A Guide to Business Loan Recovery

Every business, whether it be MSME (i.e., Mini, micro, or small enterprises), partnership, corporation, or Limited Liability Company (LLC), needs a business loan at some point. While the number of business loan borrowers is increasing, the number of loan defaulters is also increasing. If you are a Bank, NBFC, or any other financial body that lends money, then you need to know how to recover that loan amount from defaulters. 

There can be two ways through which any lender can do the business loan recovery: –

1. Through the non-judicial process
2. Through judicial process

Through non-judicial process:

Many lenders prefer the non-judicial process as a better option to recover money from the borrowers. As it is more cost and time effective. The litigation process takes time and legal representation. It will also help the borrower and lenders to protect their further business relationship. In the non-judicial process, the borrower is cooperative, thus making the loan recovery process easy. The following recourses can be taken to recover a business loan through the non-judicial process:

1. One-Time Settlement: Banks can offer one-time settlements to the borrowers, where the borrower can pay a certain percentage of the outstanding amount and the rest amount will be written off by the bank. 
2. Liquidation of assets given as collateral: In case a borrower has submitted his assets to obtain a loan, a lender can sell the asset given as collateral and recover the loan amount. 
3. Loan restructuring: The lenders can intimate restructuring the loan with the borrower. Restructuring of loan means renegotiating the terms and conditions of the loan so that it will be easier to repay the amount. 
4. Lok Adalat: Banks can also approach the Lok Adalat, an informal forum for the speedy disposal of cases. These parties can put their matter in front of them and negotiate a settlement. If both the party comes up with an agreement, the Lok Adalat will issue a settlement certificate that will be enforceable in a court of law. 
5. Appointment of Loan recovery agents: Lenders can appoint a loan recovery agent to recover the loan amount that is classified as non-performing assets (NPAs) or in default. These agents are responsible for contacting the borrower and negotiating with them on the bank’s behalf. Recovery agents appointed are required to be registered with the Reserve Bank of India. 

Through judicial process:

Business loan recovery through the judicial process can be done by taking into consideration the type of loan obtained. The loan can either be secured or unsecured. If the loan is secured, then it is backed by some collateral, such as property, inventory, or any other assets. The lender in case of default in the loan amount can seize this collateral. Whereas unsecured loans are loans that are not backed by any collateral. This loan is given by looking into the creditworthiness of the borrower. The lender has no rights over the borrower’s assets in this case. 

Business loan recovery process:

IF CASE THE LOAN IS SECURED

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

• Declaring Non-Performing Asset (NPA): The lender needs first to classify the borrower as a non-performing asset. This can only be done once the borrower has missed the three consecutive EMIs and repayment is overdue for 90 days. 
• Sending of Legal Notice: After the declaration of Non-Performing Asset, the lender has to give notice of 60 days to settle the due amount. In this stage, the borrower needs to communicate with the lender the reason for defaults. In case there is no response within a specified period the lender can gain control over the borrower’s assets offered as collateral. The assets are later on auctioned to recover the lender’s loan amount. The lender can also take over the management of the business of the borrower till the limit of the due amount and can further sell or lease it. 

Additionally, in case the lender has no right over the borrower’s property, then they can go to civil court and file a summary suit under order XXXVII of Code of Civil Procedure, 1908. If the lender obtained a decree from a court in his favor, the decree has to be followed by an execution proceeding. The execution will be completed once the lender receives the full due amount. In case the borrower is not able to settle the dues till this stage also, then the court may upon the lender’s request order the borrower to attach his property. 

Jurisdiction of the court: The pecuniary value of the suit will determine the factor in which court the jurisdiction will be applicable. This can go either in the High court or district court as well. 

Recovery of Debt Due to Banks and Financial Institution Act, 1993 (DRT Act):

A lender can also approach the Debt Recovery Tribunal (DRT) for business loan recovery. However, the amount defaulting should be more than 20 lakhs to approach the Debt Recovery Tribunals. The borrower and the lender both will get the opportunity to present their case in front of DRT. The DRT will appoint the receiver of the property to collect the details about the property. In case the tribunal passes the order of attachment of property, then the recovery officer has to proceed with the attachment and sale of the borrower’s property. 

Loan defaults by companies and LLPs

It is also taken into account that in case of default by companies and Limited Liability Firms, insolvency proceedings can be initiated to recover the account. Insolvency and Bankruptcy Code (2016) will be applicable in both cases; either the loan is secured, or the loan is unsecured. Step by step procedure to follow to recover the loan amount as follows:

• Filing of application: The lender can file an application with the National Company Tribunal (NCLT) to initiate a corporate insolvency resolution process (CIRP) against the defaulting borrower. 
• Appointment of Interim Resolution Professional (IPR): The NCLT will appoint an Interim Resolution professional to take charge of the borrower’s assets and manage its affairs during the CIRP process. 
• Moratorium: A moratorium period will be imposed to prevent the borrower from disposing of his assets till the time the IPR is coming up with a resolution plan. 
• Inviting Resolution Plan: The IPR will then invite a resolution plan from interested parties, including the borrower, to repay the debt and revive the company. 
• Approval of Resolution Plan: The NCLT will check and approves a Resolution Plan that is best in the interest of the creditors including that of the lender itself. 
• Implementation of Resolution Plan: The IRP implements the approved resolution plan, which includes the sale of assets, a debt restructuring, or a change in management. 
• Liquidation and distribution: The NCLT will order the liquidation of the borrower’s assets and to repay the creditors from it. The proceeds from the sale of assets, are distribution among the creditors, including banks, in order of priority as per IBC.   

Through the above-mentioned ways, a lender can do business loan recovery. A business loan recovery proceeding can be bought against DRT, NCLT, or even in civil court. But it depends on the circumstances that will determine under which forum the suit will lie, the circumstances such as types of borrowers, amount of loan, the value of a loan, and type of legal action. The lender has to take into consideration these things before initiation of legal proceeding.