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Debt Recovery

DEBT RECOVERY LAWS IN INDIA

A conspectus of Debt Recovery Laws prevailing in India are enumerated below:

Recovery of Debts Due to Banks and Financial Institutions Act (RDDBFI Act), 1993

India has the Recovery of Debts Due to Banks and Financial Institutions Act (RDDBFI Act), 1993 through which it has established 39 Debt Recovery Tribunals (DRTs) and 5 Debts Recovery Appellate Tribunals (DRATs) for the expeditious adjudication and recovery of debts due to Banks and Financial Institutions and for matters connected therewith or incidental thereto.

The Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016

It has been observed over the years that the disputes are not being resolved within the stipulated period of six months which has consequently resulted in late disposal and high pendency of cases before the DRTs. The Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 was enacted to solve the issue of efficiency in disposal of cases. The Act further amends the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, the Recovery of Debts due to Banks and Financial Institutions Act, 1993, the Indian Stamp Act, 1899, and the Depositories Act, 1996, and for ma`tters connected therewith or incidental thereto.

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

The Act aims to regulate securitisation and reconstruction of financial assets and enforcement of security interest and to provide for a Central database of security interests created on property rights, and other matters connected or incidental to it.

The Act permits secured creditors to take over a collateral security, assisted by the District Magistrate who has the jurisdiction over the security, in case the debtors defaults repayment of debt. Through this the creditor can recover the outstanding debt by selling the collateral security without a court or a tribunal intervening.

Need for a consolidated legislation for debt recovery in India

There were many statutes for the purpose of debt recovery however they failed to provide results mainly because of multiple forums in the statutes for the creditor to approach which created confusion and uncertain jurisdictions.

The Insolvency and Bankruptcy Code, 2016

The Code is a consolidation of the existing Insolvency laws, acting like an umbrella legislation to remove multiple forums for providing clear path to justice. The Code repealed the Presidency Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920 and brought out amendments in 11 other laws including tshe Companies Act, 2013, SARFAESI Act as well as the DRT Act.

Debt Recovery under MSME Act- India

The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 provides a proper legal framework for the regulation and smooth functioning of such enterprises. The Act also provides a speedy dispute resolution mechanism between MSME and buyer.

As defined a “buyer” means whoever buys any goods or receives any services from a supplier for consideration[1]. Any micro and small enterprise (MSE) which supplies goods or services to any buyer shall be protected under these provision of the MSMED Act, 2006. The MSMED Act, 2006 does not provide remedy to the medium enterprises against delayed payment by the buyer.

Duty of the buyer to pay

Section 15 of the MSMED Act, 2006[2] places the onus on the buyer to make all payments good to the MSE supplier within the time period agreed between them. In case there is no mutual agreement in writing then the payment must be made within 45 days form the day of actual delivery. The MSE supplier shall also have a right to charge the buyer compound interest for any such delay in payment. As per Section 16 of the MSMED Act[3], the rate of interest to be charged shall be 3 times the rate as notified by RBI.

Jurisdiction to file a compliant

One of the striking features of the MSMED Act is the jurisdiction clause i.e. Section 18 (4)[4] that provides that the jurisdiction shall be conferred on the Micro and Small Enterprises Facilitation Council in whose jurisdiction the ‘supplier’ i.e. the MSME is registered. Thus, the said provision departs from the general rule as envisaged under Civil Procedure Code, 1908 as per which in case of dispute the suit is required to be filed at the place of Defendant.

Limitation

The MSMED Act is silent on the applicability of limitation but the broad principles of delay and latches shall be applicable. For claiming the due amount from Buyer, the supplier should bring an action under the Act at the earliest. In case the supplier is sleeping over his legal rights, it may not get assistance of MSME Council.[5]

Remedies Available

At the time of drafting the MSMED bill the authorities were of the opinion that the civil disputes were detrimental to the interest of suppliers as they were time-consuming and involved “other procedural complexities”. Thus there is no recourse to courts under the MSMED Act.

As mentioned in section 18 of the MSMED Act, a delay in payment by the buyer beyond 45 days from the date of delivery, the MSE may refer the matter to Micro and Small Enterprises Facilitation Council (MSEFC). It is then at the discretion of the MSEFC, to initiate themselves or seek assistance of any institution providing alternate dispute resolution services. If no settlement is agreed upon, then the matter shall be referred to Arbitration and the provisions of Arbitration and Conciliation Act, 1996 shall be applicable. As per the Act all MSME dispute shall be closed within 180 days.

Filing of online application on MSME Samadhaan portal– The government had launched the MSME Samadhaan portal back in October 2017 to help small businesses with the easy filing application process and tracking them.

The opportunity for conciliation between the two disputing parties is given and on failure or termination of the conciliation without any settlement would result in the dispute being referred to arbitration where the MSEFC will pass a binding arbitral award. The CEO of PSEs and Secretary of the Ministries concerned shall be able to monitor the case status and issue necessary instructions to resolve them.


[1] Section 2(d) of the Micro, Small and Medium Enterprises Development Act, 2006.

[2] Section 15, MSMED Act, 2006 “Where any supplier supplies any goods or renders any services to any buyer, the buyer shall make payment therefor on or before the date agreed upon between him and the supplier in writing or, where there is no agreement in this behalf, before the appointed day: Provided that in no case the period agreed upon between the supplier and the buyer in writing shall exceed forty-five days from the day of acceptance or the day of deemed acceptance.”

[3] Section 16, MSMED Act, 2006 “Where any buyer fails to make payment of the amount to the supplier, as required under section 15, the buyer shall, notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for the time being in force, be liable to pay compound interest with monthly rests to the supplier on that amount from the appointed day or, as the case may be, from the date immediately following the date agreed upon, at three times of the bank rate notified by the Reserve Bank.”

[4] Section 18 (4), MSMED Act, 2006. “Notwithstanding anything contained in any other law for the time being in force, the Micro and Small Enterprises Facilitation Council or the centre providing alternate dispute resolution services shall have jurisdiction to act as an Arbitrator or Conciliator under this section in a dispute between the supplier located within its jurisdiction and a buyer located anywhere in India”

[5] https://samadhaan.msme.gov.in/MyMsme/MSEFC/FAQ.aspx#

Related Articles:

India: Finance Ministry to ease Debt recovery

Unpaid Installments under Settlement Agreement Not Operational Debt under IBC

India: Effective Enforcement of The Insolvency And Bankruptcy Code, 2016  

DEBT RECOVERY LAW FAQs

negotiable-act-faq (11)

The penalty for a dishonor of cheque case under Section 138 of N.I. Act is: Imprisonment upto 2 years; or Fine upto twice the amount of cheque value; or Both fine and imprisonment.

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 A suit can be filed in any competent court in whose jurisdiction any of the following acts have occurred:

  • Place of drawing of the cheque,
  • Address of bank where cheque was presented (holders bank address),
  • Address of bank where cheque is payable (drawers bank address)
  • Place from where notice was received by drawer of cheque

The payee/holder of the cheque can file criminal case under section 138 of Negotiable Instrument Act against the drawer of the cheque and simultaneously can also file a civil case for recovery.

Can both civil and criminal proceedings be filed for dishonor of cheque in India?

Yes, there can be both civil and criminal proceedings in a cheque bounce or dishonor of cheque suit in India.

Penalty for a suit of cheque bounce or dishonor of cheque in India

The penalty for a dishonor of cheque case under Section 138 of N.I. Act is: Imprisonment upto 2 years; or Fine upto twice the amount of cheque value; or Both fine and imprisonment.

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  • A person must have drawn a cheque to another person for payment of certain amount;
  • Cheque has been presented to bank within a period of 3 months from date it was drawn;
  • Cheque is returned by bank unpaid because of insufficient fund in the account;
  • Holder of cheque makes a demand for payment of the said amount of money by giving notice to drawer and within 30 days period it is unpaid and returned;
  • Drawer fails to make payment to the payee
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Section 138 of Negotiable Instruments Act is applicable for the cases of dishonor or cheque or cheque bounce.

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  • When the cheque is given as an advance.
  • When the cheque is given as a security.
  • The disparity in amount stated in words and figures.
  • Alternations in cheques require attestation by the drawer.
  • If the cheque is found mutilated.
  • When a cheque is issued to a charitable trust as a gift or donation.
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Cheque bounce is a term to define the unsuccessful processing of a dispensed cheque due to some reason or reasons.

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A cheque is a bill of exchange drawn on a specified banker, and not payable except otherwise on demand.

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A bill of exchange can be defined as an instrument in writing signed by the maker which contains an unconditional order that directs a certain person to pay a certain sum of money to the order of a certain person or to the bearer of the instrument.

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A promissory note is an instrument in writing that contains an unconditional undertaking to pay a certain sum of money to the order of a certain person or bearer of an instrument which is signed by the maker.

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Negotiable Instrument Act is an Act to define and Law relating to negotiable instruments which are Promissory Notes, Bills of Exchange and cheques.

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A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time, with the payer usually named on the document.

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