It is common that cheques are sometimes bounced as the Bank on which the cheque has been drawn has merged with some other bank and the cheque of the merged bank ceases to be a legal tender. A question arises whether the drawer of the cheque can be prosecuted under section 138 of the Negotiable Instruments Act, 1881.

The Courts have settled that bouncing of old cheques of the banks which have merged in other banks would not attract section 138 of the NI Act as the old cheques become 'Invaid' after a notified date.

The Allahabad High Court in a recent judgment in the case of Smt. Archana Singh Gautam vs. State of U.P. and Another decided on 05-06-2024 (Neutral Citation No. - 2024:AHC:102434) has categorically held that bouncing of old cheques of the banks which have merged in other banks would not attract section 138 of the NI Act.

The brief facts are that an application was filed to quash the criminal proceedings relating to a cheque dishonour case under Section 138 of the Negotiable Instruments Act, 1881 concerning a cheque issued from an account of the erstwhile Allahabad Bank, which had merged into Indian Bank. It was vehemently pleaded on behalf of the applicant that the cheque in question was invalid because it was issued after the merger of Allahabad Bank into Indian Bank .on April 1, 2020. The said cheque was issued on June 2, 2023 and by notifications issued by the Bank was valid till September 30, 2021.

On behalf of the opposite party it was argued that an invalid cheque could also attract liability under Section 138 as has been held by the Apex Court judgment in the case of NEPC Micon Ltd. V. Magma Leasing Ltd. 1999 (4) SCC 253. However, the High Court distinguished the said judgment and held that the liability under Section 138 arises only when the cheque is presented within its validity period. Th Court allowing the application of the applicant quashed & held thus:

10. So far as the judgment of NEPC Micon Ltd. (Supra) relied upon by the counsel for the opposite party No. 2 is concerned, that:
judgment relates to the different kinds of reasons for dishonouring the cheque that would come under the category of insufficient funds, but in the present case, the question is not simply the reason for dishonouring the cheque, but the question is validity of the cheque as mentioned in proviso (a) of Section 138 of N.I. Act because if the cheque itself is invalid, then the Bank is bound to dishonour the same. So far as the judgment of the Delhi High Court in Sri Premanand Prusty (Supra) relied upon the counsel for the opposite party no. 2 is concerned, this Court is of the view that this judgment has not been correctly decided.

11. In view of the above analysis, the cheque in question, which was issued from the account maintained in erstwhile Allahabad Bank after its merger with Indian Bank, was not the valid cheque on the date of presentation before the Indian Bank as required by proviso (a) of Section 138 of N.I. Act; therefore, dishonouring the same will not attract the liability u/s 138 N.I. Act.

12. This Court is also of the view that the above analogy will also be applicable to the cheques of all banks which had merged with other banks.

Time will tell whether this decision would hold waters in time to come. With due respect, the High Court perhaps lost sight of the provision in section 138 which brings the dishonour of cheque within the purview of Section 138 of the NI Act. The provision reads as under:

1. *
2. The payee or the holder in due course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice, in writing, to the drawer of the cheque, [within thirty days] of the receipt of information by him from the Bank regarding the return of the cheque as unpaid.
3. The drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice.

Even if the cheque was characterised by the High Court as ' invalid', in my opinion the mandate as contained in clauses (b) & (c) would apply with full force. Whether it is a case of 'account closed', 'signature diifer', 'Stop Payment' or invalidity due to merger of bank, the provisions of Section 139 would invariably apply once the drawer admits having given the cheque to the drawee. By interpreting the section in a technical way, as done by the Hon'ble Allahabad High Court, would make the section 138 of the NI Act redundant and the very purpose of this enactment would be frustrated.

Written By: Inder Chand Jain
Ph no: 8279945021, Email: [email protected]