses that Section 138’s object is to uphold the credibility of cheque-based commercial transactions. It cites Supreme Court authority warning against innovative devices intended to defeat the law’s purpose, and notes that modern Section 138 jurisprudence treats dishonour as central while the precise reason for dishonour is often not decisive (as shown by “stop payment”, “account closed” type cases). Yet, for merger-invalidity arguments, the reason for dishonour can become significant because it determines how presumptions apply and whether the matter can be disposed of summarily.
7. Precedent analysis
The applicants relied on rulings where cheques drawn on merged banks were treated as invalid at the date of presentation, and where courts observed that dishonour of an invalid cheque would not attract Section 138. The Bombay High Court noted a crucial factual distinction: in those cases the bank memos reflected issues tied to validity—one indicating the cheque was not drawn on the successor bank, and another expressly stating “invalid cheque”. Those endorsements opened the door for courts to consider the clause (a) validity question more directly.
By contrast, the complainants relied on a line of decisions from different High Courts declining to quash Section 138 complaints where the return memo said “funds insufficient” despite a merger-based invalidity defence. The Court extracted the principle from these authorities: where dishonour is recorded as insufficiency of funds, the statutory presumption regime takes over and invalidity becomes a disputed defence to be tested at trial.
On the Supreme Court side, the judgment leaned on the jurisprudence on presumptions and signed cheques. It referred to the decisions holding that even a signed blank cheque, later filled by the payee, can attract the presumption under Section 139, and that the drawer remains liable unless the presumption is rebutted by evidence. This logic supported the Court’s broader caution: a drawer should not be able to exploit merger-related technicalities to defeat legitimate claims when the cheque is dishonoured for insufficiency of funds.
8. Court’s reasoning
The High Court accepted that acquisition and merger instruments, and central bank directions about cheque validity periods, are not to be brushed aside. It expressly held that the phrase “within the period of its validity” is “elastic enough” to cover invalidity arising from merger. This acknowledgement prevents an overly formalistic reading that would treat printed validity as the only determinant.
However, the Court drew a dividing line based on what the bank return memo says. It reasoned that if a cheque is returned with a specific endorsement that it is “invalid”, or that it was presented on a successor bank after the validity period, then compliance with clause (a) can be examined more directly, potentially even at a threshold stage depending on circumstances. But where the cheque is returned with the remark “Funds Insufficient”, the case moves into a different procedural track because Section 146 mandates a presumption that the cheque was dishonoured for the reason stated in the bank’s slip. The Court emphasised that Section 146 creates a mandatory presumption of law, not a discretionary one.
Once that presumption is triggered, the accused must rebut it by showing that the drawee bank could not have honoured the cheque because the cheque had become invalid. That rebuttal, the Court held, requires factual investigation: whether the cheque leaf was still acceptable in clearing, whether the successor bank would honour it, whether the instrument was delivered blank and filled later, and whether the drawer is seeking to avoid liability by taking advantage of intervening events. These are “trial issues” requiring evidence, not matters to be conclusively decided in a Section 482 petition.
The Court also highlighted a real-world risk scenario: a drawer may hand over a signed blank cheque, and the payee may fill the date later. If merger-related validity periods expire in between, allowing the drawer to escape liability at the threshold would undermine the sanctity of cheque transactions. The Court aligned this with Supreme Court reasoning that signed cheques, even if filled later, remain enforceable subject to rebuttal evidence.
Applying this framework, the Court held that the present cases fall squarely in the category where the dishonour memo says “Funds Insufficient”. Therefore, the applicants’ invalidity defence cannot dismantle the prosecution at the inception and must be adjudicated at trial after evidence. The applications were accordingly dismissed.
9. Conclusion
The Bombay High Court refused to quash the complaints and upheld the issuance of process, holding that although merger-related invalidity can conceptually affect “validity” under clause (a) of proviso to Section 138, the “Funds Insufficient” dishonour memo triggers a mandatory presumption under Section 146. The accused’s plea that the cheque had become invalid raises disputed questions requiring evidence and therefore must be decided in trial, not under Section 482.
10. Implications
This judgment is likely to be cited frequently in cheque bounce litigation involving bank mergers and legacy cheque leaves. It provides a practical test for courts and litigants: the bank return memo’s endorsement will often decide whether an invalidity argument can be considered at a threshold stage. Where the endorsement is “invalid cheque” or similar, clause (a) arguments may gain immediate traction. Where the endorsement is “funds insufficient”, the presumption regime under Section 146 and Section 139 pushes the matter to trial.
For accused persons, the ruling signals that merger-based technical defences are not automatically quashable and must be proved with evidence. For complainants, it strengthens resistance to early termination, particularly where bank memos record insufficiency of funds. For trial courts, it underscores the need to carefully apply statutory presumptions and to treat validity defences as factual unless the return memo itself directly reflects invalidity.
Case-law references (as discussed in the judgment)
- Archana Singh Gautam v. State of Uttar Pradesh (Allahabad High Court, 2024 SCC OnLine All 4599): Held that if an invalid cheque is presented and dishonoured, Section 138 is not attracted; noted the merger context where cheque validity had expired. Distinguished in the present case because the return memo here did not reflect invalidity but “funds insufficient”.
- Ganta Kavitha Devi v. State of Andhra Pradesh (Andhra Pradesh High Court, 2024 SCC OnLine AP 5115): Observed that dishonour of an “invalid cheque” would not attract Section 138; the cheque was returned with “invalid cheque” endorsement. Distinguished because present memos recorded “funds insufficient”.
- Dalmiya Cement (Bharat) Ltd. v. Galaxy Traders & Agencies Ltd. (Supreme Court, (2001) 6 SCC 463): Emphasised that courts should discourage attempts to defeat Section 138’s objectives and protect commercial credibility of cheques. Used to reinforce purposive interpretation.
- NEPC Micon Ltd. v. Magma Leasing Ltd. (Supreme Court, (1999) 4 SCC 253) and Modi Cements Ltd. v. Kuchil Kumar Nandi (Supreme Court, (1998) 3 SCC 249): Recognised that dishonour reasons like “stop payment” or “account closed” do not by themselves defeat Section 138; dishonour remains central. Used to explain why the dishonour reason generally matters less, but becomes significant in merger-invalidity disputes.
- Bir Singh v. Mukesh Kumar (Supreme Court, (2019) 4 SCC 197) and Kalamani Tex v. P. Balasubramanian (Supreme Court, (2021) 5 SCC 283): Held that even signed blank cheques attract statutory presumption and the drawer must rebut. Used to caution against allowing drawers to escape liability by merger-related technicalities without trial.
- Surjit Kumar v. Sunil Kumar Dalmia (Punjab & Haryana High Court); K.K. Tractors v. Mahindra & Mahindra (Punjab & Haryana High Court); Balkaur Singh v. State of Punjab (Punjab & Haryana High Court); Maksud Ashraf Khan v. State of Uttar Pradesh (Allahabad High Court); Rohit Goyal v. Amarjeet Singh (Uttarakhand High Court); Bhikhabhai Laljibhai Patel v. State of Gujarat (Gujarat High Court): These decisions broadly declined to quash on merger/validity defences where dishonour memo suggested “funds insufficient” and treated invalidity as a disputed defence for trial. Relied on to support the “trial issue” approach.
FAQs (SEO-friendly)
Q1. Can a cheque bounce case be quashed if the cheque was drawn on a bank that later merged into another bank?
Not automatically. Courts may treat merger-related invalidity as a factual defence requiring evidence, especially where the bank memo records “funds insufficient”, because statutory presumptions then apply and the accused must rebut them at trial.
Q2. What does “within the period of its validity” mean in Section 138 proviso clause (a)?
It is not limited only to the printed validity duration. The cheque’s validity can be curtailed by external events that render the instrument unusable, such as acquisition or merger of the drawee bank, depending on attendant facts and the return memo.
Q3. Why does a “Funds Insufficient” return memo matter so much in merger-invalidity disputes?
Because Section 146 creates a mandatory presumption that dishonour occurred for the reason stated in the bank’s slip. If the memo says “funds insufficient”, the accused must rebut that presumption with evidence, making the issue fit for trial rather than quashing.
