Hard tools in debt recovery involve initiating legal proceedings.
When softer approaches fail, Legal Managers use ‘hard tools’ to recover debts through formal legal channels. These tools include various legal proceedings and dispute resolution mechanisms to ensure effective debt recovery. Below, we explore the distinct categories of such hard tools:
Alternative Dispute Resolution (ADR) Mechanisms: Legal managers utilise ADR methods like arbitration and Lok Adalat for resolving disputes outside traditional courts.
Arbitration: Arbitration proceedings under loan agreements may involve interim measures like asset preservation and appointment of receivers. Legal managers enforce arbitral awards through civil court execution petitions.
Lok Adalats: Lok Adalats facilitate informal settlements between banks and defaulting borrowers. Awards from Lok Adalats hold equivalent legal status as court decrees under Section 21 of the Legal Services Authorities Act, 1987.
Quasi-Criminal proceedings: Legal managers employ quasi-criminal measures under the Negotiable Instruments (NI) Act, 1881 and Payments and Settlements Systems (PSS) Act, 2007 for debt recovery.
When borrowers default on cheque payments, legal managers issue a demand notice under Section 138 of the NI Act, allowing 15 days for settlement. Failure to comply results in criminal proceedings.
Addressing dishonoured electronic fund transfers, legal managers issue demand notices under Section 25C of the PSS Act before initiating legal action, following a process akin to Section 138 of the NI Act.
Civil proceedings under specific laws: Under the SARFAESI Act, 2002, banks enforce their security interests for NPAs on secured assets. Legal managers issue a sixty-day demand notice under Section 13(2). If the borrower fails to settle, actions under Section 13(4) ensue. These include taking possession of secured assets, managing borrower business, including appointing a manager and even issuing notices to the debtor of defaulting borrower.
Debt Recovery Tribunals (DRTs) are tribunals that specialise in adjudicating on recovery matters where outstanding amounts exceed twenty lakh rupees. Legal managers initiate proceedings by filing applications under Section 19 of the Recovery of Debts and Bankruptcy Act. For debts below this threshold, legal managers pursue recovery through civil suits in regular courts.
Debt recovery through proceedings before Executive Magistrate: This involves utilising state-specific laws that facilitate swift recovery of dues owed to banking institutions under loan agreements. For instance, in Madhya Pradesh, the Madhya Pradesh Lok Dhan (Shodhya Rashiyon Ki Vasuli) Adhiniyam, 1987 enables expedited adjudication of such matters before Executive Magistrates. Legal managers initiate proceedings by submitting an application with the required certificate to the Magistrate, who then takes actions such as issuing attachment notices against secured assets to recover outstanding amounts as arrears of land revenue.
Realisation of debt through insolvency resolution process and liquidation under IBC: In cases where a borrower defaults on a debt exceeding ₹1 crore, legal managers can initiate insolvency proceedings under the Insolvency & Bankruptcy Code, 2016. This involves filing an application with the National Company Law Tribunal (NCLT). Throughout this process, legal managers protect the bank’s interests by assessing claims, representing the bank in Committee of Creditors (CoC) meetings, strategically voting on resolution decisions, and evaluating plans. They also decide between pursuing resolution or opting for liquidation. If liquidation is chosen, they negotiate final claim amounts and oversee asset distribution with the liquidator.
Source: Barandbench
