If you are stuck in such a situation, here is what to do.
Mr. Alok Verma, a resident of Amodpur, had a good repayment history with a finance company, “InstaLoan Services.” He recently took another loan of ₹75,000. He successfully paid the first three EMIs of ₹13,000 each through an auto-debit facility linked to his Pragati Bank account. However, due to a financial crunch, he was unable to maintain the balance in his account for the past six months. Consequently, the auto-debit instructions for the remaining ₹40,000 failed repeatedly. The company has now added penalties and interest, raising the outstanding amount to ₹60,000.
Recently, Mr. Verma received calls and messages from the company’s recovery agents, threatening to file a criminal case against him under “Section 25A and 135.” He is worried about the consequences and wonders if the amount is significant enough for the company to pursue legal action, especially since he intends to clear the dues within the next three months.
Advice in such cases
Do Not Panic: Recovery agents often use threatening language and quote sections of the law to intimidate borrowers. Understand that there is a proper legal procedure that must be followed.
Review Your Loan Agreement: Carefully read the terms and conditions of your loan. Pay close attention to the clauses regarding default, penalties, interest rates, and the legal recourse available to the lender.
Communicate in Writing: Instead of verbal assurances, communicate with the lending company via email. Clearly state your financial situation, acknowledge the debt, and express your intention to pay. Propose a timeline for repayment (e.g., the next three months, as you intend). This creates a documented record of your willingness to cooperate.
Negotiate a Settlement: You can propose a revised repayment plan with smaller EMIs or ask for a waiver of some of the penalties. Sometimes, lenders are open to a one-time settlement (OTS) for a reduced amount to close the account quickly.
Consult with Lawyer: The very basic and important step to start is talk to Lawyer / advocate. You should not hesitate in paying his consultation fee i.e. might be in range of Rs. 10,000 to 50,000 depends case to case. He is helping you in this situation of come out. He is expert in the domain and can help you explain the procedure which you might have never explored. A good lawyer can get the issues resolved much faster than you think
Applicable Sections of Law
The sections mentioned by the recovery agents, while possibly misquoted, likely refer to the following provisions:
Section 138 of the Negotiable Instruments Act, 1881: This is the primary law dealing with the dishonour of cheques due to insufficient funds. The courts have expanded its scope to include the dishonour of Electronic Clearing Service (ECS) and National Automated Clearing House (NACH) mandates, treating auto-debit failures similarly to bounced cheques.
Section 25 of the Payment and Settlement Systems Act, 2007: This section specifically addresses the dishonour of an electronic funds transfer instruction due to insufficient funds. It makes such a failure a punishable offense, equivalent to an offense under Section 138 of the NI Act. The “Section 25A” mentioned by the agent is likely a reference to this provision.
If you are the complainant
If you are the lender (the company) in such a scenario, the correct legal procedure is as follows:
Send a Demand Notice: Within 30 days of being informed by the bank about the dishonour of the electronic mandate, you must send a legal notice to the borrower. This notice should demand the payment of the due amount and must be sent to the borrower’s correct address.
Provide a 15-Day Window: The borrower has 15 days from the receipt of the notice to make the full payment.
File a Complaint: If the borrower fails to pay within these 15 days, you can file a criminal complaint before the appropriate Magistrate’s court within one month from the expiry of the 15-day period.
Consult with Lawyer: The very basic and important step to start is talk to Lawyer / advocate. You should not hesitate in paying his consultation fee i.e. might be in range of Rs. 10,000 to 50,000 depends case to case. He is helping you in this situation of come out. He is expert in the domain and can help you explain the procedure which you might have never explored. A good lawyer can get the issues resolved much faster than you think
If you are the victim
If you are the borrower who has defaulted, here is how you should proceed upon receiving a legal notice or court summons:
Do Not Ignore Communication: Never ignore a legal notice or a court summons. Failure to respond or appear in court can lead to adverse orders, including the issuance of a bailable or non-bailable warrant against you.
Verify the Notice: Check if the legal notice has been sent within the 30-day time limit from the date of the EMI bounce. Any delay on the lender’s part can be a valid defense point.
Attempt to Settle: The primary objective of these laws is to ensure the payment is made. You can settle the matter at any stage, even after a case has been filed, by paying the outstanding amount. The courts often encourage such settlements.
Prepare Your Defense: While “insufficient funds” is not a valid defense, you may have other grounds, such as a dispute over the actual amount due, calculation errors in penalties, or failure by the lender to follow the proper procedure for sending the notice.
Consult with Lawyer: The very basic and important step to start is talk to Lawyer / advocate. You should not hesitate in paying his consultation fee i.e. might be in range of Rs. 10,000 to 50,000 depends case to case. He is helping you in this situation of come out. He is expert in the domain and can help you explain the procedure which you might have never explored. A good lawyer can get the issues resolved much faster than you think
How the police behave in such cases
It is crucial to understand that cases under Section 138 of the NI Act or Section 25 of the PSS Act are not handled like typical criminal cases (e.g., theft or assault). The police have a very limited role. The complaint is filed directly with a Magistrate, not at a police station as an FIR. The police’s involvement is generally restricted to serving court summons or executing warrants if the accused person fails to appear before the court despite repeated notices.
FAQs people normally have
Can I be arrested for an EMI bounce?
The offense is bailable. This means you can get bail from the court as a matter of right. Arrest is highly unlikely and typically only happens if a person deliberately absconds and ignores court summons, leading a judge to issue a non-bailable warrant.Is my loan amount too small for the company to file a case?
No amount is too small. Lenders, especially finance companies, have streamlined legal processes to handle a high volume of default cases. They often file cases even for relatively small amounts to maintain financial discipline among borrowers and for their own recovery statistics.What is the punishment if I am found guilty?
If convicted, the punishment can be imprisonment for a term which may extend to two years, or a fine which may extend to twice the amount of the dishonoured EMI, or both.Can I settle the matter after the company has already filed a case?
Yes, the Supreme Court of India has consistently encouraged settlement in such cases. You can reach a compromise with the lender and pay the agreed amount at any stage of the trial. The court will then dispose of the case based on the settlement.
What evidence is required?
For the complainant (the lender), the key evidence includes the original loan agreement, the NACH/ECS mandate form signed by the borrower, bank statements showing the dishonour of the instruction with the reason “insufficient funds,” a copy of the legal notice sent to the borrower, and proof of its delivery (like a postal receipt).
For the accused (the borrower), evidence could include proof of any payments made, all written communication with the lender, and any documents that support a dispute regarding the quality of service or the amount claimed.
How long will the investigation take?
As mentioned, there is no police investigation. The matter is decided through a court trial. These cases are supposed to be conducted as “summary trials” for speedy disposal. However, given the backlog in the Indian judicial system, such cases can take anywhere from six months to a few years to reach a final verdict, depending on the court’s workload and the complexity of the case.
Advocate Sudhir Rao, Supreme Court of India