How to Recover Debt in India?

Borrowing money is quite a common practice for people, who do so to deal with some urgent issue, for professional use or some personal matters. However, not all borrowers are willing to timely pay their dues and often try to evade the lenders in order to avoid paying any money.

Provisions under the Indian laws include several methods for debt recovery depending upon the nature of the debt, type of debtor and the terms and conditions of the original loan. Other factors include type of debtor, capacity of the debtor to repay the debt accrued, whether the debt was accrued due to malafide intentions and the category of the creditor establishing the proceedings for debt recovery.

Filing a Civil Suit for Recovery under Code of Civil Procedure, 1908

A civil suit filed under Order IV of the Code of Civil Procedure (CPC), 1908 can be considered an excellent way to recover money from the debtor. It is a summary suit (Order 37, Code of Civil Procedure) that provides quick disposal of the suit as the defendant does not have to defend themselves as though it were a matter of right. The suit can be filed within 3 years from the date when the cause of action arises. Besides, it can be condoned and left to the discretion of the court as well.

Civil suits, especially recovery suits, are usually a long drawn battle and are best avoided. It is a common belief that if one is not familiar with the scope of Order XXXVII of the Civil Procedure Code, filing a recovery suit would potentially mean binding yourself for several years. A recovery suit may be filed as per Order IV of the CPC, 1908 in the location where the defendant resides, where they work or conduct business, or where the cause of action arises.

Another option available for such instances is the Negotiable Instruments Act, 1881, that only deals with the recovery of cash arising from instruments like cheques or bills of exchange. This Act includes provisions for cash recovery below a particular instrument. Under this Act, there are provisions to recover debt for instruments like cheques, bills of exchange, etc.

Criminal Case

There are different provisions under which a criminal suit can be filed for debt recovery from borrowers.

• When money is borrowed through cheques or bills of exchange and not repaid, the lender may file a case under Negotiable Instrument Act.
• If the money is paid through a cheque or bills of exchange but it has bounced, the lender may file a case under Section 138 of Negotiable Instrument Act, leaving the borrower to pay the amount within 30 days.

If the borrower fails to pay their dues, a criminal case may be filed against them. Furthermore, if they are found guilty, they shall be penalized with imprisonment of up to 2 years and/or a fine that can be up to double the cheque amount that has bounced.

When filing a criminal case against a borrower, the moneylender must prove that the borrower has committed a breach of trust. A moneylender can file a case under Section 420 of IPC if someone cheats a moneylender, and if they commit a criminal breach, the moneylender can take action against the borrower under Section 406 of IPC. If found guilty, the borrower may be imprisoned and will have to repay his dues to the moneylender.

Recovery of Debts due to Bank and Financial Institutions, (RDBFI) Act, 1993

This Act was what led to the creation of the Debts Recovery Tribunals (DRT) and Debts Recovery Appellate Tribunals (DRAT). 39 DRTs and 5 DRATs were established in India to recover debts due financial institutions like banks, etc. These helped with speedy adjudication and debt recovery due to banks and other financial institutions and for issues connected with it or incidental to it.

DRT may also adjudicate applications filed by the borrower/mortgagor under the Securitization Act against the action of the secured creditor with the power given to it.

• Debts recovery tribunals are presided over by a Presiding Officer (PO), who is appointed by the Central Government and is an individual qualified to be a District Judge. In the case of a DRAT, it is presided by a chairperson, who is qualified to be appointed or has been appointed as a Judge of a High Court or has been a member of the Indian Legal Services, who was a Grade I holder for at least three years in such services.
• As per the DRT Act, an Original Application (OA) can only be filed before the DRT by banks and financial institutions. DRTs adopted the summary procedure to adjudicate the dispute. Besides, the defendants can file a counterclaim against the claimed amount. Furthermore, the final orders shall be passed by the tribunal, who shall determine the amount payable by borrowers. In case the borrower does not or is not able to pay the necessary amount, a recovery certificate shall be issued against the borrower, which shall be executed by the DRT’s Recovery Officer.
• Anyone dissatisfied by an order passed by DRT may choose to file an appeal before DRAT.

Securitization & Reconstruction of Financial Assets & Enforcement of Security Interest (SARFAESI) Act, 2002

This legislation claims to create a central source of assets on which the security interests were created on. Certain creditors were appointed by the SARFAESI to manage collateral properties with assistance from the relevant authorities of the district where the collateral is found. The guidelines under the SARFAESI Act shall be applicable to Security Interest created in favor of Secured Creditor.

• Applications filed under Section 17 of the SARFAESI Act shall be made before the DRT within 45 days from the date the Section 13(4) Notice is issued. Such applications filed under Section 17 shall be disposed by the DRT as per the procedure defined under the DRT Act.

Anyone dissatisfied with the order passe by the DRT may appeal to the DRAT.

Note: It should be noted that unless you pay 50% of the amount directed by the DRAT with the Appellate Authority, the DRAT shall not entertain any appeal.

The Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016

Over the years, it has been noticed that the DRTs are not able to resolve cases within the allotted period of six months, which has resulted in late resolution of cases and an increase in the cases pending overall. The Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 was created with the purpose of boosting the efficiency of disposing such cases.

This Act ultimately amends the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, the Indian Stamp Act, 1899, the Depositories Act, 1996, and the Recovery of Debts due to Banks and Financial Institutions Act, 1993, and for issues related thereto or incidental therewith.

The Insolvency and Bankruptcy Code, 2016

The Insolvency and Bankruptcy Code, 2016 is a combination of the existing Insolvency laws and act like a united set of laws that aim to eliminate multiple forums to reduce the delay in getting justice. It repealed the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920. It also brought amendments to 11 other laws such as the SARFAESI Act, Companies Act, and the DRT Act.

The aim of this Code is not to recover money but revive enterprise/corporate debtors. Although, in the worst-case scenario, if the debtor cannot be revived, it goes through liquidation in an waterfall method as stated in the Code.

Therefore, in one way or the other, it can be said that this Act helps with recoveries to a certain extent.

The legal framework includes:

• Insolvency professionals.
• The regulator (Insolvency and Bankruptcy Board of India).
• Information utilities.
• Adjudicatory mechanisms (NCLT & National Company Law Appellate Tribunal – NCLAT).

Such frameworks and bodies aim to promote corporate governance and bring about time-bound and formal resolutions for insolvent cases.

The key features of the Code include insolvency resolution for corporate debtors through a two-step process, where the default amount is INR 1 crore. Two processes are proposed by this Code:

• Insolvency Resolution Process: The creditors play a vital role in assessing and determining if the debtor’s business can be carried on and, if so, what are the options available for the same.
• Liquidation: If revival fails or is not possible, creditors can choose to liquidate the company. Once winding up/liquidation is complete, assets of the debtor are to be distributed.

Secured creditors of the corporate individual in liquidation cases are protected under Section 52.

Section 52(1) states that a secured creditor in liquidation proceedings may either:

• Relinquish their security interest to the liquidation estate and receive the funds generated by the liquidator through asset sales as per the ways stated under Section 53, or
• Realize their security interest as per the ways specified under Section 53.

Section 52(9) states that in cases where proceeds of realization are not ample to repay the debts owed to the secured creditor, the unpaid debts shall be paid by the liquidator in the ways specified in clause (e) of Section 53(1).

Note: Section 53 deals with ‘distribution of assets’ by the liquidator.

The Arbitration and Conciliation Act, 1996

Debts that have accrued out of a commercial arrangement are usually recovered using this method. Whether the dispute can be resolved or not depends on various factors, of which, the primary aspect is the presence of an arbitration clause in the original agreement from which the dispute arises. The main issue related to arbitrability of disputes is the legal viability of the exact concept of arbitration of debt recovery.

The Supreme Court in its judgement in the case of Booz Allen vs. SBI Home Finance Limited stated that disputes arising out of a right in personam are arbitrable unlike disputes arising out of a right in rem. It also stated that this understanding is hedged by the Doctrine of Necessity and public policy in the matter will also be taken into consideration. This judgement of the apex court was followed by another in the case of Vidya Drolia vs. Durga Trading Corporation, where the four-fold test was set down which confirmed that a dispute was not arbitrable where:

• It relates to actions in rem that do not pertain to a subordinate right in personam.
• It affects third-party rights.
• It involves an inalienable sovereign function, or
• As applicable, it is non-arbitrable.

Conclusion

Borrowing is one of the most widely used ways of acquiring ample finances for different purposes. However, many a times, borrowers try to avoid paying back the loan amount and evade the lender. The above-mentioned legal framework helps ensure such individuals pay their dues and, if needed, are prosecuted under the adequate laws of the Constitution.