Money Recovery


            Money Recovery which means collecting of bad debts and outstanding receivables, or dealing with bounced cheques. Money can be recovered through various legal actions against debtors.

Procedure of Recovering Money

  • The first step is to send a legal notice to the defaulter. This is necessary in order to assure the awareness of the debtor that there is an outstanding amount which needs to be paid.

  • Such a notice must contain all the necessary details of the debt like, when was the debt incurred, total outstanding amount, due date etc. The creditor (the one who is issuing the notice) must keep a copy of the same.

  • If such a notice isn’t complied with, you can initiate a legal action against the debtor. Various methods of doing so are provided by the laws which are discussed below.

Essentials of a Legal Notice for Money Recovery

A legal notice must contain the following points:

  • Name, description, and place of residence of the sender of the notice.
  • Details of the cause of action.
  • The monetary relief claimed by the sender of the notice.
  • The gist of the legal basis for the relief claimed.
  • The legal notice must be drafted in the letterhead of an Advocate which is to be specific and proper.
  • It should contain addresses and contact details of the advocate. 
  • The date on which the legal notice is issued and the name, address and contact details of the person to whom the legal notice is issued is to be stated.
  • It should be clearly mentioned in the notice how your right has been infringed due to the act or omission of the opposite party and for that what you want from him. The specific direction must be given to the opposite party and time limit must be given.
  • The notice must be signed with date by the Advocate and the sender.

What are the Legal Actions can take against the Debtor?

            Indian law provides various methods through which a legal action can be taken against the debtor in case he/she doesn’t pay the money even after the service of notice.

  1. Summary Suit
               The most common and cheapest way is to initiate a suit is under Order 37 of the Civil Procedure Code, 1908. The peculiarities of this type of suit are as follows.
  • Object is to summarize the procedure of a case as the defendant does not have any defence.
  • The limitation period before filing the suit which is of three years i.e. more than three years should not have passed from the breach of contract otherwise an application need to be made to condone the delay with sufficient cause.
  • It is a speedy method and no time is wasted on trial as the entire case happens on the basis of written statements. Moreover, the defendant has to satisfy the court if he/she wishes to defend the suit.
  1. Recovery under Negotiable Instruments Act, 1881

               Under the Negotiable Instruments Act a case can be filed in case of recovery of money relating to Cheques, Bills of Exchange etc.

For example, in case of a cheque bounce, a 15 day notice is served upon the defaulter. In case the money is still not paid, a suit under Section 138 can be initiated against the defaulter which is a criminal case. The time limit for such a case is 30 days from the notice of delivery of the 15 day notice.

In such a case the drawer of the cheque will be punished with:-

  • Maximum imprisonment for 2 years;
  • Fine which may extend to twice the amount of the cheque; or
  • Both

It is important to note that a case under the Negotiable Instruments Act is an alternative remedy to filing summary suit for recovery. The former is a criminal proceeding to punish the defaulter in case of cheque bounces and the latter is a civil remedy to recover money.

  1. Criminal Case under the Indian Penal Code, 1860

Indian laws provide a number of remedies to the creditors who are not paid the money which is rightfully theirs. In some cases, people are even cheated of their money. This is a punishable offence under the Indian Penal Code (IPC).

Following are the provisions under the IPC which can be invoked in such cases:

i. Cheating (Section 415): If someone by deceiving or by fraudulent methods makes the other person deliver any property to him/her, they shall be liable for cheating.

Example: A, by falsely pretending to be in the Civil Service, inten­tionally deceives Z, and thus dishonestly induces Z to let him have on credit goods for which he does not mean to pay. A cheats.

Punishment: Up to 1 year in prison or fine or both.

ii. Criminal Misappropriation (Section 403): Criminal Misappropriation is said to have occurred when a person dishonestly converts property of another person for his/her own use.

Example:A finds a purse with money, not knowing to whom it belongs; he afterwards discovers that it belongs to Z, and appropriates it to his own use. A is guilty of an offence under this section.

Punishment: Up to 2 years in prison or fie or both.

iii. Criminal Breach of Trust: (Section 405): Criminal Breach of Trust is said to have occurred when there is a dishonest misappropriation or conversion for own use of another’s property.                                  

Example: A, being executor to the will of a deceased person, dishon­estly disobeys the law which directs him to divide the effects according to the will, and appropriate them to his own use. A has committed criminal breach of trust.                             

The Difference between Criminal Misappropriation and Criminal Breach of Trust

The only difference between the two is that in the latter the offender was entrusted with the property in question.

  1. Proceedings under the Insolvency and Bankruptcy Code, 2016

Proceedings for debt recovery can also be instituted under the IBC Code, 2016 wherein the defaulters are dealt with the new stringent laws in a time bound manner (less than a year).

The provisions of the Code are applicable to companies, limited liability entities, firms and individuals (i.e. all entities other than financial service providers).

 5. Indian Contract Act, 1872

Recovery of money can be made is a person frauds (Section 17), misrepresents (Section 18) or when an indemnifier or a guarantor is unable to execute the contract due to complete cash crunch and a possible insolvency form his/her end, Section 73 of the Indian Contract Act can be invoked which provides for compensation of loss or damage by breach of contract.

  1. Companies Act, 2013

If the defaulter is a company, a suit can be instituted under the Companies Act, 2013. Suits under this can be class action suits where a certain group of people representing a particular class institute a suit for recovery of debts due to them or in case of a business where debts are due in accordance with a contract.

  • When an investor doesn’t receive dividends from the company against profits made, the investor can recover the same by filing a suit under Section 127 for contract enforcement.
  • Section 212 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.
  • A petition for winding up under Section 272 can be made when 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.
  • In furtherance to above, suit can also be filed if there is a fraud committed by any officer of the company under Section 447 and under Section 451 there can be a suit for punishing for wrongful withholding of property.
  1. Out of Court Settlements

With the rising problems in litigation in India, it is advisable to resort to out of court methods of settlement of issues such as arbitration, negotiation or conciliation etc. Generally, a clause to the same is added in the agreement between the parties. Out of court settlement is a cheaper, efficient and time conserving method of recovering debt.

The main provision that needs to kept in minding in arbitration is section 7 of the Arbitration and Conciliation Act, 1996 which is regarding arbitration agreement, without which the parties cannot approach an arbitral tribunal unless there is consensus between the parties.