In this blog post, Vivek Chattopadhyay,  a final year law student of School of Law, KIIT University, provides an outline of the dire condition of the Indian Economy in terms of Money Recovery and Debt Collection so as to bring out the alternative means available at their disposal.

Overview of Money Recovery and Debt Collection in The Indian Economy

India being a developing economy is plagued with a lot of fundamental problems against which there has been no real development for a long time. Of these, the most basic of problem is that of “contract enforcement”. While lack of legal awareness and general education amongst the people of this country is a big factor, the other reason is inefficient, costly and a glacially slow legal system. While getting into contracts, most people do not even consider the remote possibilities of what may happen in the future in case of breakdowns or even if some do, they do not tend to question the terms and conditions or even what are the means available to enforce that agreement in the event the other party does not honor the agreement. According to a World Bank survey, India ranks second last, i.e., 189 out of 191 countries for contract enforcement as per the latest statistics.

Quantitatively speaking, the amount of unclaimed money just sitting in several bank accounts total to over Lacs of Crores. This not only include amounts such as a little over 64,000 Cr. Of unclaimed deposits and 3,500 Cr. Of unclaimed insurance money but also a whopping 30,000,000 Cr of unpaid bills!

Debt Recovery Tribunals, which only banks get to access, have a staggering success rate of under 25%! No wonder there is so much unclaimed money in the economy.

The difficulty in money recovery and contract enforcement leads to a massive uncertainty which is a big cost of doing business in India. Uncertain cash flow is a major factor for businesses closing down in India.  It renders the entire business environment ineffective and pulls down India’s score in the Ease of Doing Business Index released by the World Bank. If the Government undertakes to have a more systematic approach to money and debt recovery in general, not only large corporations but also small enterprises will be benefitted with massive competitive edge over others as a whole. Therein lies the purpose of the guide, to not only make aware but also to provide solutions to long standing problems involved with Debt collection and Money recovery. Court systems in India are glacially slow and a business owner should not opt for it unless they have exhausted all other means. In business, time is crucial and everything depends upon the timeliness and reliability of information. Getting stuck with an expensive and slow litigation is a thing no one wants and so this guide, to make them aware of the alternative means they can take to recover their dues.

Money Recovery and Debt Collection in India: Why is it so Difficult?

Issues with Money Recovery

Some of the most common problems with money recovery start from the very inception of the agreement with things like certainty of terms of the agreement, financial background of the parties entering into it, etc. Some of these, the more important and crucial ones are covered below so that the reader can understand and timely avoid these pitfalls.

Problems with Oral Contracts

The problems with Oral contracts is that they are not written down anywhere meaning, there is no paper trail to follow and prove its existence in the event of things going bad. The most basic thing a business owner can do is to avoid entering into oral agreements altogether. This strategy should be quite sound for most situations but what about those instances where the accepted trade practice is oral contracts? For such instances, the best thing to do, is to have witnesses who can attest the existence of such contracts in the event of a breach.

Faulty Written Agreements

One might think that shifting from Oral contracts to written ones might possibly solve all your woes but guess what? Written ones have even more problems. Unlike oral ones where if you can prove the existence of such an agreement, your job is done, but in written ones, that’s just the very beginning of the entire process.

The problem mainly with written agreements is that many parties do not have the habit of asking questions about terms and conditions, and that a great majority of contracts are very poorly drafted. Many a times people enter into agreements which turn out to be null and void at the very beginning leading to cancellation of the entire thing and the person who lent the money is left with no recourse.

Always ask as many questions as you can before signing something. If something sounds fishy, question it! If you feel something is vague, question it! Questioning something will not only clear your doubts but also keep the opposite party always on their toes and they’ll think twice before trying to cheat you.

Issues with Jurisdiction

Jurisdiction is critical because it tells you where you can or have to go to enforce a certain contract. If a contract is executed in Delhi that specifies the governing jurisdiction as the State of New York, in the event of a breach, almost never would the aggrieved be willing to go to New York to enforce it.

As a standard practice, there is almost always going to be a pre-determined jurisdiction governing the agreement. You should look into this particular jurisdiction and adjudge whether it would be favorable for you in the event you need to enforce it. In the rare instances where jurisdiction is missing, law in general says, it shall be the jurisdiction of where the contract is being entered into.

Instances of Cheating

No matter how careful you are, sometimes, things just don’t work out. This may be attributed to two aspects namely (a) Being Acts of God and (b) Being Act of Cheating. For the former, there nothing as party to the contract you can do since it is something which is much beyond the scope of foreseeable outcomes. But, in case of the later scenario breaches can be attributed to the acts of the other party.

Figuring something out on the face of it might be a bit difficult so the best thing as a contracting party a person can do is to look into the background of the other party to get a rough idea of the character of the other party and decide accordingly.

Bankruptcy of the Borrower

With cheating out of the way, there is another thing that may happen, i.e., Bankruptcy. Bankruptcy relates to the other party being completely unable to execute the contract due to a complete cash crunch and possible insolvency from his end.

The best way to avoid such a scenario is to look into the balance sheets and financial statements of the other party at the point of signing. If things seem sketchy, it’s advisable to either not enter into the contract or to ask for Indemnifiers or Guarantors.

Issues with Corporates

The main problem with corporates is a lot of red-tapism, communication gaps and inefficient management. As a contracting party, a person can have two types of relationships with a corporate. The first being an investor relationship, the second a business relationship. For the former, although the SEBI Act, Securities Contract Regulation Act and the Companies Act lays down fixed timelines, the main problem is that the investor is not aware of his right at the time of signing the agreement

The best way to know the rights an investor has is to either go through the SEBI website once or attend any of the SEBI camps aimed at increasing investor education so that the investor can assert his rights and take what is owed to him.

For the later bit when there is a business relationship, red-tapism is the primary problem where the best thing to do as a contracting party is to establish a proper person of contact in the higher management and get things done through that person so that, there is minimum confusion and errors due to time lag and communication gaps.

Issues with the Slow Legal System

Let’s face it, the main reason why most business owners do not want to go through the entire court process is due to the painfully slow legal system. The remedy to this is to opt for alternative means in enforcing the contract such as through Legal Notices, F.I.Rs, and Complaining to regulator, etc., before heading to court.

Finally, if nothing works, then only the person should head to court to have his matter sorted out. The most effective way to end court proceedings quickly is to go for summary proceedings under Order 37 of the Civil Procedure Code. Summary proceedings are all based on written statements from both parties without any unnecessary trial hearing and this drastically reduces the time lag from filing to judgment.

Expensive Arbitration

If there is an Arbitration clause in the agreement, a court will not entertain the suit.  Then the only alternative the aggrieved has is to go for Arbitration. Although Arbitration is a much faster means than litigation, it is a much more costly affair than litigation. The best way to curb Arbitration expenses is to go for Institutionalized Arbitration since the institution have a fixed rate chart and the aggrieved has to pay only the amount which significantly reduces costs.

Expensive Lawyers

Another big reason why people don’t go for Money recovery is because of the rates charged by their lawyers. The general trend is that, the aggrieved is exploited into paying much more than he should be due to his lawyer. The easiest way to remove such difficulties is to contact Legal aggregators and such services who maintain a database of qualified and cheap lawyers willing to quickly settle their matters.

Remedies to Such Issues

Once a contract has been breached, the first thing an aggrieved party should do is refer to the contract to check his available remedies. There are a lot of things a person as an aggrieved party can do once a contract has been breached, which are discussed here in brief and in detail at a later chapter in this guide.

Civil Remedies Available

In terms of civil remedies, there are a lot of things an aggrieved party can do ranging from very simple things like sending a legal notice to things like initiating a civil suit for damages or debts due.

Civil suits take a tedious amount of time and should be resorted to only when the main relief the aggrieved is seeking is monetary in nature. For more serious consequences, without delay, the aggrieved should opt for criminal remedies.

Criminal Remedies Available

For seeking criminal remedies, the first thing to do is once the jurisdiction is established the agreement is to forthwith file an F.I.R with the local police station having jurisdiction over the matter and set things in motion. Once a sufficient amount of evidence has been gathered through police investigation, a criminal suit should be initiated for quick disposal of the matter.

Out of Court settlements

Finally, for high monetary value contracts, the best way is to settle differences and cut off loses through alternative dispute mechanisms such as Arbitration or Mediation. This is a method which is most effective against corporates as the matter can be resolved very expeditiously without furthering the loses they’d normally have to bear without having to resort to the tedious court process.

For Out of Court settlements, the contract needs to specifically speak of Arbitration/ Mediation/ Conciliation or both parties need to agree to it. Without the presence of either, an aggrieved cannot go for this method of Debt recovery.

Laws Currently in Place

The purpose of this chapter is to acquaint the aggrieved with relevant statutory information that he should know in the event there is a breach. One thing to be kept in mind throughout this chapter is that, if the aggrieved is going for a civil suit before a court, he should go for a Summary Suit under Order 37 of the Civil Procedure Code as those are heard and disposed off in a much more expedited manner. This, will in the long term, not only save time but also money and face of both parties. The most relevant provisions of selected statutes that an aggrieved should be acquainted with are discussed herein below.

Contract Act, 1872

The Indian Contract Act, 1872 is the mother law in Debt recovery as all such matters originate from a Contract. There are a number of provisions of this particular statute to be kept in mind while going to file your file your suit before a court of law namely:

Section 17: Fraud

““Fraud” means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agents,¹ with intent to deceive another party thereto his agent, or to induce him to enter into the contract;

• the suggestion as a fact, of that which is not true, by one who does not believe it to be true;
• the active concealment of a fact by one having knowledge or belief of the fact;
• a promise made without any intention of performing it;
• any other act fitted to deceive;
• any such act or omission as the law specially declares to be fraudulent.”

This section is applicable when there it is proven by some form of evidence that the breaching party planned to do so all along.

Section 18: Misrepresentation

““Misrepresentation” means and includes –

(1) the positive assertion, in a manner not warranted by the information of the person making it, of that which is not true, though he believes it to be true;

(2) any breach of duty which, without an intent to deceive, gains an advantage to the person committing it, or anyone claiming under him; by misleading another to his prejudice, or to the prejudice of any one claiming under him;

(3) causing, however innocently, a party to an agreement, to make a mistake as to the substance of the thing which is subject of the agreement.”

This section is applicable when there is a variation in the intended performance of the agreement due to a difference in the intention amongst the contracting parties.

Section 124: Contract of Indemnity

“A contract by which one party promises to save the other from loss caused to him by the contract of the promisor himself, or by the conduct of any other person, is called a “contract of indemnity”.

Section 126: Contract of Guarantee

“A “contract of guarantee” is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the “surety”, the person in respect of whose default the guarantee is given is called the “principal debtor”, and the person to whom the guarantee is given is called the “creditor”. A guarantee may be either oral or written.”

These sections are applicable in the event there is an indemnifier or a guarantor present as discussed in the matter of possible bankruptcy.

Section 73: Compensation of Loss or Damage by breach of Contract

“When a contract has been broken, the party who suffers by such breach is entitled to receive, form the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it. Such compensation is not to be given for any remote and indirect loss of damage sustained by reason of the breach.

Compensation for failure to discharge obligation resembling those created by contract: When an obligation resembling those created by contract has been incurred and has not been discharged, any person injured by the failure to discharge it is entitled to receive the same compensation from the party in default, as if such person had contracted to discharge it and had broken his contract.”’

When a contract is breached, to enforce it in order to recover debts due, a suit needs to be instituted under this section.

Negotiable Instruments Act, 1881

The Negotiable Instruments Act, 1881 is specifically for those agreements which carry a promise to pay. Things like Cheques, Bills of Exchange, etc., would fall under the purview of this particular act. While approaching a court of law for any sort of enforcement against a Negotiable Instrument to recover debts and money due, this act would apply.

Section 91: Dishonor by non-acceptance

“A bill of exchange is said to be dishonored by non-acceptance when the drawees, or one of several drawees not being partners, makes default in acceptance upon being duly required to accept the bill, or where presentment is excused and the bill is not accepted. Where the drawee is incompetent to contract, or the acceptance is qualified the bill may be treated as dishonored.” 

When the person to whom the Negotiable Instrument is presented does not accept it by any reason whatsoever except for lack of funds this section would apply.

Section 92: Dishonor by non-payment

“A promissory note, bill of exchange or cheque is said to be dishonored by non-payment when the maker of the note, acceptor of the bill or drawee of the cheque makes default in payment upon being duly required to pay the same.”

When the person to whom the Negotiable Instrument is presented does not honor it by virtue of lack of funds this section would apply.

Section 138: Dishonor of Cheques

“Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honor the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank…”

This provision is much like the previous two with the only difference that, this is applicable only in case of Cheques. A bulk of contract enforcement matters under the Negotiable Instruments Act come under this provision.

Arbitration and Conciliation Act, 1996

This Act would apply only under two conditions where, (a) There is an explicit Arbitration Clause present within the agreement sought to be enforced or (b) When both parties agree to go for it in their best interests to avoid tediously slow litigation.

Section 7: Arbitration agreement

“In this Part, ‘arbitration agreement’ means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.

An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.

An arbitration agreement shall be in writing.

An arbitration agreement is in writing if it is contained in-

• a document signed by the parties;
• an exchange of letters, telex, telegrams or other means of telecommunication which provide a record of the agreement; or
• an exchange of statements of claim and defence in which the existence of the agreement is alleged by one party and not denied by the other.

The reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement if the contract is in writing and the reference is such as to make that arbitration clause part of the contract.”

This is the main provision that a party needs to keep in mind while approaching an arbitral tribunal for settlement of disputes. Without this particular clause present, unless there is consensus amongst both the parties, the aggrieved cannot go for Arbitration.

Indian Penal Code, 1908

If seeking Criminal remedies to enforce a contract for recovery of debt, this Act would apply. Through the Indian Penal Code, the aggrieved can go for criminal suits against the party that made the breach. The relevant provisions to be kept note of are:

Section 405 and 406: Criminal breach of trust and its punishment

“Whoever, being in any manner entrusted with property, or with any dominion over property, dishonestly misappropriates or converts to his own use that property, or dishonestly uses or disposes of that property in violation of any direction of law prescribing the mode in which such trust is to be discharged, or of any legal contract, express or implied, which he has made touching the discharge of such trust, or willfully suffers any other person so to do, commits ‘criminal breach of trust’ ” and  “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.”

These provisions are applicable if the breaching party denies the existence of the contract as a whole.

Section 403: Dishonest misappropriation of property

“Whoever dishonestly misappropriates or converts to his own use any movable property, shall be punished with imprisonment of either description for a term which may extend to two years, or with fine, or with both.”

This provision is applicable when the breaching party by virtue of the breach attempt or successfully converts property of the aggrieved in his own name.

Section 415 & 417: Cheating and its punishment

“Whoever, by deceiving any person, fraudulently or dishonestly induces the person so deceived to deliver any property to any person, or to consent that any person shall retain any property, or intentionally induces the person so deceived to do or omit to do anything which he would not do or omit if he were not so deceived, and which act or omission causes or is likely to cause damage or harm to that person in body, mind, reputation or property, is said to ‘cheat’ “. and  “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.”

These provisions will apply when there is a proven case of cheating against the breaching party.

Presidency Towns – Insolvency Act Act, 1909, Provincial Insolvency Act, 1920 and Insolvency and Bankruptcy Code, 2015

These three acts are applicable only when there is a case of Bankruptcy or Insolvency of the breaching party. As it is a very rare scenario in matters of contract enforcement there is no need to cover it. The main thing to remember in order avoid such a scenario is enquire into the financial health of the other party.

If the financial health appears shaky, it perhaps best to either avoid entering into the agreement or asking for Guarantors and Indemnifiers should there ever be a breach.

 

SARFAESI Act, 2002

This Act becomes applicable if only the aggrieved is a financial institution such as a bank or any private finance corporation. The provisions of law in this act relate to means of recovery through securitization and reconstruction of the assets of the breaching party or alteration of the terms of the contract so as to allow the enforcement. This Act need not be covered in this guide as, an ordinary individual cannot proceed under this Act.

Companies Act, 2013

This act is applicable only when the breaching party to the agreement is a Company. Suits under this act primarily relate to either (A) class action suits where a certain group of people representing a particular class institute a suit for recovery of debts due to them or (B) in case of business relations wherein by virtue of debts due to them go for a winding for enforcement of the contract to exact debts and money payable to him.

Section 127: Punishment for failure to distribute dividends

“Where a dividend has been declared by a company but has not been paid or the warrant in respect thereof has not been posted within thirty days from the date of declaration to any shareholder entitled to the payment of the dividend, every director of the company shall, if he is knowingly a party to the default, be punishable with imprisonment which may extend to two years and with fine which shall not be less than one thousand rupees for every day during which such default continues and the company shall be liable to pay simple interest at the rate of eighteen per cent. per annum during the period for which such default continues:

Provided that no offence under this section shall be deemed to have been committed:—

1. where the dividend could not be paid by reason of the operation of any law;
2. where a shareholder has given directions to the company regarding the payment of the dividend and those directions cannot be complied with and the same has been communicated to him;
3. where there is a dispute regarding the right to receive the dividend;
4. where the dividend has been lawfully adjusted by the company against any sum due to it from the shareholder; or
5. where, for any other reason, the failure to pay the dividend or to post the warrant within the period under this section was not due to any default on the part of the company.”

When an investor does not receive dividends from the company against profits made, the investor can recover the same by filing a suit under this provision for contract enforcement.

Section 212: Investigation into affairs of company by Serious Fraud Investigation Office

“Without prejudice to the provisions of section 210, where the Central Government is of the opinion, that it is necessary to investigate into the affairs of a company by the Serious Fraud Investigation Office—

1. on receipt of a report of the Registrar or inspector under section 208;
2. on intimation of a special resolution passed by a company that its affairs are required to be investigated;
3. in the public interest; or
4. on request from any Department of the Central Government or a State Government, the Central Government may, by order, assign the investigation into the affairs of the said company to the Serious Fraud Investigation Office and its Director, may designate such number of inspectors, as he may consider necessary for the purpose of such investigation.

Where any case has been assigned by the Central Government to the Serious Fraud Investigation Office for investigation under this Act,…”

This provision is applicable when any party that is related to the company files a complaint to the Serious Fraud Investigation Office. This is an alternative to going for a Winding up petition discussed below.

Section 272: Petition for Winding up

“Subject to the provisions of this section, a petition to the Tribunal for the winding up of a company shall be presented by—

1. the company;
2. any creditor or creditors, including any contingent or prospective creditor or creditors;
3. any contributory or contributories;
4. all or any of the persons specified in clauses (a), (b) and (c) together;
5. the Registrar;
6. any person authorised by the Central Government in that behalf; or
7. in a case falling under clause (c) of sub-section (1) of section 271, by the Central Government or a State Government.
8. A secured creditor, the holder of any debentures, whether or not any trustee or trustees have been appointed in respect of such and other like debentures, and the trustee for the holders of debentures shall be deemed to be creditors within the meaning of clause (b) of sub-section (1).
9. A contributory shall be entitled to present a petition for the winding up of a company, notwithstanding that he may be the holder of fully paid-up shares, or that the company may have no assets at all or may have no surplus assets left for distribution among the shareholders after the satisfaction of its liabilities, and shares in respect of which he is a contributory or some of them were either originally allotted to him or have been held by him,…”

When a creditor to a company is not able to exact their dues and there is a breach by virtue of non-payment on the part of the company, they may proceed under this section.

Section 447: Punishment for Fraud

“Without prejudice to any liability including repayment of any debt under this Act or any other law for the time being in force, any person who is found to be guilty of fraud, shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud: Provided that where the fraud in question involves public interest, the term of imprisonment shall not be less than three years”

This provision is applicable when there is proven fraud committed by an officer of a company.

Section 451: Punishment for wrongful withholding of property

“If a company or an officer of a company commits an offence punishable either with fine or with imprisonment and where the same offence is committed for the second or subsequent occasions within a period of three years, then, that company and every officer thereof who is in default shall be punishable with twice the amount of fine for such offence in addition to any imprisonment provided for that offence.”

When there is a wrongful conversion of property made any officer of the Company, the aggrieved can proceed under this section.

Avenues Available to an Aggrieved Party for Enforcement of Terms of The Contract

In the previous chapter, we had discussed about the statutory provisions an aggrieved should know and this one focuses on the means to apply them. In this chapter we discuss means available to enforce a contract in the event of a breach.

For the purposes of simplification, the methods available have been subdivided into two categories namely, (a) Methods available to recover monies and debts due from private individuals, and (b) Methods available to recover monies and debts due from Corporates.

Methods available against Private Individuals

In these type of cases, the matter of contract enforcement is relatively simple. This is because in case of corporates, the biggest hurdle is to identify the person liable for the breach which is not the case here and so, the aggrieved can take the following measures:

• Legal Notice: A legal notice is a formal complaint addressed to the breaching party asking him to make amends and fix the breach by performing what is expected of him in the contract. The Legal notice also sets in disclaimers for letting the breaching party know of possible actions that the aggrieved would be taking if the Legal Notice is not complied with. A standard window for complying to a Legal Notice is 30 days.
• F.I.R: An F.I.R. or first information report is a criminal complaint against the breaching party lodged under either Section 154 or 156 of the Cr.P.C against the breaching party. Going for an F.I.R. means that the aggrieved is not only looking for civil relief but also possible imprisonment of the breaching party.  The standard window for completion of an investigate due to an F.I.R is 90 days.
• Money Suit: A money suit is an ordinary civil suit before a court. Here, the aggrieved prays for obtaining the monetary compensation against the  loss caused to him by non-performance of the contract. A Couple of things that are needed to be kept in mind are, (a) An aggrieved cannot resort to this particular means of settlement unless the contract specifies the amount due to the aggrieved in the event of a breach and, (b) It is preferred that money suits are treated as a Summary suit under Order 37 of the Civil Procedure Code so that the entire matter is disposed off within 3-4 months.
• Insolvency Petition: This is situation that rarely happens in any contractual breach. The necessity for filing such a petition may arise only then when the aggrieved did not undertake the necessary due diligence to check the financial health of the breaching party at the time of signing of the agreement. In such a situation, an aggrieved has to file a petition under either Section 9 or Section 6 of the Presidency – Towns Insolvency Act, 1909 or the Provincial Insolvency Act, 1920 respectively. After the matter is adjudicated upon, an official liquidator is appointed by the said court who manages the assets of the insolvent person and liquidates them so that all debts and monies due from the insolvent can be paid off either in full or on pro-rata basis to all the creditors of the insolvent.
• Criminal Suit: A criminal suit is more serious step than a Civil one. The reason for this is that Criminal suits not only carry fines but also a fixed amount of Jail time in case of certain offences. Only when the aggrieved is absolutely sure that the breaching party is not complying to any civil means, then only this kind of suit should be resorted to. A criminal suit is usually the follow-up to an F.I.R. investigation wherein after the police file their investigation report, a magistrate take it up for disposal. The magistrate upon receiving the report, based on the evidences, facts and intention of the breaching party accordingly passes a sentencing upon the breaching party.

Methods available against Corporates

Contract enforcement against corporates is a bit tricky as unless the aggrieved can figure out the person responsible it’s very slow to get the contract enforced. The best way to alleviate such as problem is to have a point man in the company with whom all dealings and communications pass through. The reason for this is, unless there is contrary evidence, he can be held liable. Now, coming to the means available for enforcing a contract against a corporate are:

• Legal Notice: Much like in the case of a Private Individual, the most basic approach to enforce a contract is to send a legal notice. The legal notice should clearly spell out the factual scenario as well as contain disclaimers of step that will be taken against the company in case of non-compliance. Normally in case of a Private Individual, the Legal Notice would be in his name but in case of a company, it is sent to the Managing Director along with the Point Man.
• Consumer Forum Complaint: This is a very unique approach to Contract enforcement as this is applicable only in cases where the aggrieved is a consumer. A consumer forum does not necessarily need the presence of lawyer and so the aggrieved can himself file it. In order to go for a Consumer Forum Complaint, the aggrieved needs to approach the consumer forum in his jurisdiction. The aggrieved needs to basically spell out the factual scenario along with documentary evidence such as emails, receipts, etc., and explain the same before the judge. Basing on the facts and evidence given, the Judge passes a judgement against the company.  Judges in the consumer forum are highly sympathetic towards Consumers and are always looking out for them.
• Complaint to the Registrar of Companies: The next step an aggrieved can take after the legal notice is to file a complaint with the Registrar of Companies (RoC). The RoC upon receiving the complaint, based on the factual scenario and supporting evidence, sends a show cause notice to the company. The company has to revert back to the RoC within a designated time frame after which the RoC takes a decision. The decision making process is solely dependant upon the satisfaction of the RoC to the show cause notice and accordingly he either fines the company or in worst case scenarios strikes off the name of the company. This method of complaining to the RoC is very useful in plucking out Hawala companies, Fraudulent businesses, Oppressive and ineffective management, etc.
• Money Suit against the Companies: When going for a money suit against a corporate, it is always advisable to go for a summary proceeding so as to save time and minimize losses. Money suits are the slowest forms of Civil litigation for the enforcement of contracts so as to recover money and debt. In case of money suits, the suit is always in the name of the company rather than in the name of any specific officer which further complicates and delays things. This is the reason why one should go for a money suit only when all other means have been exhausted by the aggrieved. It is to be also noted that the aggrieved cannot go for a money suit unless his debt is pre-determined. Also, at the time of writing this, we are in a transition phase between Company Laws Boards being dissolved and National Company Law Tribunals being established and so, all such suits are currently halted.
• F.I.R. against the Directors: Filing an F.I.R. is the most basic criminal relief that an aggrieved can seek in order to enforce a breach. In this, the aggrieved has the approach the local police station within his jurisdiction and file the F.I.R. against the directors. It should be noted that unlike, in the case of a private individual where the F.I.R. is filed in his name, in case of a corporate, the aggrieved needs to with proper evidence point out which Directors are responsible and then only can the F.I.R be registered. Based on the F.I.R. received the police undertake a thorough investigation of the directors and the company after which they place it before a Magistrate for disposal.
• Criminal suit against the Directors: A criminal suit against the directors is a follow up after the F.I.R. Once the police are finished with their investigation, they submit their report before the magistrate who takes cognizance and starts the matter. During the hearing, based on the evidence collected and information received regarding the alleged offences of the directors, a sentencing is passed. Criminal suits carry penal punishments along with monetary penalties and so, just the mere threat of one is almost always enough to have contracts enforced.
• Class Action Suits: This is a very special brand of civil suits because it requires the presence of many, known as a class rather than one individual. If at any point of time, a group of people feel like they’ve been cheated or treated unfairly, they can band together to file such a suit. Class action suits may be like a group of creditors filing for recovery of money through a winding up suit or even complaining before the Serious Fraud Investigation Office (SFIO)/Economic Offences Wing (EOW) for suspected fraud by a business.
• Reconstruction and Securitization of Assets: This is again a very special instance applicable to only Banks and other Financial Institutions. This is applicable when the company is unable to pay back the loan taken. Banks and Financial Institutions can accordingly take steps to secure their dues by either reconstruction or securitization. Reconstruction is basically where the loan terms of the company are renegotiated so that the debts can be paid off. This is done usually when the company still viable. In case of Securitization, the assets of the company against which the loan was taken are sold off so as to realize the money due to them. This is done when the Banks and Financial Institutions either need the money urgently or the company is no longer viable for their investments.

 

Landmark Judgments that have Cleared Multiple Ambiguities in Law

Law in India is not only very complex but also courts are glacially slow, which are some of the major contributing factors to the pathetic money recovery rates in India. Even so, Judges and lawmakers are trying their best in recent times to speed up processes through establishment of tribunals, alternative dispute settlement, etc. The focus of this chapter is to bring to the notice of the aggrieved of certain interpretations and explanations Judges in their judgments have provided so as to settle the ambiguities in Debt and money recovery.

It is to be kept in mind that though we had discussed in Chapter 02 of this guide several provisions from different acts, not all need interpretation. This is mainly due to reasons like Criminal statutes for example cannot be widely interpreted and carry the literal meaning of what is written in the statute.

The same can be said for super specific statutes like the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act or even the Presidential Town and Provincial bankruptcy Acts which come into play only in the rarest of rare cases where a party is either a bank or a contract is entered into wherein one contracting party does not have the finances to execute it and so there is no need to cover in specific judgments related to those laws.

Contract Act, 1872

Oil & Natural Gas Corporation Ltd. vs. Saw Pipes Ltd.

The court had held, “determination of compensation for loss and damage caused due breach of contract vis-à-vis scope of Sections 73 and 74 of the Indian Contract Act. Sections 73 and 74 of Contract Act contemplates that in a contract the party who suffers by such breach is entitled to receive compensation for any loss which naturally arises in the usual course of things from such breach. If parties knew when they made the contract that a particular loss is likely to result from such breach, they can agree for payment of such compensation. In such a case, there may not be any necessity of leading evidence for proving damages, unless the Court arrives at the conclusion that no loss is likely to occur because of such breach. Section 74 is to be read along with Section 73 and, therefore, in every case of breach of contract, the person aggrieved by the breach is not required to prove actual loss or damage suffered by him before he can claim a decree.” 

Kailash Nath Associates v. DDA

The court, following ONGC v Saw Pipes Ltd, the therein opined, “in case of breach of contract the party will be entitled to damages in form of reasonable compensation which must not exceed the sum which has been predetermined in the contract.”

Negotiable Instruments Act, 1881

Dalmia Cement (Bharat) Ltd. V Galaxy Traders and Agencies Ltd.

The Court had held, “The Act (Negotiable Instruments Act,1881) was enacted and Section 138 thereof incorporated with a specified object of making a special provision by incorporating a strict liability so far as the cheque, a negotiable instrument, is concerned. The law relating to negotiable instrument is the law of commercial world legislated to facilitate the activities in trade and commerce making provision of giving sanctity to the instruments of credit which could be deemed to be convertible into money and easily passable from one person to another. In the absence of such instruments, including a cheque, the trade and commerce activities, in the present day would, are likely to be adversely affected as it is impracticable for the trading community to carry on with it the bulk of the currency in force. The negotiable instruments are in fact the instruments of credit being convertible on account of legality of being negotiated and are easily passable from one hand to another. To achieve the objectives of the Act, the legislature has, in its wisdom thought it proper to make such provisions in the Act for conferring such privileges to the mercantile instruments contemplated under it and provide special penalties and procedure in case the obligations under the instruments are not discharged. The laws relating to the Act are, therefore, required to be interpreted in the light of the objects intended to be achieved by it despite there being deviations from the general law and the procedure provided for the redressal of the grievances to the litigants.”

Dashrath Rupsingh Rathod vs. State of Maharashtra and Anr.

The Hon’ble Court commented—

“(i) An offence under Section 138 of the Negotiable Instruments Act, 1881 is committed no sooner a cheque drawn by the accused on an account being maintained by him in a bank for discharge of debt/liability is returned unpaid for insufficiency of funds or for the reason that the amount exceeds the arrangement made with the bank.

(ii) Cognizance of any such offence is however forbidden under Section 142 of the Act except upon a complaint in writing made by the payee or holder of the cheque in due course within a period of one month from the date the cause of action accrues to such payee or holder under clause (c) of proviso to Section 138.

(iii) The cause of action to file a complaint accrues to a complainant/payee/holder of a cheque in due course if—

(a) the dishonoured cheque is presented to the drawee bank within a period of six months from the date of its issue.

(b) If the complainant has demanded payment of cheque amount within thirty days of receipt of information by him from the bank regarding the dishonour of the cheque and

(c) If the drawer has failed to pay the cheque amount within fifteen days of receipt of such notice.

(iv) The facts constituting cause of action do not constitute the ingredients of the offence under Section 138 of the Act.

(v) The proviso to Section 138 simply postpones/defers institution of criminal proceedings and taking of cognizance by the Court till such time cause of action in terms of clause (c) of proviso accrues to the complainant.

(vi) Once the cause of action accrues to the complainant, the jurisdiction of the Court to try the case will be determined by reference to the place where the cheque is dishonoured.

(vii) The general rule stipulated under Section 177 of Cr.P.C applies to cases under Section 138 of the Negotiable Instruments Act. Prosecution in such cases can, therefore, be launched against the drawer of the cheque only before the Court within whose jurisdiction the dishonour takes place except in situations where the offence of dishonour of the cheque punishable under Section 138 is committed along with other offences in a single transaction within the meaning of Section 220(1) read with Section 184 of the Code of Criminal Procedure or is covered by the provisions of Section 182(1) read with Sections 184 and 220 thereof.”

Companies Act, 1956 [And now 2013]

Maharaja Exports and Another v. Apparels Exports Promotion Council

The Hon’ble Delhi High Court opined, “Under Section 9 of the CPC, 1908, Civil Court have jurisdiction to try all suits of a civil nature excepting suits of which their cognizance is expressly or impliedly barred. Unlike some statutes, the Companies Act does not contain ‘any express provision barring the jurisdiction of the ordinary civil courts in matters covered by the provisions of the Act. In certain cases like winding up of companies the jurisdiction of Civil Courts is impliedly barred. Where a person objects to the election of Director and claims a decree for declaration that he was one of the directors, there is no provision which bars the Civil Courts either expressly or by implication from trying such a suit.”

CDS Financial Services (Mauritius) Limited Vs. BPL Communications Limited and Ors.

The Hon’ble Court commented on this matter that, “when there is no express provision excluding the jurisdiction of the Civil Courts, such exclusion can be implied only in cases where a right itself is created and the machinery of enforcement of such right is also provided by the statute. If the right is traceable to general law of contracts or it is a common law right, it can be enforced through the Civil Court, even though the forum under the statute also will have jurisdiction to enforce that right. Sections 397,398 and 408 of the Companies Act, 1956 do not confer exclusive jurisdiction on the company court to grant reliefs against oppression and mismanagement. The scope of these sections is to provide a convenient remedy for minority shareholders under certain conditions and the provisions therein are not intended to exclude all other remedies.”

Radhe Shyam Khemka v State of Bihar

The Supreme Court in matters of criminal action against directors of a Company opined that, “while taking cognizance of alleged offences in connection with the registration, issuance of prospectus, collection of moneys from the investors and the misappropriation of the fund collected from the shareholders which constitute one offence or other under the Penal Code, court must be satisfied that prima facie an offence under the Penal Code has been disclosed on the materials produced before the court. If the screening on this question is not done properly at the stage of initiation of the criminal proceeding, in many cases, some disgruntled shareholders may launch prosecutions against the promoters, directors and those in charge of the management of the company concerned and can paralyse the functioning of such company. It need not be impressed that for prosecution for offences under the Penal Code the complainant has to make out a prima fade case against the individuals concerned, regarding their acts and omissions which constitute the different ingredients of the offences under the Penal Code. It cannot be overlooked that there is a basic difference between the offences under the Penal Code and acts and omissions which have been made punishable under different Acts and statutes which are in nature of social welfare legislations. For framing charges in respect of those acts and omissions, in many cases, mens rea is not an essential ingredient; the concerned statute imposes a duty on those who are in charge of the management, to follow the statutory provisions and once there is a breach or contravention, such persons become liable to be punished.”

The relevant extracts mentioned above illustrate how courts have time and again provided assistance in alleviating common ambiguities. Judges and Lawmakers are actively attempting to settle the law and standardize the procedure of money and debt recovery in country for various reasons such as, (a) For assisting in recovery of the lakhs of crores of monies due, (b) Improving ranking in Ease of Doing Business by the World Bank and, (c) Preventing small business from shutting down due to these pitfalls. There above mentioned cases should aid the aggrieved leaps and bounds in getting his contract enforced so that he may recover his dues.

Analysis of the Current Legal Scenario with Case Studies

The whole purpose of this guide has been to acquaint the reader with the current trends and scenario in debt and money recovery. At a glance, the reader can observe that India is badly struggling in comparison to the rest world. But, there is a silver lining which is, it’s not completely hopeless as things are in motion to change things around. Through legislation and judicial interpretation work is being done to systematize the entire process.

The indian courts are already burdened with an ever increasing caseload and so as an individual, for now the best option is to avoid litigation at all costs. That is the reason why this guide exists to acquaint the reader to the numerous other options available. Going to court is definitely a solution but a glacially slow and expensive one. As an individual, it’s best to always try alternatives first before joining the long queue of courtroom proceedings.

There are numerous such companies and startups that have already systematized the entire list of alternative options mentioned above and are doing marvellous work in it. In this final concluding chapter, we look into one such startup called “ClikLawyer”, that was born just this year in 2016 and has gotten itself quite the impressive track record. In such a short amount of time after starting operations in Mid-March, they’ve already recovered a sum totaling more than 23 Lacs with an impressive success rate of over 95% of matters taken!

We now begin by taking a look at some these success stories by Cliklawyer in hope that you too would find them inspiring and useful.

Catching a petty crook that made away with Rs. 20,000:

“Mr. Sandeep Goyal, Cafe owner at Shahpur Jat Village was in quite a distress when a man named Deepak made away with Rs. 20,000 in promise of doing something. The worst part of this matter was that, the only bits of evidence Mr. Goyal had were a couple of phone calls and a few Whatsapp Messages. He didn’t even know the last name of this person Deepak.  The entire context of this was that, Deepak had promised to install CCTVs and a network booster at Mr. Goyal’s cafe which he did not fulfill. Everything was done on the basis of oral agreements and initially, Deepak tried to dissuade Mr. Goyal with false statements and finally started rejecting his calls and blocking him everything.”

In this situation, the team at Cliklawyer stepped in upon being approached by Mr. Goyal. The team took a grasp of the entire situation and proceeded accordingly. Since the last name of this person Deepak was unknown and he was absconding, they directly went for an F.I.R. The police were hesitant but with constant follow ups and persuasion, it was finally registered and within weeks, the police turned up with Deepak at Mr. Goyal’s Cafe who then proceeded to hand over the Rs.20,000 he had made away.

Recovering Lacs swindled by a Brokerage Company:

“Mr. Vikram Soni is a Physics professor (Emeritus from JNU and Jamia Millia), who had inherited shares from his father totaling nearly 16 Lacs. At the persuasion of a Business Manager, Sunil Kumar, he got his shares invested through a brokerage company since he was a very busy man. A few months down the line, he noticed that not only the manager but also the company was not complying with the requirements they were supposed to fulfill. This got his suspicions raised and after obtaining a statement from the National Securities Depository Limited, he found that over hundreds of unauthorized transactions had been carried out from his account. This dried out the entire money so invested which caused much dismay to him. He tried approaching the CEO of the Brokerage who assured him they would look into it but nothing happened. Further distressed, he consulted a couple of lawyers who promised to recover for a fee of around Rs.50,000-1 Lac  and then he finally approached Cliklawyer.”

The team at Cliklawyer after being approached by Mr. Soni, got a grasp of the whole situation and decided to proceed accordingly. Due to the abundance of information they had, they proceeded with a legal notice, followed by an F.I.R. Within days of filing the F.I.R., the Brokerage Company, called in Mr. Soni for a meeting to discuss matters. Accompanied by one of the Lawyers at Cliklawyer, Mr. Soni met the persons of the company and came out smiling 15 Lacs richer!

Enforcing payments due from a Corporate:

“This matter comes from Mr. Nishant Sood, director of a company that dealt it diamond impregnated cutting tools. The fact of the matter was that, the company had entered into an agreement with a third party for the supply of tools totaling Rs. 1,79,955. Initially the third party while entering into the agreement had made a promise to pay which after delivery he did not honor. As a result, Mr. Sood had approached lawyers who negotiated with the said third party and decided to settle accounts through a payment of Rs. 1,30,000. The third party had promised to pay that amount initially but when called for, did not honor that as well. Frustrated repeat non-payments, Mr. Sood approached Cliklawyer for a solution”.

After being approached by Mr. Sood, the team at Cliklawyer went through the history of the debacle to figure out the current status of the matter. Basing on the prior history, the team decided to go with an F.I.R since a prior legal notice from the other lawyers had failed. After filing of the F.I.R, within two weeks, the third party contacted Mr. Sood to settle the matter. Cliklawyer took steps to ensure that the payment was honored and Mr. Sood received a sum totaling Rs. 1,30,000 from the third party.

Recovering Salaries due for services rendered:

“This final story comes from a person called Ms. Prachi Aswani. Prachi is an Architect who was hired by a company to provide them with designs from time to time. During her brief tenure at the company her salaries were delayed from time to time without reason. She was shocked to find out one day that not her services were terminated arbitrarily but also that two months of salary were pending for her. She was yet to receive a sum totaling Rs. 70,000 against services rendered by her which cause her utter dismay. She initially had approached a lawyer to seemed too lackadaisical about getting things done and that’s when she decided to approach Cliklawyer.”

The team at Cliklawyer after receiving all the necessary information, got to work on her case. Interestingly, all creative work done by an Architect such as Ms. Aswani is protected under copyright laws. Without paying her the requisite compensation for her work they were actually violating her copyright. The team set to work and sent a Legal notice threatening to sue for copyright infringement and that was the nudge the company needed. Within 3 days of sending that legal notice, all her dues totaling Rs. 70,000 were paid back to her without any delay whatsoever.

From the real life incidents shared above, the reader can clearly make out that, going to court is not always the best option. There are several avenues available that one should explore before heading out to a full fledged courtroom trial. The team at Cliklawyer in all the above four instances recovered the money sought all that without having to step into a courtroom. Small nudges like a Legal Notice and F.I.Rs go a long way in recovering your monies and debt than a suit before a court. When faced with suit that too a civil one most corporates and some businessmen know it’ll take ages and are therefore least bothered. But, if you apply a little amount of pressure with legal notices and threats of criminal action with an F.I.R, most people return the debts due.

With this, the guide on Debt Collection and Money Recovery in India is concluded. It has been the aim of this guide to make aware to the people in general of means and methods available to collect Debt and Recover Money. Hopefully that aim has been reached and you the reader are in a much better position than when you began reading. Now that you know the things you can do to ensure your debts are collected and due monies are recovered, what are you waiting for? Get to it, recover them!

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