This article is written by Utkarsh Nigam of New Law College, Bharti Vidyapeeth University, Pune. The author through this article discusses the consequences of defaulting on a personal loan. This article was written by the author while pursuing M.A in Business laws from NUJS.

INTRODUCTION

Personal loan is a type of unsecured loan which is taken to meet the current financial needs of any type. The need for urgent cash is fulfilled by this type of loan whether it is a medical emergency, money required to buy a house or to meet day to day expenses. The biggest benefit in taking a personal loan is that no questions are asked by the bank where the money will be put to use, along with it no security or collateral or guarantor is required to acquire the loan thus making it the favourable type of loan in case of a dire need. But this type of loan has drawbacks too.  Money without any security would mean high interest rates are charged by the banks on these types of loans as this would in future become a risky situation for a bank. The banks do not give these types of loan to everybody the banks give personal loan to a person who has a good track record in repayment of the loans. There can be cases where a default can be done, in cases of personal emergencies or death or bankruptcy etc. In these types of cases banks have certain rights or recourses through which they can recover the amount which they issued to the defaulter.

Remedies Available Under Code of Civil Procedure

The first option available to a bank as a plaintiff is to file a Summary suit under Order 37 of the Civil Procedure Code, 1908. The Rule 1 Sub rule 2 states that the order 37 is applicable to all suits upon bills of exchange, hundis, and promissory notes or the money payable in written contracts or enactment in which a plaintiff seeks to recover a debt or demand which is a liquidated one. The condition for this order to be applied is that the sum to be recovered is a fixed a sum of money or is in nature of any debt except a penalty or guarantee in respect of a debt or liquidated demand. Rule 2 of Order 37 requires the suit which is filed under this order to be under the ambit of reliefs granted under this order only and not any other such relief which is not mentioned. Under Order 37 the decree for the suit filed can be get in two ways, first being under Rule 2(3) which states that the defendant is given 10 days from the service of the summons on him to appear. After he has entered in appearance the plaintiff which is the bank in cases of loan default taken from the banks serves on the defendant summons for judgement within ten days from date of service which is supported by an Affidavit verifying the cause of action, amount claimed and that in his belief there is no defence to the suit filed by him.

Rule 2(5) states that the defendant may within ten days from service of such summon for judgement, by affidavit or disclose such facts as may be deemed sufficient to entitle him a chance to defend or apply for leave to defend. This may be granted to him unconditionally or on such terms as the court may deem fit. The proviso to the rule further provides that leave to defend shall not be refused by the court unless it is satisfied that the facts disclosed do not indicate substantial defence or that it is frivolous.

The other way is to get the decree under Rule 2(6) which states that in case if the defendant does not apply for a leave to defend the plaintiff shall be entitled to a judgement immediately or the court may direct the defendant to give such security as it may deem fit.  The delay in entering an appearance may be excused under clause 7 of the rule if sufficient cause is shown.

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The real benefit to a plaintiff of Order 37 suit is that where the defendant is not able to come out with a substantial defence in his case the plaintiff will be entitled to a judgement immediately. This procedure simply means that the long procedure followed in civil suits gets eliminated starting from filing a written statement to framing issues by court, cross examination etc. The long process affected the plaintiffs. Under Order 37 a plaintiff just have to show that the case falls under the ambit of this order and once the summons is issued it is now the duty of the defendant to show to the court with substantial proof that he is entitled to a leave to defend and if the leave is granted then Order 37 becomes an ordinary civil suit and then the defendant is directed to file his written statement within 30 days.

The Crux of order 37 was summarised in Sunil Enterprises & Anr. v. SBI Commercial & International bank Ltd.  where the court summarised the points under Order 37, which were-

1. If the defendant satisfies the court that he has a good defence to the claim, the defendant would be entitled to unconditional leave to defend.
2. If the defendant is successful in indicating that he has a fair or bona fide or reasonable defence although not a good defence then also the defendant is entitled to unconditional leave to defend.
3. If the defendant discloses such fact which entitles him to a leave to defend, that is if in the affidavit he discloses that at the trial he may be able to establish a defence to the plaintiff’s claim, the court may impose conditions at the time of granting leave to defend the conditions being as to time of trial or made of trial but not as to payment into court or furnishing security.
4. If the defendant has no defence or if the defence is moonshine the defendant is not entitled to leave defend.
5. If the defendant has no evidence or the defence is moonshine, the court may show mercy to the defendant by enabling him to try to prove a defence but at the same time protect the interest of the plaintiff imposing the condition that the amount claimed should be paid into the court or otherwise secured.

In case of Precision Steel & Engineering works v. Prem Deva Niranjan Deva Tayal the court pointed out that mere disclosure of facts not being substantial one the facts are nothing and what is particularly a substantial evidence depends upon the facts and circumstances of each case.

The Court in Neebha Kapoor v Javantilal Khandwala that the main reason behind Order 37 is the expeditious disposal of suits of commercial nature and it provides for such disposal as expeditiously as possible by prescribing the time frame.

Order 37 is best suited for cases in which a defendant does not have a case or does not have a substantial evidence or proof for asking for leave for defence. Cases in which the borrowers disappear with no trace, these type of cases can be moved expeditiously. The decree as executed by the court has a strong effect which tends the borrowers to offer settlements after they are served with the summons.

Remedy Available Under NI Act

The second option available in cases when the cheque is issued to return the borrowed money and it bounces or is returned by the bank for insufficient balance in the account of the borrower or in legal language when the cheque gets dishonoured then the person would be liable under Section 138 of the Negotiable Instrument Act,1881. The person who is made liable under Section 138 of the Act has a civil and a criminal liability. The Supreme Court in the case of Laxmi DyeChem v. State of Gujarat & Ors. gave the judgement that criminal proceedings because of insufficient balance can be initiated because of lack of sufficient amount in the bank account. If any person is deemed to have committed offence under this particular section the person can be punished with an imprisonment of up to two years along with a fine which can be twice the amount of the cheque.

Remedy Available Under DRT Act

The third way available with the banks and Non- Banking financial institutions is to go to the Debt Recovery Tribunal which has been established under the Recovery of Debts due to Banks and Financial Institutions Act, 1993. The Government of India through the Act has constituted 38 DRTs and 5 DRATs (Debt Recovery Appellate Tribunal). The provisions of the Act apply to the cases in which the amount involved is not less than 10 lakhs. The prime feature of the Act is that only banks and financial institutions of any type can only make applications under Section 19 of the Act for recovery of debts under this Act. The DRT and the DRAT are not bound by the provisions of the Civil Procedure Code according to section 22 of the Act but are bound by the principal of natural Justice. Summary suit procedure is followed by the Tribunal for recovery of debts. The evidence is accepted through affidavit and cross examination is not allowed except in cases where the court is satisfied. The defendant has the right to file a claim of set off against the application filed by the plaintiff.  The final order is passed by the Tribunal, if it is satisfied, directing the borrower to pay the required amount which is claimed by the plaintiff. If the borrower fails to pay the amount a recovery certificate shall be issued against the borrower under Section 19(7) of the Act which will then be executed by a Recovery Officer of the Debt Recovery Tribunal under Section 25. The Presiding officer of the Tribunal under Section 19(22) shall issue a certificate for recovery of the amount of debt and any other relevant dues to the Recovery officer. The following modes can be taken by the Recovery officer-

1. Attachment of sale of the movable or immovable property of the defendant.
2. Arrest of the defendant and his detention in prison.
3. Appointing a receiver for the management of the movable or immovable properties of the defendant.

The Tribunal under Section 19(24) shall be dealt by it expeditiously and efforts shall be made to finally dispose of the application made to it within one hundred eighty days from the receipt of the application. The Debt Recovery Appellate Tribunal shall also follow the same provisions under Section 20(6) of the Act and the appeal shall be disposed within 6 months from the date of receipt of appeal. Under Section 20(3) of the Act every defendant (borrower) is entitled to appeal against the order of the Tribunal within forty five days from the receipt of the order of the Tribunal to the Appellate Tribunal subject to the condition mentioned  under Section 21 that the borrower should deposit seventy five percent of the debt as determined by the Tribunal.

Under Section 26 of the Act it shall not be open to the defendant to dispute before the Recovery Officer regarding the correctness of the amount specified in the certificate issued by the presiding officer and the borrower cannot make any objection with regards to the certificate on any ground

Where a certificate has been issued under Section 19 of the Act, the Recovery officer without any prejudice to the provisions to the provisions of Section 25 may recover the amount by any other means stated in Section 28 of the Act. These are-

1. If any amount is due to the defendant from any person, the Recovery Officer may require such person to deduct from the amount, the amount of debt due from the defendant and such person shall comply with such requisition and shall pay the amount to the Recovery officer.
2. The Recovery Officer has the power at any time by giving a notice in writing to the person from whom the money is due or will be due to the defendant or to any person who holds or may subsequently hold money for or on account of defendant to pay to the Recovery Officer after the money becoming due such amount which is sufficient to pay the amount of debt due from the defendant.
3. A notice may be served by the officer to the person who holds or subsequently will hold any money on account of the defendant jointly, and until the contrary is proved the shares of the joint holder will be presumed to be equal. The notice would be send to all the joint holders at their addresses and complying with the contents of such notice is mandatory in nature. Where a person whom such notice is sent if proves that he/she does not hold any money for or on account of the defendant then the person will not be required to pay any sum. But if it is found that the statement was false or the proof was false in nature then such person shall be personally liable to the Recovery officer to the extent of his own liability to the defendant or to the extent of defendant’s liability under the suit whichever is less.
4. If the person to whom the notice under this section (Section 28) has been issued fails to make the payment, then he shall be deemed to be a defendant in default in respect to the amount specified in the notice and further proceedings can be taken against him for the realisation of the amount according to the provisions of Section 25,26 and 27.
5. The Recovery Officer also has the power to apply to the court in whose custody the money is belonging to the defendant for payment of the amount of money due towards the debt.
6. The Recovery Officer may recover any amount of Debt due from the defendant by sale of his movable property in the manner laid down in the Third Schedule of the Income-Tax Act,1961.

In cases of corporate loans the new provisions of the Insolvency and the bankruptcy Code will be applicable. The Adjudicating Authority in relation to insolvency resolution and liquidation for corporate persons including corporate debtors and personal guarantors thereof shall be the National Company Law Tribunal having territorial jurisdiction over the place where the registered office of the corporate person is located.For other persons mentioned in the Act the adjudicating authority will be the Debt Recovery Tribunal incorporated under section 3(1) of the Recovery of Debts due to Banks and Financial Institutions Act,1993.  

Insolvency and Bankruptcy Code

Under Section 7 of the newly passed Insolvency and the Bankruptcy Code,2016 a financial creditor may file an application to the adjudicating authority against a corporate debtor. The adjudicating authority within 14 days from the receipt of application ascertains the existence of any such default mentioned by the creditor. The authority if is satisfied with the application issues a notice to the debtor and if the debtor within ten days from the date of receipt of notice fails to make the payment of the debt then the creditor is entitled to make an application before the authority for initiating a corporate insolvency resolution process. The insolvency resolution process should be completed within 180 days from the date of admission of such application. For this purpose a resolution professional shall be appointed to carry out the process of resolution making. If the Adjudicating authority is satisfied that the resolution plan as approved by the creditors under Section 30(4) that is the resolution is approved by not less than 75% of the creditors then under Section 31 it shall by order approve the plan which shall be binding upon the Corporate Debtor and its members employees, stakeholders, creditors etc.

Where the resolution professional at any time during the corporate insolvency resolution process intimates the Adjudicating Authority, but before the confirmation of resolution plan, of the decision of the committee of creditors to liquidate the corporate debtor, then under Section 33 the Adjudicating Authority shall pass a liquidation order. The resolution professional under this case after the order has been passed will act as an official liquidator for the purpose of liquidation. The creditor under Section 42 within 14 days from the date of such decision has a right to appeal against the decision of such liquidator appointed if he gives a decision.

The same powers are conferred on the National Company law Tribunal as well which are vested with the Debt Recovery Tribunal as an adjudicating authority.

The above discussed ways have punishment of imprisonment if the provisions of these Acts are violated.  Along with it, hefty penalties are also incorporated in the provisions of the newly incorporated Acts to make the borrowers aware of the penalties if they fail to comply with the provisions. The Insolvency and the Bankruptcy Code has shifted the existing debtor in possession to a creditor in control regime. The code has introduced the concept of Insolvency Professional as a type of intermediary to oversee the process which has nearly eliminated the process of the court as the decision maker, where a lot of time was consumed in the procedure stage and then on the enforcement stage. There is a surge in the credit market because of this and a sense of stability too. The passing of this Code has given a big boost to ease of doing business in the country. The most important feature which the IBC has brought along with the other ways through which suits of default of loan are settled are the strict timelines which are mentioned in the provisions of the Act. The objective is to curtail tactics of the debtors to delay the enforcement of the decree or the liquidation process. India has a high rate of bad debt problem, the Acts aim to curb that and provide solution to it by creation of a database of the defaulters so the business in the country can flourish easily. As India being a developing country may foreign investors are also coming to the country. The Acts discussed above are a way to bring all the lenders and the debtors on the same line and whether the property is located inside or outside the country the Acts cover it all.