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DEBT RECOVERY: The Game of Loans

Know everything about the debt recovery cases with this legal guide!

Matters related to money go beyond the values of trust! ‘Debt recovery’ relates to an act of recovering money which is overdue or pending. A debt arises as soon as an individual or entity fails to pay the amount due from a borrowing or a written/ oral agreement.

Businesses indulge in promotional gimmicks to increase clientele and sometimes, end up taking a risky decision - providing products on the promise of future payment. Even if there exists an agreement which stipulates the time and process of the due payment, the client may fail to do so.

The business or person who has forwarded the loan or provided the money, suffered a loss, is called a ‘creditor’ and the individual who has abstained from paying the consideration is called a ‘debtor’.

Our law gives a comprehensive and substantial opportunity to a creditor (i.e. the one who lends the money) to recover loans from a debtor (i.e. the one who takes the money). Trying to amicably settle a recovery suit is the first option to a creditor. After failed attempts of amicable settlements, the creditor also has the option of filing a recovery suit in a court of law.

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Let’s understand the process of debt recovery cases!

There are a sizeable number of options available to a creditor for recovering his debts. These range from Civil Courts to Debt Recovery Tribunals. However, one may easily get confused with regard to the remedies available to him for the recovery of his debt(s). Options available to a creditor are as follows:

  • The first option that any creditor should consider is the option to settle the dispute in an amicable manner. The Creditor might use the approach of negotiating the terms of the settlement, and settle the matter with the debtor. 
  • The most rational and prudent option available, after all methods of amicable resolution have been exhausted, is to  send a legal notice, demanding the recovery of the due amount, within a stipulated period of time. Approaching a Civil Court by filing a case seeking recovery is the next available option. A person can also approach a Civil Court for the retrieval of a legally enforceable debt against a company. When there exists a contract, where one party is liable to repay the debt of another, a suit under The Specific Relief Act, 1963 can be filed in a Civil Court.
  • Similarly, Order 37 of the Code of Civil Procedure specifically deals with recovery of debt in a summary fashion. Here, the creditor can file a suit and the debtor has 10 days to file his reply and/or make an appearance explaining why the suit shouldn’t be tried summarily. Failure of the same can lead to the court accepting the Creditor’s story to be true and adjudicating accordingly.
  • When a debt arises out of a negotiable instrument (mainly cheques in case of a cheque bounce), a complaint can be filed in a court stating the facts about the debt under the requisite sections of the Negotiable Instruments Act, 1881. The court can then proceed against the debtor and punish him according to the law. A remedy sought under the Negotiable Instruments Act, 1881 is a criminal remedy (against a cheque bounce under Section 138 of Negotiable Instruments Act, 1881) against a debtor.
  • When the relationship of a debtor and a creditor exists in the banking sector, the proceedings can be instituted by Financial Institutions against their creditors in the Debt Recovery Tribunals under the Recovery of Debts Due to Banks and Financial Institutions (RDDBFI) Act, 1993. Proceedings can be instituted by any person against Financial Institutions in a Debt Recovery Tribunal under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act, 2002.
  • Criminal remedy also exists against debtors. A criminal complaint can be filed under sections 405 & 406 of the Indian Penal Code for criminal breach of trust.  Complaints regarding sections 415 & 417, relating to cheating, can also be instituted regarding a debtor when he deceives the creditor.

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Read to know about how and where to file a case for debt recovery!

Debt Recovery is a procedure where you can approach a judicial forum for the recovery of a sum of money owed to you by another. However, one often wonders which establishment to proceed towards for the recovery of his legally enforceable debt. 
Civil Court(s): A civil court is the most approachable forum for recovery of debts in India. Here, a petition needs to be filed stating the facts of the debt owed to you. Subsequently, adjudication upon the same is done after appraisal of evidence and following other requisite provisions of the Civil Procedure Code.

Debt Recovery Tribunal(s): There are a total of 33 Debt Recovery Tribunals which entertain complaints by and against financial institutions. Under the Recovery of Debts due to Banks and Financial Institutions Act, 1993, financial institutions can institute action against their borrowers in a Debt Recovery Tribunal, while under Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002 people who have borrowed from financial institutions can approach a DRT for retrieval of their debts. Appeals to the decision(s) of the DRT(s) can be made to the Debt Recovery Appellate Tribunal.

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Understanding the meaning of insolvency

When a person is unable to fulfil his/her financial obligations and fails to pay his due debts, it renders the person insolvent. For a corporation like a partnership firm, the inability to pay the debt during the course of business results into the insolvency or liquidation. Improper management of one’s expenses and cash is usually the reason for a person to declare insolvency.

The dictionary meaning of the word ‘insolvency’ is “the lack of financial resources”. Insolvency simply means that the person is unable to pay his/her debts in time and the property and assets owned by the person are inadequate to discharge such debts.

Persons who are insolvent under the law

These are the various categories under which the court can declare a person as insolvent:

  • Any person, who has attained the age of majority, is of sound mind and is not disqualified from entering into a contract on a condition that he is a debtor and is unable to pay his debts
  • Any person, who is a lunatic, can be declared as insolvent if the debts were incurred by him when he was sane
  • Any act of insolvency can be a reason for any partner or partners of a partnership firm to declare insolvency
  • Any person, who is a foreigner but has incurred debts in India, can declare insolvency.
  • In  a  Hindu  joint  family business, all  the  members  of the family are  personally  liable  on  a  joint  debt. In case of inability to pay such debt, the members of the Hindu joint family can declare insolvency.
  • A minor cannot be determined as insolvent as he is incompetent to enter into a contract
  • For a deceased person, insolvency cannot be declared if any proceedings are initiated after his death. 
  • A company cannot be declared as insolvent.

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Legal Guide to Debt Recovery!

Criminal action against a debtor for recovery of your debt can be an efficacious remedy, for it strikes fear of imprisonment. There is criminal remedy available with regards to recovery of debts in the Indian Penal Code, 1860 in the form of Criminal Breach of Trust, Cheating and Fraud.  Let us discuss these in detail:

  • Criminal breach of trust (Section 405): For criminal breach of trust to exist, the following is essential:
  1. There must be entrustment of property in another.
  2. The person entrusted must dishonestly misappropriate or convert for his own use, the same.
  3. The dishonest misappropriation or conversion must be contrary to the direction of the law or the mode in which it was to be executed in consonance with any legal contract devolving upon such trust.

The punishment for Criminal Breach of Trust is imprisonment up to 3 years coupled with fine, which is discretionary (Section 406).

If the same is done by a clerk or servant, then the punishment is enhanced to imprisonment up to 7 years coupled with fine (Section 408) and further enhanced to 10 years if it is done by a public servant, banker, merchant or agent (Section 409).

  • Cheating (Section 415): The essential features of cheating under IPC are that there should be a deceit which fraudulently or dishonestly induces someone to deliver any property or consent to such retention or do something which he wouldn’t have done so had he not been deceived. The said act should also cause some harm. The Punishment for cheating is imprisonment for one year or fine or both.
  • Dishonestly or fraudulently preventing debt being available for creditors (Section 422): Here, a person prevents himself or any person from paying a legally enforceable debt to himself or to another person.
  • Dishonest or fraudulent removal or concealment of property to prevent distribution among creditors (Section 421): In order to commit this offence, one must dishonestly deliver, conceal or remove his property which will prevent the distribution of the same amongst his creditors legally.

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