Merger Does Not Automatically Wipe Out Section 138 NI Act Liability: Bombay High Court Refuses to Quash Cheque Bounce Cases on SBI–SBP Amalgamation Plea

“Where Cheque Is Returned With ‘Funds Insufficient’, Presumption Under Section 146 Operates – Invalidity Is a Matter for Trial”, In a significant ruling on the interplay between bank mergers and cheque dishonour liability, the Bombay High Court declined to quash criminal complaints under Section 138 of the Negotiable Instruments Act, 1881. Justice N. J. Jamadar held that where cheques drawn on the erstwhile State Bank of Patiala were returned with the endorsement “Funds Insufficient” after its merger with State Bank of India, the issue of their alleged invalidity is a triable question and cannot be decided in proceedings under Section 482 CrPC.

The Court clarified that although the expression “within the period of its validity” in proviso (a) to Section 138 is wide enough to include situations where a cheque may become invalid due to merger, there is no straightjacket rule that merger by itself nullifies liability under Section 138. The applications seeking quashing of process were dismissed.

The complainant had advanced loan amounts in 2014 to M/s Arihant Realtors, a partnership firm of which the applicants were partners. According to the complaint, interest was paid till 2019. Towards discharge of liability, cheques dated 17 March 2021 were drawn on State Bank of Patiala, Bandra Branch.

The cheques were presented on 28 March 2021 and returned unpaid with the remark “Funds Insufficient.” Statutory notices dated 30 March 2021 were issued. Upon non-payment, complaints under Section 138 read with Section 141 of the NI Act were filed.

The Magistrate issued process. The Sessions Court dismissed revision applications. The accused then approached the High Court under Section 482 CrPC.

Were the Cheques Invalid After SBI–SBP Merger?

The applicants argued that State Bank of Patiala had merged with State Bank of India with effect from 1 April 2017 under the Acquisition of State Bank of Patiala Order, 2017. As per RBI communications, cheques drawn on SBP were valid only till 31 December 2017. Since the subject cheques were presented in March 2021, they were allegedly invalid and could not attract Section 138.

Relying on decisions of the Allahabad and Andhra Pradesh High Courts, it was contended that presentation of an invalid cheque does not satisfy proviso (a) to Section 138, which mandates presentation “within the period of its validity.”

The complainant countered that the cheques were returned not as “invalid” but for “Funds Insufficient.” Therefore, the statutory presumption under Section 146 applied, and the burden shifted to the accused to rebut it at trial. It was further argued that disputed factual questions cannot be adjudicated in inherent jurisdiction.

Court’s Interpretation of “Within the Period of its Validity”

Justice Jamadar undertook a detailed analysis of proviso (a) to Section 138 and observed:

“The expression ‘period of validity’ does not seem to be restricted to the specified ‘term’ of validity, and the question of invalidity of the cheque may arise on account of the circumstances, which may curtail the express specified ‘term’ of validity.”

The Court acknowledged that merger could, in appropriate cases, affect the validity of a cheque even if the printed validity period had not expired. However, the decisive factor is how the cheque was treated by the bank at the time of dishonour.

The Court distinguished precedents where cheques were returned with endorsements such as “invalid cheque” or “wrongly delivered not drawn on us.” In those cases, the return memo itself reflected invalidity.

In contrast, in the present case, the return memo stated “Funds Insufficient.”

Presumptions Under Sections 139 and 146: A Mandatory Burden on the Drawer

The Court emphasised the statutory presumptions under the NI Act. It held:

“If the cheque is not returned with a specific endorsement that the cheque is invalid, but on account of insufficiency of funds, then… the presumption contained in Section 146 of the N. I. Act, 1881, comes into play and the onus would shift on the drawer to rebut the presumption.”

Section 146 creates a mandatory presumption that the cheque was dishonoured as stated in the bank slip. Therefore, once the memo indicates “Funds Insufficient,” the Court is “enjoined to presume” dishonour for that reason.

The accused must rebut this presumption through evidence at trial by demonstrating that the drawee bank could not have honoured the cheque due to expiry of validity arising from merger.

Inherent Jurisdiction Cannot Decide Disputed Facts

The Court cautioned against converting Section 482 proceedings into mini-trials. It observed that documents like the Acquisition Order and RBI circulars were not placed before the Trial Court. More importantly, the question whether the cheque had become invalid despite being returned for insufficiency of funds involves factual adjudication.

The Court noted:

“In cases where despite the original drawee bank having ceased to be ‘the bank’… the cheque is returned unencashed with the remarks ‘insufficiency of funds’… the investigation into facts becomes necessary, and the question whether the drawee bank could have honoured the cheque… would warrant adjudication at the trial.”

The High Court further rejected the proposition that merger automatically extinguishes Section 138 liability:

“No straightjacket formula that, since the cheque appeared to have been presented after expiry of the period of validity… no offence punishable under Section 138… is made out, can be adopted.”

Object of Section 138: Protecting Commercial Credibility

Reinforcing the legislative intent behind Section 138, the Court relied upon Supreme Court precedents including NEPC Micon Ltd., Modi Cements, Bir Singh v. Mukesh Kumar, and Kalamani Tex.

The Court reminded that the object of Section 138 is to ensure “credibility in transacting business through cheques” and that “efforts to defeat the objectives of law by resorting to innovative measures and methods are to be discouraged.”

It also noted the settled principle that even blank signed cheques attract presumption under Section 139 unless rebutted by cogent evidence.

Holding that the matter requires adjudication at trial in light of the statutory presumptions and the bank’s endorsement of “Funds Insufficient,” the High Court dismissed all three criminal applications under Section 482 CrPC. The orders issuing process were upheld.

No costs were imposed.

Date of Decision: 10 February 2026