Commercial Debt Recovery in India

Introduction

The debt recovery law in India has been prevalent since age old times, with the concept of debt recovery governed primarily under the Code of Civil Procedure, 1908 and thereafter various laws have been enacted to safeguard the interests of debtors.

The process of recovering debts owed to a creditor by a debtor is laid down under various acts, rules and regulations in India. For example, one of the oldest acts enacted for the recovery of debt is called as the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI) wherein the provisions for establishing special recovery courts was first introduced. Under the said Act, approximately 39 Debt Recovery Tribunals (DRT) and 5 Debt Recovery Appellant Tribunals (DRATs) were established, with the sole purpose of expediting the process of the recovery of debts due to banks and financial institutions. In the year 2002, another act came into force that dealt with the enforcement of security and reconstruction of the Non-Performing Assets (NPA) of individuals and entities.  The act was known as the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) with the main objective to secure the creditor by attaching the assets of the debtor.

Safeguarding Debts of Micro and Small Companies

In recent years, the government of India has taken special care of micro, small & medium enterprises as they are the backbone of the economy and safeguarding their interests especially in terms of assisting them in the recovery of commercial debts has been of paramount importance for the Indian government. This was more specifically felt in the times of the pandemic when these enterprises were majorly affected due to lockdowns and closures of business.

A special act known as the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED) has special provisions made therein to recover the debts of the MSMEs. The Act provides for a legal framework for the regulation and smooth functioning of MSMEs and provides for a speedy dispute resolution mechanism between MSMEs and buyers. The Act covers two types of enterprises, namely enterprises that supply goods and enterprises that provide for services which shall both be entitled to claim benefits as provided under the MSMED

Under the MSMED, it is now mandatory for the buyer to make payment for the goods and services within the stipulated time frame mentioned in the relevant section. For the purpose of the MSMED, both buyer and sellers are defined therein. The term ”buyer” being whoever buys goods from a supplier for consideration while the term ‘supplier’ shall mean a micro or small enterprise which has filed the Entrepreneurs Memorandum/Udyog Aadhar with the concerned authority. It is interesting to note that the term ‘supplier’ does not include medium scale enterprises within its scope for the purpose of the MSME. Hence, medium scale enterprises would not be eligible to claim benefits of the provisions of the MSMED applicable to outstanding dues.

The time frame laid down under Section 15 of the Act casts an obligation on the buyer to make payment for goods and services.

• When the date of payment has not been agreed, the buyer is required to make payment within 15 days from the date of actual delivery of goods or providing of services if no written objection has been raised by the buyer and where the objection has been raised by the buyer then the day on which the objection is removed.
• When the date of payment has been agreed in writing by the parties and if there is no written objection raised by the buyer, then payment shall be made on the agreed date, provided the agreed date does not exceed 45 days from the actual date of delivery of goods or providing of services. However, if there has been an objection raised by the buyer then the day on which the objection is removed.

The MSME Act provides payment of interest in case of delay in payment of goods or services within the prescribed time. The section stipulates that where the buyer fails to make payment to the supplier within the time period as stated above, then the buyer shall be liable to pay compound interest to the supplier on the dues, from the date of default. The prescribed rate of such compound interest is three times of the bank rate notified by the Reserve Bank of India.

The MSMED also makes provisions for a mechanism for reporting of the unpaid amount due to the supplier. The buyer under the Act is required to furnish in its statement of annual accounts, the details of the principal amount and the interest due to any supplier as at the end of a financial year. A dispute resolution system has also been set up wherein the supplier can file its complaint with the Micro and Small Enterprises Facilitation Council (‘MSEFC’).

As a first step, the MSEFC shall initiate conciliation proceedings to resolve the dispute between the buyer and supplier. Where the conciliation proceedings fail and there is no settlement between the buyer and seller, then the arbitration proceedings are initiated for the resolution of the dispute. Such arbitration proceedings are governed by the provisions of the Arbitration and Conciliation Act, 1996.

Conclusion

There are various benefits available to MSMEs especially in terms of recovery of dues in a fast and easy manner as adopted under this MSMED. It is essential that the companies register themselves under the MSMED to avail themselves of these benefits.