Debt Resolution

Guide to Debt Recovery Laws in India

What is Debt Recovery Law?

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.

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What are the Debt Recovery Laws in India?

The two common methods of Debt Recovery in India are:

debt recovery laws

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.

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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.


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.

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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

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by Mamta

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