Corporate Debt Recovery

India is infamous for having an overburdened legal system that leads to indefinite delays in the disposal of cases. Inefficiencies in its legal infrastructure have made it all the more difficult for foreign as well as domestic investors to protect their investments in India. In fact, as seen in the famous case of White Industries Australia Ltd. vs Union of India1, inordinate delays in the legal process was viewed as breach of investment treaty obligation by India.

Thus, there has always been a long standing requirement for a stable and efficient dispute resolution system ensuring quick enforcement of contracts, easy recovery of monetary claims and award of just compensation for damages suffered, all of which are critical in encouraging investment and economic activity.

There were already following remedies available but they lagged badly in their effectiveness: 

  1. Civil remedies – The most common civil remedy for recovering money is Order 37 of the Civil Procedure Code, which allows a creditor to file a summary suit. Compared to normal suits, summary suits are disposed of faster. Once the suit is instituted and the summons are issued, the defendant has 10 days to make an appearance, failing which the court assumes the plaintiff ’s allegations to be true and, accordingly, awards the plaintiff. If the defendant makes an appearance, the court accepts his defence only if it is convinced that it is substantial to the case in question. Where the matter concerns penalties or any other uncertain amount, one cannot file a summary suit.
  2. Another option is the Negotiable Instruments Act, 1881, which only deals with the recovery of money arising from instruments such as bills of exchange or cheques. The Act contains several sections, each outlining the procedure for recovering money under a specific instrument . For instance, Section 138 explains the procedure to deal with a bounced cheque, whereby a legal notice is to be sent to the defaulter within 30 days of receiving the cheque return memo. If the cheque issuer fails to make a fresh payment within 30 days of receiving the notice, the payee has the right to file a criminal complaint under this Section. However , the complaint should be registered in a magistrate’s court within a month of the expiry of the notice period, otherwise your suit will be time-barred . If found guilty, the defaulter can be punished with a prison term of two years and/or a fine, which can be as high as twice the cheque amount.

After more than a decade of extended deliberations, and given a fresh impetus by the current Government’s mission to improve India’s image as an investment destination, there are four milestone developments that can help you resolve the commercial dispute/recovery of dues: 

  1. The Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act, 2015
    which was cleared by the parliament of India having received the assent of the President on the 31st December, 2015
    .
  2. Arbitration and Conciliation (Amendment) Act, 2015 (“Act of 2015”), 
    one major amendment is by way of insertion of Section 29 B which provides for ‘Fast Track Procedure’ which articulates that the parties to the dispute may agree that their dispute be resolved through fast track procedure with sole arbitrator and also proposes that ‘Award’ in such cases shall be given within six months’ period.
  3. Insolvency and Bankruptcy Code, 2016
    The Code has repealed a number of outdated acts like the Provincial Insolvency Act, 1920, the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920. It further amends certain legislation like the Indian Partnership Act, 1932, the Companies Act 2013, Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, Limited Liability Partnership Act 2008 and Sick Industrial Companies (Special Provisions) Repeal Act 2003. In order to sidestep any further litigation in insolvency proceedings, this new Code shall overrule all other laws and Acts.
  4. MSME SAMADHAAN- DELAYED PAYMENTS TO MICRO AND SMALL ENTERPRISES UNDER MICRO, SMALL AND MEDIUM ENTERPRISE DEVELOPMENT (MSMED) ACT, 2006The Micro, Small and Medium Enterprise Development (MSMED) Act, 2006 contains provisions of Delayed Payment to Micro and Small Enterprise (MSEs). (Section 15- 24). State Governments to establish Micro and Small Enterprise Facilitation Council (MSEFC) for settlement of disputes on getting references/filing on Delayed payments. (Section 20 and 21)

    MSEFC of the State after examining the case filed by MSE unit will issue directions to the buyer unit for payment of due amount along with interest as per the provisions under the MSMED Act 2006.

LODGMENT OF CRIMINAL PROCEEDINGS 

You also have the option of initiating criminal proceedings against the defaulter under the Indian Penal Code, 1860. You can either file a case of criminal breach of trust or cheating, or even mischief.

  • Section 406 covers criminal breach of trust under the Indian Penal Code: Under Section 406 of the Indian Penal Code. Seller can file a suit for breach of trust. Seller have to prove that the customer has breached his trust by not paying the money against the product or services provided. “Punishment for criminal breach of trust.—Whoever commits criminal breach of trust shall be punished with imprisonment of either description for a term which may extend to three years, or with fine, or with both”. Punishment is given to the person who breaches the trust.
  • Section 417 of Indian Penal Code: This section deals with the cheating. Cheating can be in any sense between seller and buyer or between any two people.”Punishment for cheating.—Whoever cheats shall be punished with imprisonment of either description for a term which may extend to one year, or with fine, or with both”.
  • Section 420 of Indian Penal Code: This section gives relief to the person who is being cheated by someone. This section also includes cheating same as section 417. This section can be one provision on which seller can take action for non payment from the customer.

But, one has to be very careful that in absence of any specific allegation in the complaint that the accused had, at the very inception, induced the complainant with dishonest intention and further the inability of the accused to make payment of the amounts due would not attract the ingredients of Sections 406 and 420 IPC.

For More info please refer to:

  • V.P. Shrivastava Vs Indian Explosives Ltd., (2010) 10 SCC 261;
  • V.Y.Jose Vs State of Gujarat, (2009) 3 SCC 78.

And also note that in practice legal remedy has to be determined depending upon the facts of each case, for which appropriate legal guidance may be taken from concerned professional.

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