How to create an effective money recovery strategy for different types of clients in different scenarios
Salman Bashar
Experienced Legal Researcher and Freelance Professional | LLB, LLM | Published Author | Contract Drafting | Legal Opinion
Introduction: To recover unpaid debts and financial commitments, businesses and individuals need effective money recovery tactics. While referencing important legal frameworks like the Insolvency and Bankruptcy Code (2016), Indian Contract Act (1872), Negotiable Instruments Act (1881), Order 37 of the Code of Civil Procedure (1908), The Recovery of Debts and Bankruptcy Act (1933), SARFAESI Act (2002), and The Micro, Small and Medium Enterprises Development Act (2006), this assignment explores the development of effective money recovery strategies tailored to various types of clients and scenarios.
1. Money Recovery and Debt Collection: Why is it so challenging?
?I) Problems with Cash Recovery
With factors like the certainty of the agreement's terms, the financial standing of the parties entering into it, etc., some of the most typical issues with money recovery arise right from the beginning of the agreement
?II) Issues with Verbal Agreements
The most fundamental thing a business owner can do is to completely avoid making oral agreements. For the majority of circumstances, this approach ought to be extremely effective, but what about those where oral contracts are the standard business practice? The best course of action in these situations is to have witnesses who can vouch for the validity of such agreements in the case of a breach.
III)?????????????Inadequate Written Agreements
One could assume that switching from verbal to written contracts would take care of all your problems, but guess what? Written ones present considerably greater difficulties. Contrary to oral agreements, where proving the existence of such an agreement ends your work, with written agreements, that is simply the beginning of the full process. The biggest issue with written agreements is that many parties lack the practice of checking the terms and conditions, and the vast majority of contracts are worded really poorly. Many times, people get into agreements that turn out to be void from the start, causing the whole deal to be cancelled and the person who provided the money to lose everything.
IV)????????????Jurisdictional problems
A contract's jurisdiction determines where you can or must travel in order to enforce it. In the event of a violation of a contract entered in Delhi with the State of New York designated as the governing jurisdiction, the harmed party would almost never be willing to travel to New York to enforce the contract. Generally speaking, the agreement will nearly always be governed by a pre-selected jurisdiction. You should investigate this jurisdiction and determine whether it would be advantageous for you 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.
V)????????????????Cheating incidents
Occasionally, despite your best efforts, things simply do not turn out as planned. This can be explained in two ways: (a) by being an act of God; and (b) by being an act of cheating. As a contracting party, you have no recourse for the former because it is well outside the realm of plausible 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 incidents.
?VI)????????????Bankruptcy of the Borrower
With cheating out of the way, there is addition affair that may happen, i.e., Bankruptcy. Bankruptcy relates to the added affair actuality absolutely clumsy to assassinate the arrangement due to a complete banknote crisis and accessible defalcation from his end. The best way to abstain such a book is to attending into the antithesis bedding and banking statements of the added affair at the point of signing. If things assume sketchy, it’s appropriate to either not access into the arrangement or to ask for Indemnifiers or Guarantors.
?VII)??????????Corporates Issues
The biggest issues with corporations are excessive red tape, poor communication, and ineffective management. A person can interact with a business in two different ways as a contracting party. The first is a relationship with an investor, while the second is a business partnership. Although the Securities Contract Regulation Act, the Companies Act, and the SEBI Act all specify deadlines for the former, the fundamental issue is that the investor was unaware of his rights when he signed the contract. The easiest way to learn about an investor's rights is to either browse the SEBI website once or go to one of the SEBI investor education camps. This will enable the investor to exercise his rights and claim what is due to him. For the latter portion of a business relationship, red tape is the main issue, and the best course of action for the 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 the least amount of confusion and errors due to delays in communication. 6
?VI)????????????Difficulties with the Slow Legal System
?Let's face it; the painfully slow legal system is the primary reason why the majority of business owners do not want to go through the complete court process. The solution to this is to choose alternate methods of contract enforcement before going to court, such as Legal Notices, F.I.Rs, and complaining to regulator, etc.
VII)?????????Costly Arbitration
A court will not consider the lawsuit if the agreement has an arbitration clause.?Then, the aggrieved party's only option is to request arbitration. Arbitration is a lot speedier process than litigation, but it is also much more expensive. The institution has a fixed rate chart, and the aggrieved party only pays the amount that considerably lowers costs, making institutionalized arbitration the greatest choice for reducing arbitration costs
VIII)??????Costly Lawyers
The fees that lawyers charge are another major reason why people choose not to use money recovery services. The offended person is typically taken advantage of into paying his lawyer considerably more than he should. Contacting Legal aggregators and similar firms that keep a database of capable and reasonably priced lawyers prepared to resolve cases promptly is the simplest approach to get rid of such problems.
?
2. Case Reference
A)???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.”
B)???Dalmia Cement (Bharat) Ltd. V Galaxy Traders and Agencies Ltd.9
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.”
?
C)???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.”
D)???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.”
?
?3. Recommendation
Section 1: Identifying legal systems:
1.1 Insolvency and Bankruptcy Code (2016): ?Through the National Company Law Tribunal (NCLT) or the Debt Recovery Tribunal (DRT) for individuals, creditors can recover their debts through this code's expedited insolvency resolution and bankruptcy procedures. The Code intends to increase asset value, encourage entrepreneurship, and increase financing availability. A creditor may start the insolvency process against a noncompliant debtor in accordance with the Code. A committee of creditors that decides on the resolution plan is appointed along with an insolvency professional who manages the debtor's assets.
1.2 Indian Contract Act (1872): This law regulates the enforcement of contracts, highlighting the significance of legally binding contracts and their provisions in efforts to recover debt. The Act can be used by a creditor to reclaim the unpaid balance and enforce the contract's provisions.
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,?with intent to deceive another party thereto his agent, or to induce him to enter into the contract;
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.13
?
1.3 Negotiable Instruments Act (1881): This law controls how promissory notes, bills of exchange, and checks are used and enforced, allowing creditors to seek redress in the event that they are not honored. A creditor may file a lawsuit against the debtor and cite the Act as justification to recoup the unpaid balance.
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
领英推荐
“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…”
With the exception of the fact that it only applies to checks, this provision is very similar to the first two. This clause governs the majority of Negotiable Instruments Act contract enforcement cases.
1.4 Companies Act, 2013
Only when a Company is the violating party in an agreement is this statute applicable. The majority of actions brought under this law fall into one of two categories: (A) class actions, where a particular class of people files a lawsuit to recover debts owed to them, or (B) business relationships, where a party files a winding order to enforce a contract in order to recover debts and money owed 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:—
where the dividend could not be paid by reason of the operation of any law;
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;
where there is a dispute regarding the right to receive the dividend;
where the dividend has been lawfully adjusted by the company against any sum due to it from the shareholder; or
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—
on receipt of a report of the Registrar or inspector under section 208;
on intimation of a special resolution passed by a company that its affairs are required to be investigated;
in the public interest; or
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—
the company;
any creditor or creditors, including any contingent or prospective creditor or creditors;
any contributory or contributories;
all or any of the persons specified in clauses (a), (b) and (c) together;
the Registrar;
any person authorized by the Central Government in that behalf; or
in a case falling under clause (c) of sub-section (1) of section 271, by the Central Government or a State Government.
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) 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”
.
Section 2: Specialized Approaches for Recovery:
3.1 Order 37 of the Code of Civil Procedure (1908):
3.2 The Recovery of Debts and Bankruptcy Act (1933):
3.3 SARFAESI Act (2002):
?3.4 The Micro, Small and Medium Enterprises Development Act (2006):
?
?4. Conclusion:
?The legal frameworks described in this assignment must be thoroughly understood in order to develop an efficient money recovery strategy. Businesses and individuals can increase their chances of successful debt recovery by adapting techniques to a variety of clients and situations. A thorough manual for navigating the complexities of debt recovery in various contexts can be found in the references to the Insolvency and Bankruptcy Code (2016), Indian Contract Act (1872), Negotiable Instruments Act (1881), Order 37 of the Code of Civil Procedure (1908), The Recovery of Debts and Bankruptcy Act (1933), SARFAESI Act (2002), and The Micro, Small and Medium Enterprises Development Act (2006).
?
?
1.??????Chattopadhyay, Vivek. ‘Debt Collection and Money Recovery in India: Challenges and Solutions’. iPleaders, 11 Aug. 2016, https://blog.ipleaders.in/debt-collection-money-recovery-india-challenges-solutions/.
2.??????Ibid.
3.??????‘Debt Recovery’. S.S. Rana & Co., https://ssrana.in/litigation/criminal-litigation-india/debt-recovery/. Accessed 10 Aug. 2023.
4.??????Ibid.
5.??????Chattopadhyay, Vivek. ‘Debt Collection and Money Recovery in India: Challenges and Solutions’. iPleaders, 11 Aug. 2016, https://blog.ipleaders.in/debt-collection-money-recovery-india-challenges-solutions/.
6.??????Walia, Shreyika, et al. ‘Debt Recovery Laws in India | Debt Recovery Process in India’. Ahlawat & Associates, 17 Nov. 2022, https://www.ahlawatassociates.com/blog/legal-framework-for-debt-recovery-in-india/. (Accessed at 10th August,2023)
?
7.??????Ibid.
8.??????Chattopadhyay, Vivek. ‘Debt Collection and Money Recovery in India: Challenges and Solutions’. iPleaders, 11 Aug. 2016, https://blog.ipleaders.in/debt-collection-money-recovery-india-challenges-solutions/.
9.??????M/S. Kailash Nath Associates vs Delhi Development Authority & Anr on 9 January, (2015), CIVIL APPEAL NO. 193 OF 2015 ?[ARISING OUT OF SLP (CIVIL) NO.32039 OF 2012]
10.???Dashrath Rupsingh Rathod vs State Of Maharashtra & Anr on 1 August, (2014), IN THE SUPREME COURT OF INDIA, CRIMINAL APPELLATE JURISDICTION, CRIMINAL APPEAL NO. 2287?OF 2009
?
11.???Maharaja Exports And Anr. vs Apparels Export Promotion?on 13 February, 1985, 1986 60 CompCas 353 Delhi
?
12.???Insolvency and Bankruptcy Code (2016)
13.???Indian Contract Act (1872)
14.???Negotiable Instruments Act (1881)
15.???Companies Act, 2013
16.???Order 37 of the Code of Civil Procedure (1908)
17.???The Recovery of Debts and Bankruptcy Act (1933)
18.????SARFAESI Act (2002)
19.???The Micro, Small and Medium Enterprises Development Act (2006)