Debt Recovery in India: The Legal Framework

When debt cannot be recovered, it turns into bad debt. Normally, in “Debt Collection” the creditor tries to recover consumer credit and loans/ receivables that have not been paid back and in “Debt Recovery” the creditor hires a third party to recover such debt/ receivables when it goes unpaid for a substantially longer time period. Many times there is a security given by the borrower to the creditor, however when that security becomes unusable to pay back the complete debt, recovery becomes important.

There are various legal as well as non-legal methods to recover a debt/ receivable. The non-legal ways include personal contact with the borrower or sending agents to recover the money, etc.

The legal ways include:

1) Civil Remedy: A civil suit can be filed in any Court which has the appropriate jurisdiction by any aggrieved party against the defaulter party.

2) Criminal Remedy: FIR can be lodged in the local police station that can take cognizance of the matter in serious cases. After this, a criminal case can be filed to carry on the legal proceedings.

3) Arbitration, Mediation, and Conciliation:  These are efficient and quick ways to amicably resolve recovery disputes outside the Court but within the legal framework.

The laws that govern the debt recovery in India are:

1) Indian Contract Act 1872:  Dishonoring of contract represents the majority of debt recovery cases in India. Section 17, 18, 124, 126 and 73 can be invoked for varied reasons like misrepresentation, fraud, compensation for breach of contract, etc.

2) The Indian Penal Code: Criminal breach of trust under section 405 and 406, cheating and dishonest misappropriation of property are some grounds that are available for any aggrieved party to approach the Court under the penal law.

3) RDDBFI Act: If the aggrieved party is a financial institution, bank or even a private finance company, this Act provides for the establishment of various Tribunals to look into debt recovery cases.

4) SARFAESI Act: The Act is enacted with the objective to regulate securitization and reconstruction of financial assets. Establishment of Asset Reconstruction Companies is also one of the unique provisions of this Act.

5) Negotiable Instruments Act: Instances like section 138 for the dishonor of cheques, a legal notice is first issued under this Act and later the proceedings are initiated. These proceedings are criminal in nature.

6) Arbitration Act: When the parties expressly insert an arbitration clause or decide to adopt arbitration as means of resolving the dispute, then in such cases arbitration process can be invoked.

7) Insolvency Act: When the defaulter is a firm, the parties can invoke the insolvency proceedings against the defaulter under this recent Act.

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