Laws & Legal Procedure for Recovering Outstanding Debts & Unpaid Money: Lawyers Advice

At times money extended to a company or an individual becomes irrecoverable. And various provisions in the law provide for the recovery of such debts. Some of these important provisions that come to the rescue of creditors are listed below:

Recovery of Outstanding Debt & Unpaid Money under the Negotiable Instruments Act, 1881
The introduction of Chapter XVII containing sections 138 to 147 was done to improve the efficacy of banking operations. Another prominent reason was to prevent the payee from suffering on account of non-payment due to dishonour of cheque. On that account, Section 138 of the Act lists the offences and highlights situations when a case of dishonour of cheque can be filed. It is often viewed as a person-specific law but section 141 deals with the offences of section 138 committed by a company. In Anil Gupta V. Star India Pvt Ltd & Ors [Criminal Appeal No. 1364 of 2014], the Hon’ble Supreme Court held that the Managing Director is only vicariously liable. So, if the accused company breaks free, the case can’t be pursued.

Now, to go ahead with the recovery of debt, the following conditions must be fulfilled else the commission of an offence under this section would be disregarded:

1. The cheque must be presented within its validity period or 6 months from the date it is drawn, whichever falls early.
2. The payee must give notice of demanding money to the drawer, within 30 days of the cheque being dishonoured by the bank.
3. The drawer has failed to make payment to the payee, despite the notice being served.

Grounds for Dishonour of Cheque:

1. The foremost ground is insufficiency of funds which occurs when the amount written in the cheque is more than what is contained in the account.
2. If the signature of the drawer didn’t match with what the bank has, the cheque would get dishonoured.
3. If it is a post-dated cheque, presented after the date mentioned on the cheque.
4. Account closed by the drawer is another.
5. If the cheque is presented after its expiry that is 3 months.
6. When a stop instruction is given to the bank by the drawer to stop the processing of the cheque or cancel payment.

If the aforementioned conditions are satisfied, a case can be filed and these are some important documents needed for it:
● Original Cheque
● Cheque Return Memo
● Copy of Legal Notice
● An Affidavit supporting the Complaint

In all this, the question of territorial jurisdiction under section 138 is tricky. The Hon’ble Gujarat High Court in Brijendra Enterprise V. State of Gujarat & Ors [Criminal Misc.App. No. 13062 of 2011] stated that a complaint should be filed in a court within whose jurisdiction the branch of the bank is located where the payee maintains his account. Recently, the Hon’ble Supreme Court under Article 142 of the Constitution of India passed an order in May, 2020 to extend the limitation period. This was done considering the pandemic and it applies to section 138 of the Negotiable Instruments Act, 1881 as well.

Recovery of Outstanding Debt & Unpaid Money under the Civil Procedure Code, 1908
Summary Suit– One of the best remedies for recovery of money under Civil law is the summary suit. It is an expeditious way of enforcing a right which is contained under order XXXVII of the Code. This suit can be instituted in case of bills of exchange, hundies and promissory notes, and is a viable option to recover debt. In pursuance, a plaint must be presented in the court of appropriate jurisdiction. It describes the facts of the case along with affirming that the suit has been filed under order XXXVII and no other relief has been claimed that lies outside the ambit of order XXXVII.

Procedure for Summary Suit:

1. Post institution of the plaint, the Court issues a summon to the defendant and s/he has to enter an appearance within 10 days.
2. After the defendant enters an appearance, s/he shall file a leave to defend within 10 days since a defendant doesn’t usually have the right to contest till it proves the dispute is a triable one.
3. If within 10 days, the defendant doesn’t enter an appearance or is unable to prove meritance for leave to defend, the decree is passed in favour of the plaintiff.
4. If he successfully files leave to defend and subsequently a favourable order is passed, the defendant can file a written statement.
5. Thus commences the trial after arguments and later the decree is passed.

In Uma Shankar Kamal Narain and Anr V. MD Overseas ltd [2007 AIR SC(SUPP) 521], the Hon’ble Supreme Court upheld previous judgments passed by the lower courts which rendered the grounds relied upon as sham, in case of a leave to defend summary suit relating to dishonoured cheques.

Recovery Suit- Another effective remedy for recovery of money lies under Order IV of the Code of Civil Procedure. The Recovery suit can be filed in the District or the High Court depending on its pecuniary value. Determination of territorial jurisdiction precedes the pecuniary part and it generally is where the defendant resides or carries business or where the cause of action arises.

Procedure for Recovery Suit:

1. A plaint which compiles a description of facts, amount involved etc., has to be instituted.
2. Documents are to be submitted supporting the plaint, like the written contract, particulars of the claim etc., along with an affidavit proving the plaint and the facts.
3. Post examination of the plaint, the Court sends out the summon to the defendant.
4. Then, the defendant enters an appearance after which s/he is required to file its written statement.
5. Framing of issues involved commences then begins the trial. And after the conclusive evidence, finally the arguments are heard and the decree is passed.

Recovery of Outstanding Debt & Unpaid Money under the Insolvency and Bankruptcy Code, 2016
Creditors were among those who benefited the most from the inception of the Insolvency and Bankruptcy Code, 2016. Part II of the Code provides for the Corporate Creditors to initiate the insolvency procedure. However, proving the debtor’s default is a prerequisite.

For recovery, the creditor can approach the Adjudicating Authority which is the National Company Law Tribunal (NCLT) here, under Section 10 of the IBC. The financial or operational creditor can thus initiate the Corporate Insolvency Resolution Process(CIRP), a mode to assess the defaulter’s capacity to repay. In Standard Chartered Bank v. Satish Kumar Gupta, R.P. of Essar Steel Ltd. & Ors [Civil Appeal No. 8766-67 of 2019], the Hon’ble Supreme Court set aside NCLAT’s order and emphasised on equitable treatment of creditors, instead of equal treatment for unequals.

Steps Involved:

1. Creditors can make an Application to the NCLT which aims at bringing the debtor into the resolution. For that, the creditor must provide proof of a default of at least Rs 1 lakh. In lieu of COVID-19, this limit has been relaxed to Rs 1 crore since March, 2020. Further, the NCLT gets 14 days to either accept or reject this application.
2. Post inclusion of the debtor, the Board of Directors is suspended and management comes under the control of an Interim Independent Resolution Professional. A Moratorium is also formed which forbids commencement or continuance of legal proceedings involving the corporate debtor.
3. The interim independent resolution professional starts the verification process. Then, a committee of creditors is also constituted.
4. Now, a resolution professional is appointed by the creditors. It could be the same interim professional or a new professional which is decided by the creditors.
5. Now, the creditors get 180 days to accept the CIRP. If accepted, it becomes binding on all the parties involved, otherwise, the corporate debtor is ordered to liquidate.

In K. Sashidhar vs. Indian Overseas Bank[AIR 2019 SC 1329], the Hon’ble Supreme Court restricted the jurisdiction of the Adjudicating Authority. It stated that the NCLT has no jurisdiction and power to examine the commercial decision of the Committee of Creditors. This method of recovery has a lot of advantages for the creditors. There is transparency throughout, and together the NCLT and IBBI keep the functioning smooth. More importantly, it’s a hassle free and time-bound process that ensures time-bound filing, recovery and so on. However, in the light of the lockdown, the government has exempted this period from the CIRP timeline.
Authored By: Adv. Anant Sharma & Ayushi Shrivastava