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A cheque you submitted as earnest money for a government tender comes back unpaid, and a few weeks later the tender authority's letter arrives. It does not just reject your bid; it threatens a Section 138 complaint. This is a different animal from a trade cheque that bounced. An EMD cheque is bid security, money the authority holds to bind you to your offer, not payment for goods or services already supplied. That difference shapes everything that follows: whether a tender EMD cheque bounce is even a criminal matter, what the authority can forfeit, and what you can realistically do about it.
Earnest money deposit, or bid security, is the sum a tender authority asks for to keep your offer on the table. It is typically 1% to 3% of the estimated tender value. Its purpose is narrow: it deters a bidder from withdrawing during the bid validity period, from refusing to sign the contract if awarded, and from failing to furnish performance security. It is not a part payment for the work.
Most tender documents allow the EMD to be furnished as a demand draft, a fixed deposit receipt, a bank guarantee, or a cheque drawn on a scheduled or co-operative bank. Some central tenders now accept an insurance surety bond as an alternative. Keep the instrument type in mind, because the legal consequence of a failed instrument differs sharply:
Two practical points before you sign. First, a cheque is valid for presentation for three months from its date, so an EMD cheque dated well before the technical bid opening may have to be reissued. Second, micro and small enterprises registered on the Udyam portal are generally exempt from paying EMD in public procurement under the MSE procurement policy. Read the EMD clause before you hand over a cheque you can ill afford to lose.
Section 138 applies when a cheque drawn on an account maintained by the drawer is returned unpaid for insufficiency of funds or because it exceeds the arrangement, and the drawer fails to pay after a written demand. The section requires that the cheque was issued for the discharge, in whole or in part, of any debt or other liability. That phrase is where most EMD cases turn.
Follow the clock. The payee must issue the demand notice within 30 days of receiving the bank's return memo. The drawer then has 15 days from receipt of the notice to pay. If no payment comes, the complaint must be filed within one month of the cause of action. Miss a step and the complaint fails on limitation, not on merits. The complaint is filed before the Magistrate where the payee's bank branch is situated, when the cheque was delivered for collection through that account.
Once a complaint is entertained, Section 143A permits the court to order interim compensation of up to 20% of the cheque amount. If there is a conviction and an appeal, Section 148 requires a deposit of a minimum of 20% of the fine or compensation awarded. Offences under the Act are compoundable under Section 147.
An EMD cheque is usually handed over as security, and at the bidding stage the bidder owes the authority nothing. The authority holds the cheque against a future default. So the honest answer is: it depends on what the tender document says and what had happened by the date of presentment.
If the tender conditions declare that the EMD stands forfeited on dishonour, or that the bidder is liable to pay the EMD amount the moment the cheque is returned, that clause creates a crystallised liability, and Section 138 is available. If the cheque was pure security for an event that had not occurred, the drawer has a real argument that no legally enforceable liability existed on the date of presentation. The Supreme Court examined this distinction in Sripati Singh v. State of Jharkhand (2021), holding that the question is whether a legally enforceable liability existed when the cheque was presented (Supreme Court of India).
Note also what Section 138 does not comfortably cover: a cheque returned because it was presented after its three-month validity sits outside the section in most cases. Stop-payment instructions, by contrast, have generally been treated as dishonour for this purpose.
Forfeiture of bid security is a contractual power, not a statutory one. The authority can forfeit only what the tender document permits, and only on the trigger it lists. Standard triggers include withdrawal of the bid during the bid validity period, failure to sign the agreement or furnish performance security on award, and submission of a false declaration. Non-encashment of the EMD instrument is often expressly listed as well.
Read three things in your tender document before assuming the worst: whether dishonour of the EMD cheque is itself a listed trigger; whether the clause says the full EMD is forfeited or only the actual loss; and whether a separate debarment clause applies. Debarment or blacklisting carries civil consequences, and public authorities are expected to give a show-cause notice and a hearing before passing such an order. A forfeiture order passed without reasons, or beyond the clause, is open to challenge through the authority's own grievance mechanism, and in appropriate cases before a writ court.
Keep forfeiture and criminal liability in separate compartments. Forfeiture recovers the authority's loss under the contract. A Section 138 complaint is a criminal proceeding with compensation attached. An authority may pursue both, but it cannot collect the same amount twice.
Two pieces of correspondence matter, and they are not the same letter.
It must be in writing, issued within 30 days of the return memo, state the cheque particulars and amount, and demand payment within 15 days. Typical defects include a wrong cheque number or amount, service at an address the firm has vacated, and a notice issued before the memo was received. A defective notice is not a technicality to celebrate; it usually means the authority reissues and the timeline shifts.
Reply to the Section 138 notice within the 15-day window, through a lawyer, admitting nothing and setting out the facts: the cheque was bid security, the tender document governs forfeiture, and no liability had crystallised on the date of presentation. In parallel, send a separate representation to the tender-issuing authority against the forfeiture, quoting the relevant clause. Do not send a fresh cheque to regularise the position unless you are certain it will be honoured; a second dishonour doubles the exposure.
The defences that actually work are narrow and factual. Absence of a legally enforceable debt on the date of presentation. A tender that was never accepted, or a bid withdrawn within the period the document allows. Presentation after the cheque's validity. A notice that was never served or was issued beyond 30 days. A demand for more than the cheque amount. Remember that the presumptions run against you: Section 139 presumes consideration, and Section 140 removes several standard defences. The burden of rebuttal is real but not impossible.
Sanghvi Constructions, a Udyam-registered small contractor in Nashik, bids for a state public works tender of ₹3.2 crore. The EMD is 1%, ₹3,20,000, furnished by a cheque dated 12 January 2026 on a district co-operative bank. A client's payment is delayed, and the cheque is returned on 20 January 2026 with the memo funds insufficient. The technical bids are opened on 15 January. On 28 January the department rejects the bid as non-responsive and forfeits the EMD. On 12 February, well within the 30-day window, it issues a Section 138 notice demanding ₹3,20,000. No payment is made in 15 days, and in March 2026 the department files a complaint before the Magistrate where its own bank branch is located.
The firm's defence turns on one question: was there a legally enforceable liability on 20 January? It had not withdrawn its bid, the tender was still under evaluation, and the firm's reading of the EMD clause is that the amount became forfeitable only on a listed default. That is a defensible position if the clause really reads that way, and a hopeless one if the document declares the EMD payable on dishonour. Either way, silence is the worst response. A reply within 15 days preserves the argument, and a negotiated compounding under Section 147 may cost less than three years of trial, with Section 143A interim compensation of up to 20%, about ₹64,000 here, hanging over the firm in the meantime.
Keep the original bank return memo; the 30-day notice clock runs from your receipt of it.
Pull out the tender document and mark the EMD clause, the forfeiture trigger and the debarment clause.
Note the cheque date, presentation date and bid validity dates on one sheet.
Reply to the demand notice within 15 days of receipt, in writing, through counsel.
File a separate representation against the forfeiture with the tender-issuing authority.
Preserve the bid submission acknowledgement, portal records and all correspondence.
Evaluate compounding under Section 147 before the first hearing rather than after.
If a tender EMD cheque has come back unpaid, do this today: diarise the 15-day window from the date you received the demand notice and send a written reply through counsel before it closes.
This article is for general information only and is not legal advice. Consult a qualified professional for your specific facts.
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