Debt Collection in India

Practical Guide

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Is there a minimum amount to start a legal action?

There is no minimum amount required to start a legal action. The sums involved do affect the specific courts where you can sue or the procedure you can sue under. However, litigation in India is a cumbersome ordeal. We do not recommend pursuing legal action unless the amounts involved are considerable and the likelihood of recovery is fairly reasonable.

Will the due amount condition the type of procedure and does the loser pay?

Yes, the amount involved determines the Court that you could approach. The pecuniary jurisdiction of Courts varies state-wise and city-wise. For example, the ordinary pecuniary jurisdiction of the Courts at Mumbai is divided as follows: for cases with amounts up to INR 10,000, the Court of Small Causes has jurisdiction; for values between INR 10,000 and INR 1,00,00,000, the City Civil Court; for higher amounts, the Bombay High Court. 

Additionally, the nature of the dispute is also relevant. Specific Courts could have exclusive jurisdiction over certain subjects. For example, the Court of Small Causes must be approached for all tenancy disputes in Mumbai regardless of the amounts involved.

Moreover, a summary procedure may be available in certain types of commercial disputes, or in cases where acknowledgement of debt is clear and unequivocal.

Courts in India are conservative in awarding costs. Usually, the loser would be ordered to pay only if the stance taken was frivolous or vexatious.

Is it mandatory to send a warning letter before taking legal action to collect a debt?

In general, it is not mandatory to send a warning letter (called “legal notice” in India) before initiating legal action. However, the legal notice is useful for the aggrieved party to demonstrate that opposite party was reasonably notified, however, the amount remained unpaid.

That said, legal notice is mandatory for certain specific types of claims such as recovery of amount of a dishonoured cheque under the Negotiable Instruments Act, 1881 or recovery of operational debt under the Insolvency and Bankruptcy Code, 2016, among others.

What are some best practices for creditors to increase the possibility to recover the debt?

First, the debtor's financial position, creditworthiness, and commercial relationships must be ascertained. 

Then, it is vital to have documents proving the debt. In general, any document coming from the debtor acknowledging the debt, contractual documents and correspondences are useful. Third-party documents, videos, and witness statements may also supplement.

How can a foreign creditor start a procedure for international debt collection in India?

This depends whether the debt is proved in a foreign court or an Indian one. The foreign creditor can pursue lawsuits in Indian Court at par with Indian nationals and collect the debt. 

If, however, the basis of debt collection is the judgement of a non-Indian court, there are two courses of actions:

  • if the non-Indian court is located in a ‘reciprocating territory’ as recognized by Government of India, the judgement would be treated at par with an Indian Court judgement. The foreign creditor can move for execution of the judgement and seize assets or garnish payables to discharge the debt. Recognized ‘reciprocating territories’ are updated from time to time; at present they include United Kingdom, Singapore, Bangladesh, Malaysia, United Arab Emirates, New Zealand and Hong Kong SAR. 
  • if the non-Indian court is not located in a ‘reciprocating territory’, its judgement would not be recognized or directly enforceable in India, i.e., it would not be accorded the legal force that an Indian court order will be. In order to enforce this foreign judgement, a new civil suit must be filed in the relevant Indian Court. The foreign judgement would be one of the evidence exhibits in this suit, along with other evidence such as contract, invoices, correspondence, etc. The Indian Court would then try the dispute anew.

Can interim measures be taken?

Once a suit is filed, a separate application must be made seeking interim measures. The appropriate interim measures would depend on case to case. Generally, a court would have the power to:

  • Injunct an act;
  • order to prevent the waste, damage, alienation, sale, removal or disposition of a property;
  • secure the amount in dispute;
  • appoint a Court Receiver to safeguard a property; or
  • attach assets or preserve evidence.

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