Recovery of Trade Debts

There are various options available to a creditor who is looking to recover a trade debt. The said options are:

1. A creditor can file a commercial suit for recovery under Commercial Courts Act, 2015 read with Code of Civil Procedure, 1908 (“CPC”) before a competent civil commercial court.
2. In case of a bank or financial institution, the creditor can also approach Debts Recovery Tribunal (“DRT”) and file an Original Application for recovery of trade debt under Recovery of Debt Due to Banks and Financial Institutions Act, 1993 (“RDDB Act”).
3. In case where there is an arbitration agreement between the parties, the debt can be recovered through arbitration proceedings to be conducted as per Arbitration & Conciliation Act, 1996.

Note: In India, a financial creditor can approach the Court under Insolvency & Bankruptcy Code, 2016 in case of a default by the borrower/ debtor, however, as per the law settled in India, insolvency proceedings are not recovery proceedings but much more serious than recovery proceedings, where the borrower/ debtor can also be declared insolvent and the assets of the borrower/ debtor can be liquidated.

Further for recovering debt from the debtor, the creditor can also avoid taking legal measures by trying the Out-of-Court settlement. The same may be achieved by sending notices, etc. to the debtor calling upon the debtor to pay the debt.

Alternative to legal options
A creditor should always send a demand notice/ legal notice to the debtor before taking any legal recourse. The aforesaid notice can be an invite to the debtor for reconciliation of monies credited or settlement or negotiation to resolve the issues relating to the debt between the said creditor and debtor.

Does the amount due in any way determine the legal option(s) that are open to a creditor for its recovery?
In so far as filing a suit for recovery before competent civil court is concerned, the amount due only determines the pecuniary jurisdiction of the court to adjudicate the suit and no other aspect. However, in case of an original application to be filed by a bank/ financial institution under RDDB Act, the amount of debt must be at least INR 2 Million. If the debt is less than 2 million the bank/ financial institution can only file a suit for recovery before regular civil court

Are there any procedural requirements to consider before formal legal proceedings can be commenced? Can penalties be imposed on parties that do not comply with these requirements?

Yes, in certain cases, statute mandates that creditor must send a legal notice to the debtor before commencing the recovery proceedings. For instance, as per Section 80 of CPC, it is mandatory for the creditor to serve a legal notice before filing of a suit if the opposite party is Government or a Public officer.

Similarly, in cases of recovery to be made by banks or financial institutions, it is a mandatory for them to declare the account of the borrower as a non-performing asset and serve a legal or demand notice before initiating recovery proceedings before DRT or any other forum for that matter.

Further in commercial contracts ordinarily, the dispute resolution clauses provide for mediation, settlement or negotiation between the parties, before recovery proceedings can be initiated.

Ordinarily in a legal/ demand notice, the following details should be provided:

• There should be precise mentioning of the facts and statements in relation to the grievance for which action is to be taken.
• Mentioning of relief from the grieving party.
• Mentioning the ways to resolve the problem in hand with the summary of the facts.

Letter before claim
In so far as requirement of sending a letter before claim or a statutory demand is concerned, the same has already been taken care of in answer to the previous question.

The alternative dispute resolution is mandatory in cases, where parties by way of an agreement, have agreed to adopt such mechanism in case of any dispute. Besides, in a recent amendment in CPC, in case of a commercial dispute, parties have to resort to mandatory mediation/ settlement talks before the actual court proceedings can commence.

Further, in case an agreement contains an arbitration clause, it is mandatory to resort to arbitration. In other cases, it is not mandatory. Besides the above, Section 89 of CPC provides that if it appears to the court that there exists a possibility of settlement, the court may with the consent of the parties, refer them to Alternate Dispute Resolution methods like Arbitration, Conciliation, Mediation or Lok Adalat to enable them to settle their disputes.

Penalties for non-compliance
In cases where there is a statutory mandate or a contractual mandate of sending a demand/ legal notice to the debtor before initiating any legal action against the debtor, the creditor must fulfill the said mandate. Failing to do so may result in adverse consequences including rejection of claim on the ground of being premature and not being a validly instituted proceeding.

In cases where such conditions are not mandatory, a party can still send a legal notice before initiating any legal action against the defaulter, however, non-sending of notice shall not have any adverse impact on the claim or proceeding.

Before commencing legal proceedings, are there any steps that a creditor can take to verify the debtor’s financial strength or their solvency status?

Debtor’s financial strength
It is advisable to the creditors to verify the debtor’s financial strength or their solvency status before initiating any legal proceeding through the statutory documents filed by such debtor or through any other legitimate means. This will enable a creditor to establish before the Court that the debtor despite being in a position to pay the debt has failed to do so.

What is the limitation period in your jurisdiction for filing a claim for recovery of a trade debt in the local courts? Can this period be extended? If so, on what grounds can extensions be granted?

The period of limitation for such suits/claims is three years from the date of accrual of the cause of action in terms of Limitation Act, 1963. The position is same in case a proceeding is initiated under CPC or RDDB Act.

Extension
If there is any delay in filing the claim/ recovery suit, the same shall not be condoned by the Court. There is no provision either in CPC or RDDB Act. The claim in such case shall lapse and become a time barred debt.

Which court(s) have the jurisdiction to determine trade debt recovery disputes in the first instance? Are there any special courts for trade debt recovery?

As stated earlier, the amount due shall determine the pecuniary jurisdiction of the civil courts in such cases. In India, in 2015 a new statute namely Commercial Courts, Commercial Division & Commercial Appellate Division Act, 2015 was introduced, whereby a trade debt above INR 300,000 was defined as a commercial dispute. For commercial disputes, commercial courts were established in various states of India at District level. In cases where High Courts have original pecuniary jurisdiction, commercial courts were established in such high courts. Accordingly, commercial courts shall take up matters relating to trade debt depending upon the total amount involved in the matter.

Similarly, if a bank or financial institution wants to initiate recovery proceedings under the RDDB Act before the competent DRT, the amount involved in the claim should be at least INR 2 Million.

Special courts
The Recovery of Debt Due to Banks and Financial Institutions Act, 1993 (“RDDB Act”) provides for establishment of Debt Recovery Tribunals in various cities in India for expeditious adjudication and recovery of debts due to banks and financial institutions. As of date, 39 Debt Recovery Tribunals (DRTs) and 5 Debt Recovery Appellate Tribunals (DRATs) are functioning across the country.

What are the main stages of trade debt recovery proceedings?
In case of a proceeding being initiated under CPC, the creditor has to file a plaint/ claim document before the competent court having jurisdiction in the matter in the prescribed format under Order VI of CPC. The claim document must be drafted in accordance with CPC and the rules prescribed therein.

Further, in a recovery proceeding under RDDB Act, the creditor i.e. bank or financial institution has to file an original application under Section 19 of the aforesaid Act, seeking recovery of loan or credit given to the defaulting debtor, in the format prescribed under the DRT rules and by providing particulars of debt in the application.
In respect of a contract containing arbitration agreement, the Claimant is required to invoke the arbitration by issuing a letter and appointing its nominee arbitrator or suggesting names of sole arbitrator to be appointed, as the case may be. Once the arbitral tribunal is constituted, the claim has to be filed providing the details and particulars of the claim. Though no specific format is prescribed under Arbitration & Conciliation Act, 1996.

Court fee
For a recovery suit to be filed under CPC, the court fee is determined in terms of Court Fees Act, 1870. In India, in every state separate court fee is prescribed and therefore, the exact amount payable as court fee shall depend upon the value of the claim and the state where the claim is being filed.

In so far as filing a claim before DRT is concerned, the court fee shall be payable as per Rule 7 of the DRT (Procedure) Rules, 1993. The court fee payable shall be INR 12,000/- where debt is INR 1 Million, and thereafter INR 1000 for every Hundred Thousand rupees of debt due or part thereof in excess of INR 1 Million subject to a maximum of INR 150,000/-.

Service
After filing of the claim document/ plaint, if the court is satisfied with cause of action, the court may issue summons to the debtor/ defendant. The service of summons along with claim document/ plaint and supporting documents is governed under Order V of CPC, wherein the detailed procedural rules are provided.

In so far as DRT is concerned, in terms of Section 19(4) of RDDB Act, the DRT before which claim has been filed shall issue summons to the debtor/ Defendant.
As stated earlier, the service of claim document and plaint is governed in terms of Order V of CPC and if the Plaintiff fails to serve the documents, ordinarily court grants him another opportunity for doing so. However, if Plaintiff fails to serve the document even thereafter, the claim may fail.
There are similar provisions in respect of a claim before DRT as well.

In arbitrations also if the claim documents are not properly served, the Claimant shall get another opportunity of doing so. However, in case of repeated failures of the Claimant, the claim may fail.

Ordinarily, the time-limits for service of claim documents and plaint is provided in the order issuing summons itself.

Statement of defence
Yes. In case of a commercial suit for recovery, the debtor/ defendant has a statutory time-limit of 30 days from the date of service of summons to file its response/ defence. Such time-limit may be extended at the discretion of the court, however, the same shall not exceed 120 days from the date of service of summons.

Insofar as the recovery proceedings under Section 19(5)(i) of RDDB Act is concerned, the debtor/ defendant has a time limit of 30 days from the date of service of summons to file its response, which can be extended maximum by 15 days more.

In case the debtor fails to file a defence even after the extended statutory period, the Defendant’s right to file its defence shall be forfeited.

Subsequent stages
After the defence has been filed, the case shall then proceed for trial and the following steps shall be followed:

• Admission/ Denial of documents by both the parties of each other’s documents;
• Framing of Issues;
• Examination-in-chief and cross-examination of witnesses

Passing of decree or rejection of suit after hearing final arguments

Are there any fast-track or summary proceedings in place to determine trade debt recovery cases? How long do such proceedings take?

• The debts are certain, modest (i.e. of low value) and undisputed.
• Or where the creditor has no real prospect of succeeding or the debtor has no prospect of defending the claim, and there is no other compelling reason why the case or issue should be disposed of at trial?

If so, can you briefly describe how these proceedings are carried out?

Duration of proceedings
Yes. There are certain summary procedures provided under CPC, which are as follows:

• Order XXXVII of CPC provides for summary proceedings for recovery of debt. Such proceeding can be initiated in cases of cheque, promissory bills, hundis or in a case where debt is arising out of a contract and is an admitted debt;
• Further, under Order XIIIA of CPC, on an application by the Plaintiff/ Defendant, if the court is of the view that the Plaintiff has no prospect of succeeding in the matter of Defendant has no prospect of successfully defending the claim, the Court may pass a summary judgment.
• Besides, as per Order XII Rule 6, the Court may proceed to pass a judgment on the basis of admissions made by the parties.
• Similar procedure is followed in RDDB Act also, wherein in terms of Section 19(5B), the tribunal may order the defendant to pay the amount of admitted claim within 30 days of the order.

What provisional measures can be taken to preserve the evidence or creditor’s interests pending a final judgment? On what grounds can these measures be granted?

The laws in India provides for interim injunctions to preserve the evidence/ subject matter/ subject amount involved in case of a trade debt. The same are as follows:

Under Order XXXIX Rule 1&2 of CPC, Court can grant interim injunction against the Defendant to preserve the subject matter of the claim as well as against the assets of the Defendant in certain circumstances;

Under Order XXXVIII of CPC, the Court may pass an order attaching the property of the Defendant at any stage during the pendency of the suit;

Under Section 19(13A) of RDDB Act, the DRT can pass an attachment order against the Defendant from disposing off any property which may include movable, immovable property, any intellectual property rights or other properties defined under the Act;

Further, in case of an arbitration under Section 9 of Arbitration & Conciliation Act, the Court can grant interim injunction to protect the subject matter or subject amount of the dispute;

Under Section 17 of Arbitration & Conciliation Act, 1996, even the arbitral tribunal has powers to grant injunction to protect the subject matter or subject amount of the dispute;

Grounds
If the court is of the opinion that the debtor may abscond or may not cooperate properly in recovery proceedings, or the decree, if any passed by the Court may not be effectively executed, the court may at its own discretion or on an application filed by the Plaintiff/ Claimant pass such orders as mentioned above.

Once the trial has concluded, what remedies are typically ordered by the courts if the creditor succeeds in obtaining judgment against the debtor?
Once the trial has concluded, the Court shall proceed to pass a decree in favour of the creditor or reject the claim. In case, the creditor succeeds in obtaining judgment in his favour and against the debtor, the creditor can execute the said judgment/ decree before the Court, in case the debtor, does not honour the judgment. Upon filing of the execution, if the debtor still refuses to pay or is unable to pay, the court/ tribunal may order the attachment of the property and/ or assets of the debtor to satisfy the decree/ judgment.

In cases where Recovery Certificate is issued under RDDB Act, a Recovery Officer is appointed who oversees the execution of such Recovery Certificate.

In case of an arbitral award, the same can be executed unless a stay is granted on the same.

: Late payment interest

Are there any statutory rules relating to late payment interest? If so, are there any rules on when and how much interest can be charged on late payment? Can it be freely charged subject to the agreed contract terms?
The interest levied on the late payment of the credit amount, in normal circumstances, is governed by the Interest Act, 1978 and such interest will accrue till the date of realisation of the payment. As far as the rate of interest is concerned, the Court has the discretion to decide the rate of interest.

In arbitrations, however, if there is a contract between the parties which provides for a particular rate interest payable on any loan or credit amount or delayed payment, then the same shall become payable. However, if no such rate has been agreed between the parties, the arbitral tribunal has to award simple interest in terms of Interest Act plus 2%.

What legal costs are considered recoverable from the other party in your jurisdiction? Can the successful party recover legal costs from the unsuccessful party in litigation? Do courts have any discretion to rule over costs if the parties have already made an agreement on costs?
Yes, legal costs which include the court fees, counsel’s fee and other litigation cost can be claimed as costs from the unsuccessful party in litigation/ arbitration. However, Courts in India are very conservative in awarding the actual cost and nominal cost is allowed.

In terms of Section 31A of Arbitration & Conciliation Act, 1996, the arbitral tribunal has the power to award cost, which may include counsels’ fee, arbitrators’ fee and other costs provided therein.

Unsuccessful party pays costs
Yes, if a party is unsuccessful, he may be asked to pay the cost which shall be included in the final decree which is passed by the court in favour of the successful party.

Court’s discretion on costs
Imposition of costs is always within the discretion of the Courts and the same is imposed after considering the actual incurring of such claimed costs by the parties. However, if the parties have a pre-litigation agreement or arrangement that a particular cost will be payable by the unsuccessful party to the successful party, such amount shall be considered by the Court/ tribunal only.

How are costs calculated:

• (a) If a dispute has been settled before legal proceedings are initiated (and there is no prior agreement on costs)? Will the creditor be entitled to recovery of its legal costs?
• (b) If the parties have agreed on who will pay the costs, but are unable to decide how much costs should be recovered, is there a procedural mechanism by which the court may decide the issue?
• (c) If the dispute settles after legal proceedings have been commenced, and the parties cannot agree on costs? Can the court exercise its discretion to determine the issue of costs?
• (d) If the dispute is settled at trial (but there is no agreement on costs)? How does the court decide whether legal costs are recoverable in such cases?

Recovery of legal costs before legal proceedings have been initiated
No, the creditor will not be entitled to recover any legal costs if the matter is settled before the initiation of legal proceedings. However, both parties are free to decide on the aspect of legal costs while settling the disputes before the initiation of legal proceedings.

Cost-only proceedings
If the parties have agreed on payment of costs, then the Court will decide the quantum of cost in terms of Section 35 of CPC. Similar powers are available with DRT.

Recovery of legal costs after legal proceedings have been initiated
Yes, as stated here in above, the court/ tribunal has full discretion, on the aspect of costs.

Recovery of legal costs where dispute is settled at trial
As stated here in above, the court/ tribunal has full discretion, on the aspect of costs. In some cases, Court in its discretion may also allow refund of court fees paid by the creditor.

When judgments are considered due and enforceable in your jurisdiction? If the debtor fails to satisfy the judgment, what is the procedure to enforce it in the local courts?
In terms of Section 33 of CPC, after hearing the case, the court shall pronounce judgment and decree shall follow. The decree is enforceable in terms of Section 38 read with Order XXI of CPC. There is no statutory time-limit to pay the debt amount because, generally the decree itself specifies the time limit to satisfy the decree.

Further, in terms of Section 19 (21) of RDDB Act, a Recovery Certificate is issued and in terms of Section 25 of RDDB Act, a Recovery Officer is appointed to execute/ enforce the judgment of the tribunal.

An arbitral award can be executed like a decree passed under CPC and in terms of Section 36 of Arbitration & Conciliation Act, 1996 read with Order XXI of CPC.

Payment in instalments
If the judgment calls for payment by the debtor in instalment, then the debtor shall be called a defaulter on the date when the instalment was due and payment was not made.

Procedure for enforcement
Procedure for enforcement of decree is governed under Order XXI of CPC, wherein execution of all kinds of decree is given in detail.

Further in terms of Section 25 of RDDB Act, the recovery can be done by various modes which have already been elaborated in the said Act.

Time limit
As per Limitation Act, 1963, different period of limitation is provided for different types of decrees. The same are as follows:

• Article 135 – The limitation for filing execution of a decree granting a mandatory injunction is three years;
• Article 136 – The limitation for filing execution of a money decree or order granting delivery of any property or any order of a civil court is twelve years. However, for a decree granting a perpetual injunction, there is no limitation prescribed.

What are the rules in relation to filing an appeal against judgments rendered in the first and second instance?

Appeal
In terms of Section 13 of Commercial Courts Act, 2015, an appeal in case of a decree passed under CPC shall lie in terms of Order XLIII of CPC, before Commercial Appellate Division established at High Court. No second appeal is prescribed under CPC against an order passed in an appeal arising out of a commercial dispute.

In case of a proceeding before DRT, an appeal shall lie before the DRAT in terms of Section 20 of RDDB Act.

In case of an arbitral award, no appeal is prescribed, however, an application can be filed under Section 34 of Arbitration & Conciliation Act, 1996 seeking to set aside the arbitral award.

Grounds for appeal
There can be various grounds for appeal under CPC and RDDB Act. Such grounds for challenging the judgment may inter alia include, that:

• the judgment is in contravention of any law for the time being in force in India;
• the judgment is suffering from any material irregularity which is error apparent on record;
• the procedure was not correctly followed;
• the judgment was passed ignoring the evidence;
• the judgment is in contravention of public policy of India.

Time limit
In terms of Commercial Courts Act, 2015, an appeal against a judgment passed under CPC, can be filed within sixty days from the date of judgment.

An appeal under RDDB Act, can be filed before DRAT within thirty days. However, in case of delay in filing the appeal, the delay may be condoned by DRAT in its discretion, if the Appellant provides sufficient explanation for such delay.

How long do local courts normally take to determine and enforce debt recovery claims?
In so far as a civil action under CPC is concerned, there is no time limit prescribed and courts ordinarily takes 3-5 years to finally dispose off a suit. However, in case of a suit where summary procedure has to be followed, the same has to be disposed off in a time bound manner prescribed therein.

Under RDDB Act, the recommended time to complete the recovery proceedings under Sections 19(24) of the said Act is 180 days from the receipt of the application.

In an arbitration, as per Section 29A, the proceeding has to be concluded with twelve months of completion of pleadings, which can be extended for six months by the mutual consent of parties. In case further extension is required, an application is to be file before the competent Court.

ies

To what extent are insolvency proceedings in court (or the threat of their commencement) considered an effective tool for debt recovery? Are there any disadvantages in issuing insolvency proceedings against the debtor?

Insolvency proceedings: an effective tool

Disadvantages in issuing insolvency proceedings against debtors
As per the law settled in India, Insolvency proceedings are not meant to be used as debt recovery tool. However, having said that considering the far-reaching effects of insolvency proceedings on a debtor, it is much more efficient than, recovering debt through regular court process which can get really frustrating for the creditor.

Can a creditor commence insolvency proceedings against the debtor if the debt is genuinely disputed or if the debtor has a genuine cross-claim right or right of set-off?

No.

Insolvent debtors

When is a debtor deemed insolvent in your jurisdiction?
In case no resolution plan is submitted or approved by the Court during the Insolvency proceedings initiated against a debtor and the debtor’s liquidation value is less than its total debts, then debtor’s assets are required to be liquidated in terms of Section 53 of Insolvency & Bankruptcy Code, 2016. In such case, the debtor shall be declared insolvent.

Law on insolvency
The insolvency matters in India are governed in terms of Insolvency and Bankruptcy Code, 2016 (IBC).

Can a debtor, incorporated or governed by the laws of another jurisdiction and doing business in your jurisdiction, be subject to insolvency proceedings in your jurisdiction?

No insolvency proceedings can be initiated against an entity incorporated and governed by the laws of another country, though carrying out business in India. However, if any such entity has an Indian sister concern, which is incorporated in India, in that case insolvency can be initiated against the Indian entity. Section 3(8) of IBC defines ‘Corporate Debtor’ as a person who owes debt to another person. Further, Section 3(7) of IBC describes ‘corporate person’ as defined under Section 2(20) of Companies Act, 2013. Section 2(20) of Companies Act, 2013 envisages that corporate person includes only those companies which are incorporated under Companies Act, 2013 or under any previous company law i.e. Companies Act, 1956. Therefore, it can safely be surmised that winding up of foreign entities or initiation of CIRP against foreign entities is not permissible under IBC.

Can debt collection be outsourced to third parties such as debt recovery agencies in your jurisdiction?
In India there are no such recognized agencies. However, some banks and financial institutions engage some third-party private agencies for recovery of dues.

In terms of Section 5 of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”), certain Asset Restructuring Companies are recognized in India, which undertake debt collection business by buying out the debt portfolio from banks and financial institutions.

Steps to reduce recovery costs

Are there any steps that a creditor can take to ensure that any legal costs incurred in trying to recover the debt will not outweigh the amount of the debt?
Yes, the creditor can ensure that the credit shall be given to those corporate debtors who can furnish proper guarantees, in order to minimize the risk of default. Further, the creditor can draw up proper credit agreement incorporating various rights and liabilities of the debtor and also including arbitration agreement. The creditor can also ensure to incorporate certain clauses in the credit agreement in respect of payment of interest and legal cost in case of default. These steps can ensure that if there is a default on the part of the debtor, the creditor can recover the debt without incurring heavy legal costs.

Are alternative dispute resolution (ADR) methods commonly used in your jurisdiction to recover trade debts?

Yes, if the creditor and debtor have executed a credit agreement incorporating arbitration clause, then the arbitration can be a recourse to resolve the dispute. Further, if in a recovery proceeding initiated under CPC, the court finds that there is a prima facie possibility that the dispute can be resolved through mediation or Lok Adalat, the court may direct the parties with their consent to resolve/ settle the dispute through Alternate Dispute Resolution (ADR) mechanism.

Are the parties required to consider ADR before and/or during court or insolvency proceedings?

In terms of Section 12A of Commercial Courts Act, 2015, it is mandatory for the parties to exhaust the remedies of ADR before initiating recovery proceedings. Insofar as, during the pendency of proceedings, as stated earlier, in terms of Section 89 of CPC, with consent of parties, the court may direct the parties to explore the possibilities of settlement through ADR mechanism.

Further, IBC does not prescribe any provision for considering ADR methods during the pendency of insolvency proceedings. However, the parties are free to consider ADR process before the commencement of insolvency proceedings.

Is ADR considered as a serious and viable alternative to formal legal proceedings in your jurisdiction?

Yes, ADR is considered as a serious and viable alternative in India, due to the fact that ADR and in particular Arbitration is considered more time saving and cost efficient to resolve any dispute. There is a general tendency of Courts to encourage the Dispute Resolution through ADR mechanism rather than going through the long and exhausting process of traditional legal proceedings.