FINTECH, ARTIFICIAL

INTELLIGENCE, MACHINE
LEARNING AND THE LAW
Litigation under Section 25 of the Payment
and Settlement Systems Act, 2007
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Litigation under Section 25 of Payment and Settlement Systems Act, 2007

Approximate Reading Time: 18 minutes

Learning Objective
● To understand litigation under the Payment and Settlement Systems Act, 2007 for
the dishonour of electronic payments.

Litigation Under Payment and Settlement Systems Act,

2007
The Payment and Settlement Systems Act 2007 (PSS Act) has similar provisions to Section
138 with respect to digital payments such as RTGS, NEFT or ECS.

As per Section 25 of the Act, where an electronic funds transfer initiated by a person from
an account maintained by him cannot be executed on the ground that the amount of
money standing to the credit of that account is insufficient to honour the transfer
instruction or that it exceeds the amount arranged to be paid from that account by an
agreement made with a bank, such a person will be punishable with imprisonment of up to
2 years, or a fine of up to twice the amount of the amount.

Absence of ground to believe that the payment may be dishonoured is not an acceptable
defense as per Section 25(3).

Although cognizance of offences is to be taken after a written complaint of an officer

authorized by the RBI, for the dishonour of electronic funds transfer (i.e. Section 25
offences), a complaint in writing by the person aggrieved by the dishonour of the funds
transfer is sufficient, as per Section 28.

An offence under Section 25 can only be tried by a Metropolitan Magistrate or a judicial

magistrate of the first class. (Refer to Section 28).

It will be presumed that the electronic funds transfer was initiated for the discharge of a
debt or other liability unless it is proved otherwise. Further, the court is to presume
dishonour upon the production of a communication from the bank denoting such
dishonour.

The provisions of Chapter XVII of the NI Act (i.e. Sections 138 to 148) are applicable to the
dishonour of electronic funds transfer as well. Thus, interim compensation, trial process
and appellate procedure as applicable to dishonour of cheques will apply to electronic
funds transfer cases as well.

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Litigation under Section 25 of Payment and Settlement Systems Act, 2007

Definition of electronic funds transfer under the PSS Act, 2007

As per Section 2(1)(c) of the PSS Act, “electronic funds transfer” means
any transfer of funds which is initiated by a person by way of
instruction, authorisation or order to a bank to debit or credit an
account maintained with that bank through electronic means. It
includes point of sale transfers, automated teller machine
transactions, direct deposits or withdrawal of funds, transfers initiated
by telephone, internet, and card payments.

Conditions for the provision to be applicable

(a) The electronic funds transfer must be initiated for payment of an amount towards
the discharge of a debt or liability;

(b) It must be initiated as per the relevant procedural guidelines issued by the system
provider;

(c) The beneficiary must make a demand for payment by giving a notice in writing to
the person who initiated the transfer within 30 days of receipt of information
regarding dishonour;

(d) The payer must fail to make the payment within 15 days of receipt of the notice.

Conditions for Liability under Section 25

Condition 1: The funds transfer needs to be initiated for discharging a
legally recoverable debt or liability

The funds transfer needs to be initiated for the discharge of a legally recoverable debt or
other liability. The existence of a legally recoverable debt will be presumed as per Section
25(2) of the PSS Act unless the contrary is proved.

Condition 2: The instruction cannot be executed on account of

insuf icient funds

Condition 3: Notice to the payer

When the payment instruction is not executed, the payee (beneficiary) must send a notice
to the payer making a demand for the payment of the amount.

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Litigation under Section 25 of Payment and Settlement Systems Act, 2007

The notice must be in writing and sent within a period of 30 days of receipt of the
information regarding dishonour.

A period of 15 days must be provided for the payer to satisfy the liability.

Condition 4: Payer fails to pay despite the notice

The payer must have failed to make the payment within a period of fifteen days of receipt
of notice from the payee or holder in due course.

Section 27 of the Act seeks to affix the liability, in case of a company, on the persons
responsible for the conduct of the business of the company and particularly includes
directors, manager and secretary who either consented to the offence or dealt with it with
neglect.

Step-by-step procedure in case of a complaint under

Section 25 of the Act
These steps are triggered after the failure of the defendant to make the payment within the
15-day period from the issue of notice pursuant to non-execution of an electronic funds
transfer instruction.

As per Section 25(5) of the PSS Act, the provisions of Chapter XVII of the Negotiable
Instruments Act (i.e. Section 138-147 of the Act) apply to PSS Act proceedings as well.

Step 1: Drafting of the complaint

A complaint needs to be drafted, along with a copy of the documents mentioned below.

ECS dishonour intimation/return memo

In ordinary NEFT transfer cases, the beneficiary does not receive an intimation, only the
initiator of the payment does. Therefore, in such cases, it may be difficult to initiate Section
25 proceedings.

However, in an ECS dishonour scenario, this intimation is received by the beneficiary (which
receives ECS payments) through an entity registered with RBI for Electronic Clearing Service
Debit Clearing as a ‘user institution’ (see here). If the beneficiary or another entity receiving
the payments on its behalf is not registered with RBI as a user institution, such dishonour
message may not be received.

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Litigation under Section 25 of Payment and Settlement Systems Act, 2007

Notice

A copy of the notice sent by the beneficiary upon becoming aware of the non-execution of
the instruction needs to be provided. The notice should have been dated within a period of
30 days of the receipt of the ECS dishonour instruction and demanded payment within a
period of 15 days from the date of receipt of the notice.

Postal slip or courier receipt

The postal slip or the receipt provided by a courier company proves that the notice was
indeed in writing and was sent to the payer whose instructions are dishonoured
demanding the payment. It proves that the beneficiary completed the obligation on his part
to serve the notice.

Envelope/acknowledgement due card/courier delivery

con irmation/tracking report

These are documents that act as proof of delivery of the notice to the debtor. A courier
delivery confirmation will confirm when the drawer has received the notice, so the period
of fifteen days within which he needs to honour the payment starts from this date.

Power of attorney

Section 142 of the NI Act does not specifically state that the payee or the creditor or the
drawee shall lodge the complaint himself. If someone other than the payee or the creditor
lodges the complaint, he or she will require a power of attorney. Such power of attorney
must be attached to the complaint.

Step 2: Filing of the complaint before a magistrate of the relevant

jurisdiction
As per Section 142 of the NI Act (recall that Section 25(5) of the PSS Act refers to the
procedure under the NI Act), the complaint shall be filed within 30 days from the cause of
action, i.e., failure to repay as discussed above.

Any delay is only permissible at the discretion of the court, upon sufficient cause being
shown for it.

The provisions of the NI Act will be applicable for identification of the magistrate who has
territorial jurisdiction.

As per the NI Act, the complaint must be filed with the metropolitan magistrate or a judicial
magistrate of the first class within whose jurisdiction:

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Litigation under Section 25 of Payment and Settlement Systems Act, 2007

a. If the cheque is delivered for collection through an account: The branch where the
payee/holder in due course maintains the account.

b. In other cases: The branch of the drawee bank where the drawer maintains his
account is located.

Thus, as per inference from sub-clause (a), the complaint can be filed with the magistrate
having jurisdiction where the beneficiary holds its account.

As per Section 142A of the Act, if a complaint has been filed against an issuer of a cheque in
a particular court having territorial jurisdiction, all subsequent complaints must also be filed
at the same court.

Step 3: The Magistrate takes cognizance under Section 200 of the

Cr.P.C.
The burden is on the defence to prove that the cheque was not received by the
complainant towards the discharge of any debt or liability as there lays a presumption as to
the debt under Section 25(2) of the PSS Act which reads as under:-

It shall be presumed, unless the contrary is proved, that the electronic funds transfer was
initiated for the discharge, in whole or in part, of any debt or other liability.

Therefore, it is obligatory on the courts to hold this presumption in every such case where
the facts have been established. This has also been held in the case of Hiten P. Dalal v
Bratindranath Banerjee1 decided by the Supreme Court.

Step 4: Issue of summons under Section 204 of the Cr.P.C.

After the magistrate takes cognizance, summons is issued to the accused, requiring the
accused to be present during the proceedings. The summons may be delivered by hand
(most effective), post (at the residence or office address), or by publication in the local
newspaper.

An accused usually attempts to avoid delivery of a summons.

If the summons is delivered, there is an obligation on the accused to appear in the court, or
else a warrant will be issued for his or her arrest.

1
AIR 2001 SC 3897

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Litigation under Section 25 of Payment and Settlement Systems Act, 2007

Once the summons is delivered, there is a high likelihood of settlement

outside the court, because it is very difficult for the debtor to not
attend court proceedings (else a warrant for arrest will be issued) or
deny the existence of the debt or issue of the cheque. Therefore, the
aim of the creditor is to get the summons delivered.

Step 5: Bail under section 437 of the Cr.P.C.

It is possible that a non-bailable warrant is issued against the accused (see a relevant write
up here). The accused might then seek bail so that his personal presence is not required
every time. It's the discretion of the court to call for the appearance of the accused.

Step 6: Plea of accused

The accused pleads ‘not guilty’ and the trial begins. If the accused pleads guilty, a decision is
issued on the basis of admission or confession.

Interim compensation

When the accused pleads ‘not guilty’, the court can award interim compensation of up to
20% of the amount of the cheque to the complainant, which must be paid within 60 days
(extendable for a period of 30 days by the Court). If the amount is not paid, the recovery
process for a fine as per Section 421 of the Cr.P.C. can be used. Refer to Section 143A of the
NI Act. This is included by reference as per Section 25(5) of the PSS Act.

If the accused is acquitted on completion of the trial, the complainant will be directed by
the court to refund the amount to the accused with interest at bank rates within 60 days
(extendable for a further period of 30 days).

Step 7: Evidence and arguments under Section 145 of the Act

As per Section 143 of the Act (incorporated by reference to PSS Act proceedings as well), a
summary trial procedure is used. Provisions of Section 262 to 265 of the Cr.P.C. will apply
for this purpose as far as possible.

Evidence of the complainant and also evidence of the accused and witnesses can be
recorded on affidavit. The returned cheque, bank slip and return memo can be admissible
as evidence. The bank’s officers may be summoned to provide evidence as well.

The arguments in Section 138 cases can be straightforward based entirely on the
documentary evidence to establish the requirements of the section and press for
punishment.

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Litigation under Section 25 of Payment and Settlement Systems Act, 2007

Step 8: Judgment
The accused can be convicted or acquitted and the details of the evidence as well as the
statement of reasons will be included in the judgment.

Step 9: Appeal
As per Section 148 of the Act, an appeal can be filed before an appellate court. The court
may direct the appellant to deposit a minimum of 20% of the fine or compensation
awarded. This amount will be in addition to any interim compensation that was awarded,
and must be deposited within 60 days. The court can give an extension of 30 days. At any
stage of the appeal, the court can order the amount to be deposited with the payee. In case
of acquittal of the appellant, the amount is needed to be repaid back within a similar time
period as above, at an interest computed at the bank rate.

Recap
● Section 25 of the Payment and Settlement Systems Act imposes criminal
punishment for dishonour of electronic funds transfer instructions, of up to 2 years
of imprisonment and/or fine of twice the cheque amount. The provision is
advantageous, because the money recovery process under the Code of Civil
Procedure, 1908 is slow and cumbersome. Under criminal law, the police does not
easily register cases for cheating if a cheque is dishonoured.

● Section 25 of the Payment and Settlement Systems Act, 2007 prescribes similar
consequences and a similar process for the dishonour of electronic funds transfers
as Section 138 of the Negotiable Instruments Act.

● To invoke the provision under the PSS Act, a notice of non-execution of payment
instructions must be sent to the payer within 30 days, and an opportunity to pay
within a period of 15 days must be provided from the date of receipt of the notice. In
case of failure to pay, a proceeding may be initiated before the criminal court within
a period of 30 days.

● Once the summons is successfully served, it is very likely that the payer (debtor) may
proceed for settlement of the claim with the beneficiary, fearing criminal
consequences mentioned in the provision.

● The court may order interim compensation to be paid to the complainant when the
accused pleads ‘not guilty’.

● Officers of the bank may be required to furnish evidence in a PSS Act proceeding
under Section 25.

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Litigation under Section 25 of Payment and Settlement Systems Act, 2007

● The NI Act prescribes a mechanism for filing appeals, which will be applicable to PSS
Act proceedings as well. In an appeal by the payer, the appellate court may require a
sum of 20% of the amount to be deposited with it, which can also be paid to the
payee during the proceeding.

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