Debt Recovery for Business. A Trouble ?

Introduction

The practice of money lending and borrowing has dated back to historical times. People exchange, borrow, and lend to carry out trade relations and to keep economy working. With the advent of globalisation, commercialization and liberalization, every person from shopkeeper to business companies, is taking loans it becomes crucial to regulate it. The conduct of money in form of loans show credit creation boosting economy, however default leads to de scale the economic development. It becomes need of the hour to have legal recourses for the creditors to recover their debt. An economy with high debts can be detrimental to nations GDP and growth.

Prior to various enabling legislation for debt recovery, the sole recourse was to file a civil suit under which was decided as per civil procedure code 1908. The lawsuit may be filed under Order IV of the CPC or  Order 37, which is a summary suit that allows for a quick resolution. This sole procedure led to overburdening of the courts and justice delivering process became tedious and inefficient, due to which Debt Recovery Tribunals (DRT) and  Debts Recovery Appellate Tribunals (DRAT) were formed under the Recovery of Debts Due to Banks and Financial Institutions Act,1993 (RDDBFI Act).

However, the article’s primary focus is on “Ease of Recovery of Debt by Creditors (Individual / Proprietor / Partnership Firm / LLP / Company etc.) from the companies to which Creditor has supplied goods, provided services, and given loans etc.” and how the common person, small businesses, real estate buyers, suppliers of goods & services, banks, NBFCs, society, etc. can get benefit. In this article, we shall look forward to legal recourses for debt recovery under various acts that can aid for speedy disposal of the debt.

Recourses under different laws-

1. Insolvency and Bankruptcy Code, 2016
2. The word “default” is defined under section- 2(11) Insolvency and Bankruptcy Code, 2016 as “means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt”.
3. The framework includes-

• Insolvency professionals.
• The regulator (Insolvency and Bankruptcy Board of India).
• Information utilities.
• Adjudicatory mechanisms ( National Company Law Tribunal- NCLT & National Company Law Appellate Tribunal – NCLAT).

2016. Recovery proceedings can be started against the debtor or corporate debtor which can only be company under IBC, 2016.
2017. Persons that can initiate Recovery process-

• “A person to whom a financial debt (Loan) is owed is known as financial creditor.”[1]
• “An Operational Creditor can be defined as a person to whom an operational debt is owed. “Operational Debt” includes- Goods or Services, employment, or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government, or any local authority.”[2]

It’s a general norm among the creditors that IBC code can be used to recover debt, however recently NCLAT ruled that IBC proceeding cannot become a debt recovery process, it is to bring the company back on its feet.[3] This has also been said in Swiss Ribbons Pvt. Ltd. & Anr. vs. Union of India & Ors.[4]. It is also said in State Bank of India vs. M/s LML Limited and others[5] that “Insolvency proceedings are meant to avert the problems associated with individual creditors separately rushing to recover their debts and the concomitant waste caused by such actions against an already distressed debtor. High Court of Allahabad, has recently barred parallel proceedings in the National Company Law Tribunal (NCLT) and the Debt Recovery Tribunal (DRT).”[6]

1. Provision of NCLT- A petition can be filled by the creditor to a corporate debtor that has defaulted and used the services provided by the creditor. A demand notice will be issued to debtor and if creditor does not receive the payment within 10 days, then an application can be filled initiating recovery process. NCLT within 14 days of application either accepts or rejects the application.
2. Debt recovery under Micro, Small and Medium Enterprise Development (MSMED) Act, 2006-

The MSMED Act, 2016 provides a legal framework for regulation and speedy dispute resolution between MSME and buyer. Section 15 of MSMED act, 2006 places onus on the buyer to complete all payments to MSE supplier in the stipulated time and if there is no agreement then payment to be made within 45 days. The striking feature is section 18 which states that jurisdiction will be conferred upon Micro and Small Enterprises Facilitation Council (MSEFC) in whose jurisdiction the “supplier” i.e., MSME is registered, diverging from the general rule in which suit is instituted in the place of defendant.

In this, if the buyer did not pay the amount in 45 days from the date of delivery, MSME can report the matter to MSEFC which can seek resolution upon the matter. However, if it is unable to, both the parties can resort to Arbitration. Government has launched the MSME Samadhaan portal to aid the small business in filing application and checking the status.

3. Recovery of Debts due to Bank and Financial Institutions (RDBFI Act), 1993

The RDDBFI Act of 1993 and the Debts Recovery Tribunal (Procedure) Rules of 1993 set forth the rules that apply to DRTs. The state’s relevant High Court has supervisory jurisdiction over the DRTs, which are run by the Ministry of Finance. When a bank or other financial institution needs to recover any debt from a person, it can submit an application to the Debts Recovery Tribunal for recovery against that individual. But over time, the Debts Recovery Tribunal has come to deal with two distinct Acts, namely the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act of 2002 and the Recovery of Debts Due to Banks and Financial Institutions (RDDBFI) Act of 1993. In contrast to the SARFAESI Act of 2002, which gives borrowers, guarantors, and anyone else who has been wronged by a bank or financial institution the right to contact the DRT, the RDDBFI Act of 1993 only allows banks and financial institutions to do so.

4. Securitization & Reconstruction of Financial Assets & Enforcement of Security Interest (SARFAESI) Act, 2002

This legislation makes the claim that it will establish a single source of assets for the creation of security interests. The SARFAESI designated several creditors to oversee the collateral properties with help from the district’s pertinent authorities. Security interests created in favour of secured creditors must adhere to the SARFAESI Act’s regulations.

Within 45 days of the date the Section 13(4) Notice is published, applications made according to Section 17 of the SARFAESI Act must be submitted to the DRT. Such Section 17 applications must be decided upon by the DRT in accordance with the DRT Act’s stated process. Any person who is dissatisfied with the decision made by the DRT may appeal to the DRAT.

5. The Arbitration and Conciliation Act, 1996

This strategy is typically used to collect debts that have accumulated as a result of commercial agreements. The existence of an arbitration clause in the original agreement from which the dispute originates is the main criteria that determines whether the issue can be settled. The legal viability of the precise idea of arbitration for debt collection is the key concern in relation to the arbitrability of disputes. In contrast to conflicts emerging out of a right in rem, issues developing out of a right in personam are arbitrable, according to the Supreme Court’s ruling in the case of Booz Allen vs. SBI Home Finance Limited[7]. Additionally, it was emphasised that the doctrine of necessity serves as a safeguard for this understanding and that public policy will also be considered. The Vidya Drolia v. Durga Trading Corporation[8] decision, in which the four-fold test was established and it was determined that a dispute was not arbitrable if-

• It relates to actions in rem that do not pertain to a subordinate right in personam.
• It affects third-party rights.
• It involves an inalienable sovereign function, or as applicable, it is non-arbitrable.

Conclusion

From the above analysis, there are various laws that provide mechanism to recover the debt, however a strict regularization of tribunals is need of the hour. Creditors must have a proper knowledge of the recourses available to incorporate for the recovery. There are reports and data that shows that despite all the recovery laws, a large chunk of creditors are unable to use mechanisms and aid themselves. This calls for better implication, execution and speedy disposal of matters by courts and tribunals. 

Footnotes

[1] Section 5(7) of the Insolvency and Bankruptcy Code,2016.

[2] Section 5(20) of the Insolvency and Bankruptcy Code, 2016.

[3]https://www.business-standard.com/article/companies/ibc-provisions-cannot-be-turned-into-debt-recovery-proceeding-nclat-123031300927_1.html .

[4] AIR (2019) 4 SCC 17.

[5] Writ Petition (Civil) No. – 30285 Of 2017.

[6] Ibid.

[7] (2011) 5 SCC 532.

[8] Civil Appeal No. 2402 Of 2019.