Debt Recovery Laws in India

Debt Recovery Laws in India

In our day-to-day life, we enter into numerous financial transactions involving significant amounts of money and other ailed components. With the increasing commercialization and globalization, the transfer of money has become an absolute necessity and all the entities ranging from small shopkeepers to large-scale businessmen are taking loans and other financial assistance to survive in the market. This transfer of money in the form of loans leads to credit creation which contributes to economic development. However, things got extremely bitter when the borrower fails to repay the loan or fails to discharge his financial obligation.

At that juncture, the lender or the aggrieved person needs to look at the legal mechanisms to recover the money. In this article, we are going to talk about such legal provisions which deal with debt recovery in India. If you have given a loan to someone; who is reluctant to pay, this article can immensely help you in getting back your dues.

What is Debt Recovery?

Before moving ahead, let us understand the meaning of the term debt recovery. As per Black Law Dictionary, the term ‘debt recovery’ means the legal process or the methods to recover the amount that you have given to someone else. In simple words, it refers to the legitimate modes of getting back the money advanced by you. It is important to note that the money lent by you may carry interest or not.

What are the Methods of Debt Recovery in India?

There are various methods to recover debts in India, which can be broadly classified into 2 categories (1) legal methods and (2) illegal methods. The non-legal methods refer to the practice of harassing the customer through commission agents with an objective to force them to repay the money. In this article, we will discuss only the legal methods in detail, which are as follows-

Civil Remedy

This is one of the most common remedies to recover debts in India. For exercising this remedy, you need to send a legal notice to the other party highlighting them to pay back the money or you will initiate a civil suit against him. Interestingly, in a civil suit, you can claim compensation in addition to the recovery amount. A civil suit to recover money is filed under Order IV of the Civil Procedure Code (CPC). It is important to note that the limitation period of filing a civil suit is 3 years from the date of cause of action. The place of filing the suit is determined on the basis of the location where the defaulter resides or carries out his business.

However, before initiating a civil suit, you must be borne in mind that it is a time-consuming procedure. Further, you are required to deposit a court fee depending upon the amount of your claim.

Summary Suit

To remove the defect of a time-consuming process, there are provisions in the CPC to file a summary suit under Order 37 of CPC. For filing a suit, it is essential that the amount of debt does not exceed 10 Lakh Rupees. In a summary suit, the defaulter is given a time period of only 10 days to appear before the court from the date the suit is filed. If the defaulter fails to appear, the Court shall presume that the claims of the Plaintiff are valid and may pass an award immediately.

Negotiable Instrument Act

It is a normal practice in the banking arena they asked their customer to give them blank cheques during the disbursement of loans. If you fail to pay your EMIs on time, the bank may present those cheques for encashment and if those cheques got bounced due to lack of balance, the banks are legally competent to initiate penal actions against you under Section 138 of the Negotiable Instrument Act. If this section is invoked, you will not only be asked to repay the money coupled with interest but may face a jail term also.

Filing a Criminal case under the Indian Penal Code (IPC)

This method is widely used to recover debts in our country. The India Penal Code (IPC) provides a list of offences and punishment for the act involving default in repayment of money. The aggrieved party may file a case under the following sections-

  • Criminal Breach of Trust – Section 405 and 406
  • Dishonest misappropriation of property – Section 403
  • Cheating – Section 415 and 417

It is important to note that some of the aforesaid offences are cognisable and non-bailable in nature, which will put the defaulter in serious trouble.

Asking for relief under Indian Contract Act

Since a loan arrangement is a type of valid contract between the parties, the Indian Contract Act, 1872 also comes into play. Many times, the contract contains special provisions which may change the nature of disputes between the parties. Talking about the legal principles, the aggrieved party can assert its claim by showing fraud (Section 17), misrepresentation (Section 18), contract of indemnity (Section 124) and contract of guarantee (Section 126).

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

This act is applicable when the aggrieved party is any financial institution such as a bank or a non-banking financial company (NBFC). This act provides for the establishment of special tribunals to adjudicate the case involving the recovery of money. The Debt Recovery Tribunals (DRT) and Debt Recovery Appellate Tribunals (DRAT) are set up to handle the disputes of individuals and partnership firms. The aggrieved party can initiate the recovery proceedings by filing an application along with the prescribed court fee as per Section 19 of the RDDBI Act.

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Securitisation & Reconstruction of Financial Assets & Enforcement of Security Interest (SARFAESI) Act, 2002

This Act is popularly known as the SARFAESI Act which was enacted with the objective to regulate and reconstruct the financial assets of the country. For using SARFAESI, it is important that a security interest must be created of either movable or immovable property. Interestingly, this Act can be used to recover the money without court intervention by selling assets declared as Non-performing Assets.

As per Section 13 of the Act, when a loan is classified as NPA, a notice of the same is given to the borrower. The notice provides that the borrower must pay the amount within a period of 60 days, failing which the creditor may exercise the rights, which include selling the loans to an Asset Reconstruction Company (ARC) at a discounting rate.

Insolvency and Bankruptcy Code, 2016

To remove the deficiencies in all the existing legal provisions pertaining to the recovery of money and revival of sick business entities, this Code was brought into force in the year 2016. The code has the main objective of the revival of corporate debtors while ensuring maximum recovery of all the stakeholders involved. To bring the code into motion, a creditor can file an application before the National Company Law Tribunal (NCLT) if the amount of default exceeds the threshold of 1 Crore.

The time period for accepting or rejecting the application is 14 days. If the application is accepted, an interim resolution professional (IRP) is appointed which later on constitutes a committee of creditors (CoC) which takes all the important decisions of the company. The code has stipulated a maximum period of 180 days to complete the resolution process and pass a resolution plan. However, this period can be extended by a period of 90 days with a maximum outer limit of 330 days. The resolution plan must be approved by a majority of 66%.

If the resolution plan is not accepted, the liquidation took place wherein the assets of the company are sold and liabilities are paid off. The dues of the creditors are paid in accordance with the waterfall mechanism provided under Section 53 of the Code. Presently, this is one of the most effective ways of recovering the outstanding amount.


To recover the outstanding dues or debt, there are various methods as discussed in detail above. If the amount of debt is not very high, you can go for a civil suit or a summary suit. If the loan is accompanied by a security interest, you should approach SARFAESI for quick recovery through the auction mechanism. If you are claiming your money against large companies, the IBC mechanism is a perfect fit owing to the time-bound redressal offered by it.

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