Section 138 and EMI Defaults: Can You Be Sued Over a Bounced Cheque?

Many borrowers issue post-dated cheques to lenders as security for EMI payments. But what happens when one of those cheques bounces due to insufficient funds? Can you really face legal action for it?

The answer is yes—under Section 138 of the Negotiable Instruments Act, 1881—but with some important nuances.

What is Section 138 of the Negotiable Instruments Act?

Section 138 makes it a criminal offence to dishonor a cheque due to insufficient funds or when the cheque amount exceeds the arrangement with the bank. However, for this section to apply, the cheque must have been issued to settle a legally enforceable debt or liability.

So, when a borrower defaults on an EMI and the cheque issued as security is presented and bounces, the lender can initiate legal proceedings under this section—starting with a legal notice and potentially ending with a criminal complaint.

Timeline of Legal Action Under Section 138

1. Cheque Bounce
   The bank returns the cheque unpaid, usually due to insufficient funds or a mismatch.

2. Legal Notice Sent
   The lender (payee) sends a written demand notice to the borrower (drawer) within 30 days of the cheque being dishonored, requesting payment within 15 days.

3. Failure to Pay
   If the borrower does not pay within 15 days of receiving the notice, the lender can file a criminal complaint within the next 30 days.

   Does Every EMI Default Trigger Section 138?

   Not necessarily. For Section 138 to apply:

   • The cheque must represent a legally enforceable liability.

   • If the cheque was issued purely as security and not toward a specific due payment, courts may consider it differently.

   Courts have delivered mixed judgments in such cases, often depending on the timing, intention, and circumstances surrounding the cheque issuance.

   Also, remember—this law applies only to cheques, not to missed EMI payments through electronic transfers or bank apps.

   Your Legal Options as a Borrower

   • Respond Promptly to Legal Notices
     Ignoring a Section 138 notice can seriously harm your defense.

   • Explore Out-of-Court Settlement
     Many lenders are open to negotiation—especially if you respond quickly and show intent to resolve.

   • Challenge the Complaint
     If the cheque wasn’t for a legally enforceable debt or was misused, you can contest the claim.

   • Consult a Legal Expert
     A lawyer can help assess the strength of the case and recommend the right legal strategy.

     Final Thought

     Defaulting on EMIs backed by cheques can lead to criminal proceedings, not just credit score damage. Section 138 is a powerful legal tool that lenders can use to pressure repayment. If you receive a legal notice under this law, act quickly, understand your rights, and get professional legal support. Handling it early can save you from a potential criminal record over a bounced cheque.