Guide to Debt Recovery Laws in India

What are Debt Recovery Laws?

Let us know what a debt recovery law is before we learn more about India’s debt recovery laws. Money transactions keep happening and small-time business owners to big business houses take financial assistance to stay in the market. 

Many of these money transfers occur in the form of loans that leads to credit creation. This credit creation plays a key role in contributing to the country’s economic development. The problem arises when the borrower does not repay the money borrowed on time and forces the lender to take legal action against them.

Debt Recovery is the correct method used to recover the borrowed money back from the borrower. The money given by the lender might be having interest or no interest, and the borrower must pay the amount back on time.

What are the Debt Recovery Laws in India?

The two common methods of Debt Recovery in India are:

Legal Methods

There are a few legal methods that are used commonly by lenders to recover their loans. They are:

1. Asking for Relief Under the Indian Contract Act

2. Civil Remedy

3. Filing a Criminal Case Under IPC (Indian Penal Code)

4. Insolvency and Bankruptcy Code, 2016

5. Negotiable Instrument Act

6. RDDBFI Act, 1993 (Recovery of Debts due to Bank and Financial Institutions)

7. SARFAESI ACT, 2002 (Securitisation & Reconstruction of Financial Assets & Enforcement of Security Assets)

8. Summary Suit

Illegal Methods

Although unethical, some non-traditional lenders do debt collection in an illegal way; which includes the lender or commission agents harassing the borrower, forcing them to repay the borrowed money.

Legal Methods Used for Debt Recovery in India

Let us look at the legal methods commonly used for Debt Recovery in India and discuss them in detail here.

1. Asking for Relief Under the Indian Contract Act

Indian Contract Act, of 1872 comes into existence because while taking a loan there is going to be a contract between the lender and the borrower. There might be special provisions in the contract made between the two parties which can change the disputes. The lender or the aggrieved party can claim the money by showing:

• Contract of Guarantee (Section 126)
• Contract of Indemnity (Section 124)
• Fraud (Section 17)
• Misrepresentation (Section 18)

2. Civil Remedy

This is one of the most common ways of Debt Recovery Law in India. Here the lender sends a legal notice to the borrower, asking them to pay the money back or face legal action. To recover money in a civil suit, Order IV of the Civil Procedure Code (CPC) is used. The place of filing a suit depends on the location where the borrower or defaulter resides or has his business. The civil suit must be filed 3 years from the date of the cause of action.

One thing that must be kept in mind is that a civil suit is a time-consuming process, and a court fee has to be deposited based on the amount going to be claimed. In addition to the recovery amount, the lender can also ask for compensation.

3. Filing a Criminal Case Under IPC (Indian Penal Code)

IPC is commonly used after Civil Remedy to recover debts in India. The lender or the aggrieved party can file a case under:

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

Some of the offenses above can put the borrower in serious trouble as they are non-bailable and cognizable.

4. Insolvency and Bankruptcy Code, 2016

This Code came into existence in 2016 to eliminate the flaws associated with money recovery in the existing legal provisions. The objective of this Code is the revival of corporate debtors yet, at the same time, ensure maximum recovery of the stakeholders who are involved.

Suppose the defaulted amount exceeds Rs. One crore, the creditor can apply to the NCLT (National Company Law Tribunal). The period for accepting and rejecting the application is 14 days, and, an Interim Resolution Professional (IRP) is appointed once the application has been accepted.

The Code has a time of 180 days to pass a resolution after completing it. The resolution plan must be approved by 66% of the Committee of Creditors (CoC). It can be extended to 90 days with an outer limit of 330 days.

If the resolution plan is not accepted, the company assets are sold and used to pay off liabilities. This is one of India’s Debt Recovery Law methods that are effective and used to recover any outstanding payments.

5. Negotiable Instrument (NI) Act

It is normal to ask borrowers to give signed blank cheques while taking loans. If the borrower defaults, the blank cheque is submitted to the bank so that the payment is received on time. If the cheque bounces, the banks can take legal action under Section 138 of the Negotiable Instrument Act. In this Act, the defaulter must pay the pending amount with interest or face jail.

6. RDDBFI Act, 1993 (Recovery of Debts due to Bank and Financial Institutions)

In this Act, the aggrieved party can be the bank or a non-banking financial company (NBFC). There are special tribunals like the Debt Recovery Tribunals (DRT) and the Debt Recovery Appellate Tribunals (DRAT) to deal with the disputes of individuals and firms. The lender can initiate the recovery proceeding as per Section 19 or the RDDBFI Act. They can apply along with the prescribed court fee.

7. SARFAESI ACT, 2002

The SARFAESI Act was created to regulate and reconstruct financial assets, and a security interest must be made in this Act. The property or assets can be either movable or immovable. Money can be gotten back without court intervention as per this Act by selling assets declared as Non-performing Assets.

When the loan is classified as NPA under Section 13 of this Act, a notice is sent to the defaulter, and they have to pay the amount within 60 days. If they fail, the lender or creditor can sell the loans to an ARC (Asset Reconstruction Company) at a discounted rate.

8. Summary Suit

In a Summary Suit, the defaulter gets just ten days from the date the suit is filed to appear before the Court. The amount of debt should not exceed ten lakhs of rupees to file a lawsuit. If the defaulter fails to appear before the Court, then the Court has all rights to pass an award immediately, keeping in mind that the claims of the Plaintiff are valid.

Best Practices for Leveraging the Legal System for Debt Recovery 

Now that we’ve discussed most of the extant relevant laws to debt recovery in India, its also important for lenders to keep in mind the right approach when navigating the Indian legal system. 

Being experienced with how the legal system works and how to effectively maneuvre can take a lender a long way. There are some common learnings which any lender would do well to pay heed to when it comes to debt recovery by approaching the courts of India. 

Here are some best practices for leveraging the legal system for debt recovery that lenders can keep in mind. 

Developing a Structured Process 

The first step to effectively navigating the legal system is to systemize your internal processes. A debt recovery matter requires coordination between several people. A lender may be outsourcing the matter to a practicing litigator. 

The litigator will need extensive support from internal legal team and the finance team to understand the particulars and nuances of the case. Further, the internal legal team and the finance team will also need to coordinate between themselves to effectively manage the case. 

In order to streamline this process, the lender must carefully document which team and personnel are responsible for which part of the process. 

For example, they may designate a single person who will be the point of contact between the lender and the outside counsel. 

In this way, systems can be put in place which ensure that the functioning of the team is as smooth as possible and the matter is handled in the best possible way. 

Effective Communication 

Before and after the legal matter develops in the courts of law, the lender will need to communicate numerous times with the borrower. It is important for all communications to be handled properly so that the lender has the chance to put their best foot forward when approaching the court. 

For example, each and every communication and discussion that takes place between the lender and the borrower needs to be properly documented. This will allow the lender to properly present their arguments before the court and ensure that nothing relevant falls through the cracks. 

There are several ways that a lender can make their communications more effective. Another example can be approaching the borrower in the right frame of mind rather than being aggressive or disruptive. This ensures that the borrower has the best chance of repaying as large an amount as possible. 

Effective communication can go a long way in ensuring that the lender does their best when approaching the court and when approaching the borrower.  

Legal Recourse 

When the lender approaches a court of law, there are certain aspects that they need to keep in mind. The first important best practice is to present the case in the most professional and matter-of-fact manner as possible. 

There is no need to bring emotions into the picture since it can harm the lender’s own case. The lender must present itself as a business and appeal to the court that its business interests be protected to preserve the economic system. 

Further, it is important for lenders to hire the best counsel that they can. The extra cost of hiring a good lawyer is well worth it. An experienced lawyer can help present the lender’s standpoint in the most effective way since they know the common practices and ways of the court. 

Lastly, its important for lenders to approach the right court of law that has appropriate jurisdiction. Many debt recovery matters are often unheard of because the lender has approached the wrong court of law. The lender must decide whether the appropriate jurisdiction is the IBC, the DRT, the district court, or any other. 

Leverage Technology 

It is important for lenders to leverage the latest technological capabilities that are available. We now have numerous software tools that can help a lender optimize their internal processes to ensure that they can put their best foot forward in court. 

The lender can utilize a software stack that works well together so that they get the best out of each individual tool. For example, the lender can choose between the Apple ecosystem of products or the Google ecosystem of products. 

Further, niche tools specific to the lender’s business can be added to the technology stack. Many new software tools are being developed that cater specifically to the needs of lenders such as Legodesk. 

Maintain Ethical Standards 

It’s essential for lenders to maintain their reputation. Once a lender gets a bad reputation for treating their borrowers unfairly, then it can harm any new business that may have come their way. That’s why its crucial for lenders to maintain a very professional tone when managing a matter of default. 

The lender must also be highly mindful of all extant laws and guidelines that are released by the RBI on how a lender needs to conduct themselves when speaking to a defaulting borrower. For example, all communications and visits to a defaulting borrower must be done within working hours. 

If a lender maintains its ethical standards, it is more likely to be successful in court since the court can judge whether the lender maintained their own position well. 

Why Choose Legodesk?

As we mentioned, it is important for lenders to choose the right technological tools that can help them streamline and improve their internal processes. 

One such tool has been released by Legodesk which has been built from the the ground up keeping the needs of lenders in mind. This tool offers a range of useful features for lenders such as case management, contact management, the Feet-on-Street app, legal notice automation, and more. 

Lenders can give us a call so we can provide a demo of the tool so lenders can make an informed decision about the tool. Our software is trusted by banks, NBFCs, and also enterprises. 

In The End

You must know now about the Debt Recovery Law and how it works. Get in touch with us to learn more about Debt Recovery Law and how it works. We can assist with any Debt Recovery method if you want guidance and help.