News

Invalid Cheques do not Attract Liability Under Section 138 of NI Act

In a decision delivered by the Allahabad High Court on June 5, 2024 in the case of Archana Singh Gautam vs. State of U.P. and Another [2024: AHC:102434] it was held that cheques that are invalid due to institutional changes such as mergers do not attract liability under Section 138 of the Negotiable Instruments Act, 1881.

This case involves an application under Section 482 of the Criminal Procedure Code, 1973 to quash criminal proceedings initiated under Section 138 of the Negotiable Instruments Act, 1881 (hereinafter referred to as the “NI Act”). The applicant had issued a cheque on June 2, 2023, from an account in the erstwhile Allahabad Bank. On April 1, 2020, the Allahabad Bank merged with the Indian Bank. This cheque, presented to the Indian Bank on August 21, 2023, was returned, claiming to be invalid, with the endorsement “wrongly delivered, not drawn on us”. The applicant contended that since the cheques of Allahabad Bank were valid only until September 30, 2021, post-merger, as per a circular issued by Indian Bank, the cheque presented was invalid and therefore could not attract liability under Section 138 of the NI Act.

Thus, the major bone of contention in this case was whether a cheque issued from an account held in the erstwhile Allahabad Bank account, after the merger and beyond the specified validity period, would attract liability under Section 138 of the NI Act, 1881.

On hearing contentions of both parties, the court pointed out the need for the cheque to be valid at the time of its presentation, as per proviso (a) to Section 138 of the NI Act. The court observed that the cheques from the erstwhile Allahabad Bank were invalid after September 30, 2021, following the bank’s merger, and that cheques that are invalid due to institutional changes, such as bank mergers, do not meet the criteria for prosecution under this section. Thus, the court held that since the cheque issued was from the erstwhile Allahabad Bank, it was invalid on the date of its presentation before the Indian Bank and therefore, the dishonoring of such a cheque does not attract liability under Section 138 of the NI Act. Subsequently, the criminal proceedings brought under Section 138 of the NI Act were quashed.