Cheque Returned For "Funds Insufficient" Post Banks Merger; Validity Of Presentation U/S 138 NI Act Requires Trial & Investigation: Bombay HC
Cases where a cheque is returned as “invalid” or “presented after validity period” and cases where it is dishonoured for insufficiency of funds are different
Justice Nitin Jamdar, Bombay High Court
The Bombay High Court has held that no straightjacket formula can be applied to quash proceedings under Section 138 of the Negotiable Instruments Act, 1881 merely because the cheque was presented after structural changes such as merger or acquisition of the drawee bank. Where a cheque is returned with the endorsement “funds insufficient”, the question whether it was presented within its legally enforceable validity period is a matter that warrants adjudication at trial, the Bench noted.
Furthermore, on the scope of clause (a) of the proviso to Section 138, the Court observed that the expression “within the period of its validity” is elastic enough to cover situations where the validity of a cheque may be impacted by factors such as merger with or acquisition by another bank. The Court distinguished between cases where a cheque is returned as “invalid” or “presented after validity period” and cases where it is dishonoured for insufficiency of funds, holding that in the latter category, factual investigation becomes necessary.
Justice N. J. Jamadar while dismissing applications seeking quashing of complaints filed under Section 138 read with Section 141 of the Negotiable Instruments Act, observed, “Whereas, in cases where the cheque has been returned with the remarks, ‘invalid’ or ‘presented on the successor bank after the period of the validity of the cheque’ and the like, compliance of clause (a) of the proviso to Section 138 of the N. I. Act, 1881, in the matter of presentation of the cheque within the validity period, could be examined by the Court, in the light of the attendant facts and circumstances of the case. No straightjacket formula that, since the cheque appeared to have been presented after expiry of the period of validity of the cheque drawn on the erstwhile drawee bank, no offence punishable under Section 138 of the N. I. Act, is made out, can be adopted”.
“…In cases where despite the original drawee bank having ceased to be ‘the bank’ within the meaning of clause (a) of the said proviso the cheque is returned unencashed with the remarks “insufficiency of funds” and the like, the investigation into facts becomes necessary, and the question whether the drawee bank could have honoured the cheque as it was rendered invalid, would warrant adjudication at the trial, the bench further opined.
Advocate Mahendra Svar appeared for the applicants and Advocate Jatin Karia appeared for the respondents.
In the present matter, the cheques were presented for encashment by the accused company, but were returned unpaid with the endorsement “funds insufficient”. The applicants contended that the cheques had been presented beyond their validity period because the original drawee bank had ceased to exist following a merger, and therefore no offence under Section 138 was made out.
Statutory notices were issued by the complainant and, upon failure of payment within the prescribed period, complaints were instituted before the Magistrate.
The accused approached the High Court seeking quashing of the proceedings on the ground that the essential requirement of presentation within the validity period had not been satisfied.
The High Court then examined clause (a) of the proviso to Section 138, which mandates 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 held that the expression “within the period of its validity” cannot be construed rigidly. Even where the original drawee bank ceases to be “the bank” within the meaning of the provision due to merger or acquisition, the attendant circumstances must be examined, it noted.
Noting that different High Courts have also adopted similar approach in a variety of fact situations, the bench thus observed in the judgment, “In my considered view, therefore, in a situation of the present nature, where the cheques have been returned with the remarks, “funds insufficient”, and not on account of alleged invalidity of the cheques, the question as to whether, the cheques were dishonoured for insufficiency of funds becomes a tribal issue and must be adjudicated at the trial.
Cause Title: Chetan Sunderji Bhanushali v. Hema Ramesh Chheda [Neutral Citation: 2026:BHC-AS:6948]
Appearances:
Applicants: Mahendra Svar, Prachi Patel, Advocates.
Respondents: Mr. Jatin Karia (Shah), Snehankita Munj, Shraddha Kamble & Dipti J. Karia, Advocates.