Notice Under the Payment and Settlement Systems Act, 2007: Explained in Simple Words
Receiving a legal notice under Section 25 of the Payment and Settlement Systems Act, 2007 can be confusing, particularly when the notice relates to a failed EMI, ECS mandate, NACH instruction, or another electronic payment. It is important to understand that the correct legal terminology is Payment and Settlement Systems Act, 2007, rather than “Payment of Settlement Act.” Section 25 deals with the dishonour of certain electronic funds transfers because of insufficient funds or because the transfer exceeds an agreed limit.
This guide by Puneet and Vihaan Law Partners explains the basic concept, legal notice process, possible consequences, and practical steps in simple language.
Legal Awareness Note: The application of Section 25 depends on the facts, the payment mechanism involved, the underlying liability, and compliance with the statutory requirements.
What Is the Payment and Settlement Systems Act, 2007?
The Payment and Settlement Systems Act, 2007 is an Indian law dealing with payment systems and their regulation. The Reserve Bank of India has an important role under the Act in regulating payment systems.
For borrowers and individuals, Section 25 is particularly relevant in situations involving certain electronic funds transfers that are dishonoured because the account does not contain sufficient funds or because the transaction exceeds an agreed arrangement with the bank.
In simple terms, where the statutory conditions are satisfied, dishonour of an electronic payment instruction can potentially result in legal proceedings.
What Does a Section 25 Notice Mean?
A Section 25 legal notice generally communicates a demand following the dishonour of an electronic funds transfer.
For example, a person may have authorised an electronic payment instruction such as an ECS or similar electronic mandate for repayment of a legally enforceable debt. If the transaction is returned unpaid because of insufficient funds, the payee may issue a statutory demand notice if the requirements of Section 25 are fulfilled.
Recent Indian court decisions have considered Section 25 proceedings involving electronic payment instructions, including loan repayment arrangements
The notice is therefore not something that should automatically be treated as an ordinary collection message.
When Can Section 25 Become Relevant?
Section 25 is concerned with an electronic funds transfer initiated from an account where the transfer cannot be completed because the available balance is insufficient or the transaction exceeds the amount arranged to be paid under an agreement with the banks.
The statutory provision also concerns the underlying legally enforceable debt or liability.
Therefore, simply receiving a notice does not mean that every allegation contained in it has automatically been established. The specific statutory ingredients and facts must be examined.
What Are the Important Requirements?
A Section 25 proceeding can involve several important requirements.
1. Electronic Funds Transfer
There should be an electronic funds transfer falling within the scope of the provision.
2. Legally Enforceable Liability
The payment instruction should relate to a legally enforceable debt or other liability where the provision applies.
3. Dishonour
The electronic transfer must have failed in the manner contemplated by the legislation.
4. Statutory Demand Notice
The payee must comply with the statutory notice requirements. Courts have specifically considered whether a demand notice was issued within the prescribed period.
5. Failure to Make Payment
The statutory period following receipt of the notice can become important. Section 25 proceedings therefore require careful attention to dates and service.
What Is the Time Limit for a Notice Under the Payment and Settlement Systems Section 25 Notice?
Notice Under the Payment and Settlement Systems
One of the most important issues is timing. Under Section 25, the demand notice is generally required to be made within 30 days from receipt of information from the bank regarding the dishonour of the electronic funds transfer.
The person receiving the notice is then given 15 days from receipt of the notice to make the required payment under the statutory framework.
Because limitation and service can become significant in litigation, recipients should preserve:
Date of the failed transaction
Bank return information
Date of notice
Date of delivery
Tracking information
Payment records
Loan or transaction documents
What Happens If You Receive Such a Notice?
Do not simply ignore it.
A sensible first step is to read the entire notice carefully and identify:
Who issued the notice?
What payment is being claimed?
What electronic transaction allegedly failed?
What is the date of dishonour?
What statutory provision has been mentioned?
When was the notice issued?
When was it delivered?
What amount is demanded?
What deadline has been provided?
What documents have been attached?
These details can help determine whether the notice corresponds with the actual transaction.
What If the Amount Mentioned Is Incorrect?
A recipient should not automatically accept every figure stated in a demand notice.
Compare the claimed amount with:
Loan agreement
Account statement
EMI schedule
Bank statement
Payment receipts
Settlement communications
Previous correspondence
Applicable charges
If the amount appears incorrect, the issue can be specifically addressed in an appropriate legal response.
What If You Have Already Paid?
If the amount has already been paid, preserve clear documentary evidence.
Useful records may include:
Bank transaction statement
UTR/reference number
Payment receipt
Email confirmation
SMS confirmation
Settlement agreement
Account closure statement
A payment made after a dispute has arisen should also be documented properly.
Can the Parties Settle the Dispute?
Depending on the circumstances and stage of proceedings, parties may explore settlement.
Recent judicial decisions demonstrate that parties can report mutually agreed payment arrangements in proceedings involving Section 25 of the Payment and Settlement Systems Act.
However, settlement should not be assumed to automatically terminate legal proceedings. The legal effect depends on the stage of the matter, the terms of settlement, and the applicable procedural law.
A written settlement should clearly record the agreed amount, payment schedule, consequences of default, and treatment of pending proceedings where relevant.
Can a Section 25 Case Be Challenged?
The answer depends entirely on the facts.
Potential issues may arise regarding:
Whether the electronic transfer falls within Section 25
Whether a legally enforceable liability existed
Whether the payment instruction was actually authorised
Whether the transaction was dishonoured for the relevant statutory reason
Whether the notice was issued within the prescribed period
Whether the notice was properly served
Whether the required statutory conditions were satisfied
Whether the amount claimed is legally recoverable
Courts have examined these statutory ingredients in Section 25 proceedings.
This does not mean that every recipient has a particular defence. The documents and facts of each matter must be examined individually.
Section 25 and Loan App / EMI Disputes
Section 25 notices are sometimes encountered in disputes involving digital loans, EMIs, ECS mandates and electronic payment instructions.
For example, judicial records include matters where loan repayments through electronic mandates were dishonoured and proceedings were initiated under Section 25.
However, a loan default and a Section 25 offence are not automatically identical concepts. The statutory ingredients must still be established.
Therefore, borrowers should distinguish between:
Ordinary payment default → contractual/recovery consequences
and
Statutorily covered dishonour of an electronic funds transfer → potential Section 25 proceedings where legal requirements are fulfilled.
What Documents Should You Keep?
If you have received a Section 25 notice, create a complete document file.
Recommended documents:
Original legal notice
Envelope or delivery record
Loan agreement
Bank statements
EMI schedule
ECS/NACH mandate details
Payment receipts
Emails and messages
Settlement correspondence
Previous notices
Bank return/dishonour information
Identity and account-related records relevant to the transaction
Maintaining a chronological record can make it easier to understand the dispute.
Common Mistakes to Avoid
Ignoring the Notice
Ignoring a statutory demand can create unnecessary legal complications.
Making an Immediate Admission
Do not casually admit liability without reviewing the documents and facts.
Losing the Notice Envelope
The delivery date may become relevant to calculating statutory timelines.
Deleting Messages
Electronic communications may become relevant to understanding the transaction and dispute.
Relying Only on Verbal Assurances
Important settlement or payment arrangements should preferably be documented.
Assuming the Case Is Automatically Invalid
A mistake in one part of a notice does not necessarily mean that the entire matter disappears. The legal effect depends on the specific circumstances.
Section 25 vs Section 138 of the Negotiable Instruments Act
Section 25 of the Payment and Settlement Systems Act, 2007 and Section 138 of the Negotiable Instruments Act, 1881 are separate statutory provisions.
Section 25 specifically addresses certain electronic funds transfer dishonours, while Section 138 primarily concerns dishonour of cheques.
In some cases, proceedings may refer to both provisions depending on the payment mechanism and factual circumstances. Recent court decisions illustrate matters involving Section 25 alongside Section 138.
Therefore, a recipient should carefully identify the exact statutory provision cited in the notice rather than assuming that every payment-related notice is a cheque-bounce case.
Why Legal Notice Review Matters
A legal notice contains more than a demand for money. It can establish the sender's version of events and identify the legal provision being relied upon.
A careful review can help identify:
The alleged transaction
The claimed liability
The statutory provision
Relevant dates
Notice requirements
Supporting documents
Payment history
Possible factual inconsistencies
For this reason, a recipient should treat a statutory notice seriously and obtain independent legal advice based on the specific documents and circumstances.
Puneet and Vihaan Law Partners
Puneet and Vihaan Law Partners provides this article as part of a Legal Awareness Initiative intended to explain Indian legal concepts in accessible language.
The firm operates in relation to matters across
Delhi and Himachal Pradesh.
Phone: 9711376833 | 9625929998
Head Office: Delhi — Serving All Over Delhi
Himachal Pradesh Office: Serving All Over Himachal
Frequently Asked Questions
1. What is the Payment and Settlement Systems Act, 2007?
It is an Indian legislation governing payment systems and related regulatory matters. Section 25 deals with certain dishonoured electronic funds transfers.
2. What is a Section 25 notice?
It is generally a statutory demand notice concerning a dishonoured electronic funds transfer where the requirements of Section 25 are applicable.
3. Is “Payment of Settlement Act” the correct name?
The correct statutory name is Payment and Settlement Systems Act, 2007.
4. Does Section 25 apply to every EMI default?
No. Section 25 concerns specific statutory conditions relating to electronic funds transfers. An ordinary EMI default does not automatically establish a Section 25 offence.
5. What type of payment can be involved?
The provision can apply to qualifying electronic funds transfers. The exact payment mechanism and facts should be examined.
6. What happens after an electronic payment is dishonoured?
Where the statutory requirements are satisfied, the payee may issue a demand notice and potentially initiate proceedings if the required payment is not made within the applicable statutory period.
7. Is there a deadline for issuing the notice?
Section 25 contains a 30-day period linked to receipt of information from the bank regarding the dishonour.
8. How much time does the recipient get after receiving the notice?
Section 25 provides a 15-day period following receipt of the notice for payment in the circumstances covered by the provision.
9. What if I have already paid the amount?
Keep documentary proof of payment and carefully compare it with the amount and transaction mentioned in the notice.
10. Can I dispute the amount mentioned in the notice?
Yes, factual or legal disputes concerning the amount can arise. The appropriate response depends on the underlying transaction and documents.
11. Can a Section 25 matter be settled?
Settlement may be possible depending on the circumstances and procedural stage. Courts have dealt with matters where parties recorded settlement arrangements.
12. Is a Section 25 case the same as a cheque-bounce case?
No. They arise under different statutory provisions. Section 25 concerns qualifying electronic funds transfers, while Section 138 of the Negotiable Instruments Act concerns cheque dishonour.
13. Should I ignore a Section 25 legal notice?
It is generally unwise to ignore a statutory legal notice. Review the notice, preserve the documents and consider obtaining independent legal advice promptly.
14. Can the notice contain an incorrect claim?
A notice may contain disputed facts or amounts. The recipient can examine the underlying transaction and respond appropriately based on the actual documents.
15. What should I do first after receiving the notice?
Preserve the notice, note the delivery date, check the payment transaction, collect the relevant documents, and obtain independent legal advice based on the specific facts before deciding how to respond.
Final Takeaway
A Section 25 notice under the Payment and Settlement Systems Act, 2007 should not be treated casually. The legal consequences depend on whether the statutory requirements are satisfied, the nature of the electronic transaction, the underlying liability, the timing and service of the notice, and the subsequent conduct of the parties.
If you receive such a notice, read it carefully, preserve all records, verify the transaction and dates, and understand the legal provision mentioned before taking further action.
Legal Awareness Initiative — Puneet and Vihaan Law Partners
Disclaimer: This article is for general legal awareness and public education only. It does not constitute legal or professional advice. Viewers must seek independent professional advice based on their own specific facts.
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