Recovery of Shares

Legal Framework for the Debt Recovery of in India

Debt Recovery

For those who need to deal with an urgent situation, for work purposes, or for some personal issues, borrowing money is a fairly typical practice. But not all borrowers are eager to pay on time; instead, they frequently try to get away from their creditors to avoid making payments. Depending on the type of debt, the type of debtor, and the terms and conditions of the initial original loan, provisions under Indian law provide various techniques for recovering debt. Other considerations include the type of debtor, their financial ability to repay the debt, whether the debt was incurred with malicious intent, and the type of creditor initiating the debt recovery process.

Recovery of Debt

According to the Black Law Dictionary, “debt recovery” refers to the legal procedure or tactics used to recoup the money you have given to someone else. Simply, it is the process of collecting money from businesses or individuals who owe it to a creditor. This process can be difficult and time-consuming and requires specialised techniques and knowledge. 

Purpose of Debt Recovery Laws

The process of debt recovery involves the creditor making an effort to recoup the money that the debtor owes them. It is the procedure creditors use to try to get the debtor to pay up. 

Indian debt recovery laws are intended to shield consumers from unethical tactics used by debt collectors. Consumers are protected from debt collectors’ harassment, intimidation, and excessive pressure. However, since the laws are not intended to shield consumers from the repercussions of their choices, they do not stop debt collectors from suing consumers to collect the debt. 

Additionally, even if a consumer is unable to pay the debt, the laws are not intended to shield them from doing so. Consumers are only protected if they can demonstrate that the debt collector is attempting to recover a debt that is not theirs.

Methods of Debt Recovery in Indian Legal Framework

Legal methods and available remedies for debt recovery include:

Civil Remedy under Code of Civil Procedure, 1908

Any aggrieved party may bring a civil lawsuit against the party in default in any court with the necessary jurisdiction. In India, this is one of the most widely used methods of debt recovery. To use this remedy, you must first provide the other party formal notice that they must repay the money or face a civil lawsuit from you. It’s interesting to note that in a civil lawsuit, you can also ask for compensation on top of the money you recover. According to Order IV of the Civil Procedure Code (CPC), a civil lawsuit is initiated to recover money. It is significant to remember that a civil lawsuit must be filed within three years of the cause of action date. 

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Summary Suit 

Order 37 of the CPC (Civil Procedure Code), 1908 permits a creditor to launch a summary suit under Order 37 of the CPC. Once filed, a summary lawsuit assumes the truth of the plaintiff’s claims and rules in their favour if the defendant does not appear in court or does not present a convincing defence within ten days of filing the lawsuit. When the nature of the debt or the amount owed makes it possible for legal penalties to be applied, a summary lawsuit may not be filed.

Criminal Remedy

An FIR may be filed with the local police station, which may investigate the incident in extreme circumstances. Following this, a criminal case may be brought to continue the legal process.

Filing a Criminal Case – The Indian Penal Code (IPC)

In our nation, this technique is frequently employed to collect debts. The India Penal Code (IPC) lists the offences and penalties for actions, including failure to repay money. The following parts are where the injured party may bring a claim:

  • Criminal Breach of Trust – Sections 405 and 406
  • Dishonest Misappropriation of Property – Section 403 
  • Cheating – Sections 415 and 417

The defaulter will face severe consequences because several of the offences mentioned earlier are cognisable and not subject to bail.

Negotiable Instrument Act, 1881

The Negotiable Instruments Act of 1881, which only addresses the recovery of money originating from instruments like checks or bills of exchange, is another alternative that may be accessible in such circumstances. The provisions of this act cover cash recoveries below a specific instrument. This act contains measures for debt recovery for items like checks, bills of exchange, etc.

When disbursing loans, it is common practice in the banking industry for customers to be asked to provide blank checks. The bank may offer those checks for encashment if you don’t pay your EMIs on time. Under Section 138 of the (NI) Negotiable Instrument Act, the bank is authorised to take legal action against you if those checks bounce due to insufficient balance. If this clause is used against you, you could be sentenced to jail in addition to being required to refund the money plus interest.

Insolvency and Bankruptcy Code, 2016

This Code was created in 2016 to fix all of the legal issues concerning money recovery and the rebirth of failing commercial entities. The main goal of the Code is to help all parties involved in recovery by restoring corporate debtors. The creditor may use the NCLT to enforce the Code if the debt exceeds one crore.

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The application will be rejected or accepted within 14 days. If the application is approved, an IRP is established, creating a committee of creditors (CoC) that meets to make all important decisions for the business. To fulfil the resolution way and pass a resolution plan, 180 days are required according to the Code. However, this period can be expanded to 90 days’ time frame with a maximum extension of 330 days. The 66% resolution proposal must receive the backing of a majority.

If the crucial plan is rejected, the business enters into liquidation, during which its liabilities are settled and its assets are sold. The waterfall process is used under Section 53 of the Code to pay creditors’ debts. One of the most beneficial methods of regaining the outstanding amount.

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

The SARFAESI Act aimed to preserve and rebuild the nation’s economic resources. A safety interest must be created for a property (movable or immovable) in order to use SARFAESI. It’s interesting to note that this act allows for the recovery of funds without the need for legal action by dealing with assets designated as non-performing assets.

According to Section 13 of the Act, the borrower is informed when a loan is typed as NPA. According to the information, the borrower must make the payment within 60 days; otherwise, the creditor may use its rights and force the sale of the loans to an asset reconstruction company at an exorbitating price.

RDDBFI Act, 1993 governs the Recovery of Debts Due to Banks and Financial Institutions

The financial institution, such as a bank or a non-banking financial company (NBFC), might be the aggrieved party under this act. This law enables the creation of specialised tribunals to hear cases involving the recovery of money. The Debt Recovery Tribunals (DRT) and Debt Recovery Appellate Tribunals (DRAT)[1] were established to resolve conflicts involving private parties and partnership firms. According to Section 19 of the RDDBI Act, the aggrieved party may begin the recovery proceedings by submitting an application along with the required court fee.

Debt Recovery Tribunal – The formation of the RDDBFI Act 1993 resulted in the creation of the DRT Debt Recovery Tribunal. DRT handles cases involving disputed debts exceeding Rs.10 lakhs. Debt Recovery Appellate Tribunal deals with the appeal against the passed order by the DRTs. 

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

Over time, it has been observed that the DRTs are unable to complete cases within the six-month deadline, which causes cases to be resolved later than expected and an overall increase in the number of cases pending. To increase the effectiveness of resolving such matters, the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) 2016 was enacted.

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In the end, this act amends the Indian Stamp Act of 1899, the Depositories Act of 1996, the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act of 2002, and the Recovery of Debt Due to Banks and Financial Institutions Act of 1993, as well as for matters incidental or related thereto.

The Arbitration and Conciliation Act, 1996

This strategy is typically used to collect debts that have accumulated as a result of commercial agreements. An arbitration clause that exists in the original agreement from which the dispute originates is the main criterion determining whether the issue can be settled. The legal viability of the precise idea of arbitration for debt collection is the key concern in relation to the arbitrability of disputes.

In contrast to conflicts emerging out of a right in rem, issues developing out of a right in personam are arbitrable, according to the Supreme Court’s ruling in the case of Booz Allen vs SBI Home Finance Limited. Additionally, it was stated that the doctrine of necessity serves as a safeguard for this understanding and that public policy will also be taken into account. This ruling of the apex court was followed by VidyaDrolia v. Durga Trading Corporation decision, in which the four-fold test was established, and it was determined that a dispute was not arbitrable in cases where:

  • It applies to in-rem operations that are unrelated to a supporting right in personam.
  • The rights of third parties are impacted.
  • There is an unalienable sovereign function involved.
  • As applicable, it is non-arbitrable.

Conclusion

One of the popular methods of obtaining sufficient funds for various purposes is borrowing. However, borrowers frequently attempt to evade the lender and avoid paying back the loan amount. As discussed above, there are many different ways to reclaim unpaid dues or obligations. You can file a civil or summary lawsuit if the debt is not very high. If a security interest is attached to the loan, you should contact SARFAESI for prompt recovery through the auction procedure. The aforementioned legal framework aids in ensuring that these people pay their dues and, if necessary, are penalised in accordance with Indian laws.

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