Most of the financial transactions in a business take place through credit or loans for the long-term association between the parties. Non-recovery of such loans or credit result in bad debts. It affects the credit score and harms future loan opportunities.
“Debt” is the obligation of the debtor to pay a certain amount to the creditor.
Debt Recovery disputes can be solved in three ways:
- Civil Remedy- In this, a party can send a legal notice to the debtor and initiate a civil suit against the debtor.
- Criminal Remedy- In this, a party can initiate the criminal proceeding against the debtor after filing an FIR with the police station having jurisdiction over the matter.
- Out of Court Settlement- Both parties can opt for an easy and effective option by solving the matter outside the court.
Legislations governing the Debt Recovery Disputes in India
- Code of Civil Procedure, 1908
For speedy disposal of recovery cases against the debtor, Order XXXVII of the Act can be invoked. The Order deals with the “Summary Suits”.
- The Order applies to suits upon bills of exchange, hundies, and promissory notes; or suits in which the plaintiff seeks only to recover a debt or liquidated demand in money payable by the defendant, with or without interest, arising by way of a written contract, or an enactment, where the sum sought to be recovered is a fixed sum of money or in the nature of a debt other than a penalty; or a guarantee, where the claim against the principal is in respect of a debt or liquidated demand only.
- After the summary suit is filed, the accused is served with a summons, and he must appear within 10 days of the summons’ service. He is served with the summons of the judgment if he appears successfully.
- In summary suits, the defendant has no right to defend his case. But, the court at its discretion can grant such a right to him if he provided facts proving his substantive defense in the matter, thereby making it a triable issue. A defendant can do so after the service of a summons of judgment within 10 days of such service, he has to apply for leave to defend his case.
- If the defendant fails to apply for the leave to defend on the prescribed period, or his leave is refused. In such a case, the plaintiff stands entitled to judgment.
- To have an ex-parte decree set aside, a defendant must demonstrate to the court that he was prevented from appearing in court or applying for leave to defend the case under Order 37 Rule 4 of the CPC, 1908. To set aside the decree, the defendant must provide sufficient cause of non-appearance and show that the summons was not properly served on him, according to Order 9 Rule 13. Rule 13 of Order 9 does not apply to summary actions.
2. Indian Penal Code, 1860
The Indian Penal Code deals with more serious cases of debt recovery. Recovery of debts can be claimed if the following sections are invoked:
- Section 403 (Dishonest Misappropriation of Property): Any person who misappropriates or converts any movable property for his use is subject to a two-year prison sentence, a fine, or both. For example, A finds a purse with money, not knowing to whom it belongs. A sells it immediately without attempting to discover the owner. A commits the dishonest misappropriation of property.
- Section 405 (Criminal Breach of Trust): If any person misappropriates or converts the entrusted property to his use, disposes, or dishonestly uses the property which is against the direction of law. The person commits a breach of trust. For example, a Revenue Officer is entrusted with public funds and is required by law or by an express or implied contract with the government to deposit all public funds in a specific treasury. A dishonestly appropriates the money. He has committed a breach of trust.
He is subject to punishment for criminal breach of trust under section 406 of the Indian Penal Code, which provides for a maximum sentence of three years in prison, a fine, or both. The offense is cognizable and non-bailable.
- Section 415 (Cheating): If any person fraudulently or dishonestly induces any other person to deliver any property with an intention of deceiving him leads to cheating. For example, A, falsely pretending to be a civil servant, intentionally deceives Z to let him have goods on credit for which he doesn’t mean to pay. A commits cheating.
The punishment for cheating is defined in section 417 of IPC which states imprisonment extendable to 1 year or fine or both.
3. Indian Contract Act, 1872
The contract Act in India gives birth to most debt recovery cases. The provisions invoked in such cases are :
- Section 17 deals with fraud. Any party who enters into a contract with the intent to deceive another commits fraud.
- Section 18 leads to misrepresentation. Any party misleads another party for information that is not true and makes them believe it to be true.
- Section 73 deals with compensation for loss or damage caused by the breach of contract. Any party who breaks the contract is entitled to pay compensation or damage to another party who suffered loss or damage.
- Section 124 deals with contracts of indemnity. Any party who promises to save another party from the loss caused by a third party is called a contract of indemnity.
- Section 126 deals with the contract of guarantee, surety, principal debtor, and creditor. In such contracts, a party(surety) guarantees to discharge the liability of a third party(the creditor) on default of the principal debtor.
4. Recovery of Debts Due to Banks and Financial Institutions (RDDBFI Act), 1993
The act aims for the recovery of debts due to banks and financial institutions. It also provides for the establishment of Tribunals for adjudication and debt recovery. But, the act doesn’t apply if the amount of debt is less than 10 lakh rupees.
Important provisions of the act:
- Section 3 of the act talks about the establishment of “Debt Recovery Tribunals (DRT)” by the Central Government. Above these DRT are the “Debts Recovery Appellate Tribunals(DRAT)” established under Section 8 of the act.
- DRT has the power and jurisdiction to entertain and decide applications from the banks and financial institutions for the recovery of debts under section 17(1). Whereas Section 17(2) also talks about the jurisdiction and power of the DRAT to entertain appeals against any order made by DRT.
- Only the Supreme Court and High Court exercising their jurisdiction under Article 226 and 227 of the constitution are entitled to exercise any jurisdiction, power, or authority in matters related to being specified in Section 17.
- The procedure for application to the tribunal is explained in Section 19 of the Act.
- Through Direct application: A party can make an application to the DRT within the local limits of jurisdiction directly.
- Through SARFAESI Act, 2002: A party can make an application to DRT under SARFAESI Act if the loan is classified as NPA Under Section 13(2) of the SARFAESI Act by the secured creditor. A Creditor under Section 13(4) of the act can exercise its right after the debtor fails to repay the money within 60 days of sending him notice.
- If two banks or financial institutions file a complaint with the tribunal against the same person, the later bank or financial institutions can join the applicant bank at any point before the final order by filing a complaint with the tribunal.
- An appeal to the appellate tribunal may be filed within 45 days of the appellant receiving a copy of the tribunal’s order. A court can accept the application after the expiry of the period of 45 days if satisfied with the sufficient cause for not filing it within the prescribed time.
- An appeal from a person whose amount is due to the bank or financial institutions cannot be entertained by the appellate tribunal unless he deposits 70% of the recovery amount to the DRAT.
- The provisions of the Limitation Act, 1963 applies to an application made to the tribunal.
- Section 25 of the Act talks about the mode of recovery of debts in three ways: (a) Attachment and sale of movable or immovable property of the defendant; (b) arrest of the defendant and his detention in prison; (c) appointing a receiver for the management of the movable or immovable properties of the defendant.
5. Negotiable Instruments Act, 1881
This Act comes into force when there are cases of dishonour of cheques under Section 138. Under the Negotiable Instruments Act, for recovery of debt, the aggrieved party first sends a legal notice to the debtor and then the proceeding takes place. For details refer to “Disputes we fund- Negotiable Instruments Disputes” on the site.
6. Arbitration and Conciliation Act, 1996
Section 7 of the Arbitration and Conciliation Act allows parties to opt-out of the court settlement in order to expedite the resolution of the case. In the event of a disagreement, a party must have a written agreement or a contract clause stating that the case will be referred to an arbitrator. For more details, refer to “Disputes We fund- Arbitration Disputes” on the site.
7. Insolvency and Bankruptcy Code, 2016
Explained in detail under “Dispute we Fund- Insolvency and Bankruptcy Code, 2016”.