People take loans to cover the distance between their needs or desires and insufficient finance and many a times, they are not able to pay these loans back. So, what are the steps which can be taken against the defaulting party and how the defaulting parties can avoid this default in payment?
Before understanding these concepts it is crucial to know the meaning of the term “loan”. A loan is “A bailment without reward ; consisting of the delivery of an article by the owner to another person, to be used by the latter gratuitously, and returned either in specie or in kind. A sum of money confided to another. ” [i] Many uncertainties and complexities lead to questions in the minds of both lender and borrower such as, what are the penalties for non-payment of the loan amount? whether a case can be filed against the defaulting party or not?
Types of loans
There are several types of loans which provide financial assistance to people. These are explained below:
1. Home loans– Home loans are very common these days and these help people to arrange finance to buy or build their homes.
2. Student loans– Many students take loans to pay their education expenses. In this loan, the student is the main borrower while parents, siblings and spouse are co-applicants.
3. Auto loans– These are the loans taken for the purchase of automobiles. In case of default of payment the lender or the car dealer try to restructure the terms of payment or they repossess the vehicles.
4. Credit Cards– Credit cards holders if do not pay their bills on time then their interest rate accumulates. Late payments are added to your credit reportas you become 30, 60, 90, 120, and 180 days late. Unfortunately, these late payments will make your credit score decrease and could ruin your ability to get a credit card, loan, or even a job in the future. Your insurance rate could also increase as a result of credit card delinquencies.[ii]
5. Personal loans– These are type of unsecured loans which people take to deal with their day to day expenses. These are given by banks to people who have good credit score.
Effects of non- payment of loan amount
Although it depends upon the type of loan and the policies of the lender yet some common repercussions in case of non-payment of loan amount are given below:
a. Decrease in credit score– Whenever any person makes default in the payment of EMIs(Equated Monthly Installments), it decreases their credit score which has a negative impact on their further borrowing capacity.
b. Penalties– In case of late payments which is a part of default in payment, the lender can impose penalty amount on the defaulting party.
c. Seizure of collateral or property– In case of secured loans, when the borrower is given sufficient notice and time period to repay the loan amount, the lender opts for the option to seize the collateral. When the home loans or auto loans are not paid then the lender has a right to have the repossession of the automobile or auction the house of the defaulting party.
d. Legal Actions–
1. Civil Liability:- When the borrower defaults in payment of loan amount, it leads to breach in contract which can give rise to civil liability only and it is not considered crime. In this case, the lender or the aggrieved party can recover the amount by filing a civil suit against the defaulter for the payment of expenses, seizure of collateral or repossession/ auction of their property.
It is also to be noted that if a debt is secured, the creditor can seize the property without going to court. If the debt is unsecured, the creditor must go to court and get a judgment before seizing property.[iii]
2. Criminal liability:- Default in payment can arise criminal liability only if it is proved that the borrower had dishonest intentions when he/she entered into the contract. In this case the accused can be prosecuted under Section 420 of The Indian Penal Code, 1860. A recent judgment by two bench judge of Supreme Court in Satishchandra Ratanlal Shah v. State of Gujarat & anr. where it was held that mere failure to pay the loan amount cannot be called “cheating” under Section 420 of IPC, 1860.
The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act, 2002 ACT
SARFAESI Act, 2002 gives powers to banks for the seizure property of the borrowers in case of secured debt. As per Section 2(j) of SARFAESI Act “default means non-payment of any principal debt or interest thereon or any other amount payable by a borrower to any secured creditor consequent upon which the account of such borrower is classified as non-performing asset in the books of account of the secured creditor.”
According to the Section 13 of this Act, banks give a 60 days’ notice period to the party who has made default in payment of loan amount. The party is classified as Non Performing Asset (NPA) for the banks. If the defaulting party does not reply or take any action, then bank can:
- take possession of the secured assets of borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset;
- take over the management of business of the borrower;
- appoint any person to manage the secured assets the possession of which has been taken over by the secured creditor.
Limitation Period for Recovery of debt
According to The Limitation Act, 1963, limitation for recovery of the outstanding debt is 3 years from the last deposit made by the borrower. This means that the suit has to be filed within 3 years of cause of action.
In case of waiver of default, the limitation commences from the date of last default in payment of the last installment as originally fixed , articles 37 of limitation Act will apply. Under section 18 of Limitation Act 1963, if there is an acknowledgement in writing of the debt to the bank and such acknowledgement is made before expiry of 3 years from the date when money was payable then the period of limitation will be extended by acknowledgment in respect of liability concerning property or right before the expiry of the period of limitation and should be in writing and signed by the borrower.[iv]
Procedure for recovery of debt
The creditors include financial creditor, operational creditor and dealers of bill of exchange, hundies and promissory notes. In case of the default in payment by the borrowers different procedures are to be adopted by the creditors.
The Insolvency and Bankruptcy Code, 2016
(For Financial and Operational Creditors)
IBC, 2016 is applicable to the matters relating to the insolvency and liquidation of corporate debtors where the minimum amount of the default is one lakh rupees.[v]
1. For Financial Creditors- According to Section 7 of IBC, 2016, financial creditors which include banks, financial institutions, homebuyers, enterprise, corporate entity, etc on experiencing default in payment can by itself or jointly with other financial creditors can file an application against a corporate debtor before the Adjudicating Authority.
After this, the Adjudicating authority shall within 14 days of the receipt of application will either reject or admit the application on the basis of their investigation regarding occurrence of default.
2. For Operational Creditor- According to Section 8 of IBC, 2016, Operational Creditor which includes manufacturers, traders, employees, if face the default in payment, can send a demand notice of invoice demanding payment to the debtor. Within a period of 10 days of receipt of such notice, the debtor can bring to notice any dispute or repayment of operational debt as specified under Section 8(2).
If no such response is made by the debtor, then operational creditor can file an application under Section 9 of IBC, 2016 before the Adjudicating Authority for initiating a corporate insolvency resolution process. Following are the documents which are to be attached with the application as per sub section 3 of Section 9:
- a copy of the invoice demanding payment or demand notice delivered by the operational creditor to the corporate debtor;
- an affidavit to the effect that there is no notice given by the corporate debtor relating to a dispute of the unpaid operational debt;
- a copy of the certificate from the financial institutions maintaining accounts of the operational creditor confirming that there is no payment of an unpaid operational debt by the corporate debtor; and
- such other information as may be specified.
The Adjudicating authority within 14 days of such receipt of application can admit or reject the application of Operational Creditor.
Summary Suit under Order 37 of Code of Civil Procedure, 1908
(In case of Bills of Exchange, Hundies, Promissory Notes)
If there is a case related to Bills of Exchange, Hundies or Promissory notes, then the creditor can file Summary suit under Order 37 of Code of Civil Procedure, 1908. These are the suits in which the plaintiff seeks only to recover a debt or liquidated demand in money payable by the defendant, with or without interest, arising:
- on a written contract, or
- (ii) on an enactment, where the sum sought to be recovered is a fixed sum of money or in the nature of a debt other than a penalty; or
- (iii) on a guarantee, Where the claim against the principal is in respect of a debt or liquidated demand only.
Section 420 of Indian Penal Code, 1860
(Criminal Suit of Cheating)
The lender has to prove that the person had committed criminal breach of trust and had not returned back the money. So he can file a suit under Sec 420 of IPC as the person whom he had to lend the money has cheated him and also under Sec 406 of IPC for Criminal Breach and if the court finds guilty, the person will be imprisoned and has to repay the money he borrowed.[vi]
How to avoid default in payment
- Proper Communication- Communicating the reasons to the lender regarding non-payment of loan amount in time can save a person from penalties and actions by the lender and lender can suggest other options to the borrower regarding the same.
- Rescheduling- If the borrower is not able to pay the EMIs then they can ask for restructuring the policy which makes them to pay less amount by extending the period to repay the whole amount.
- Loan Restructuring- Mostly used in cases of home loans, the bank can also grant you an extension of up to 1 year for repayment of the loan.[vii]
- Loan Conversion- The bank can also give you an option of converting your unsecured loan into a secured loan, which will significantly reduce your EMI.[viii] So, this option can also be taken into consideration.
Everybody faces financial crunches but it is always advisable to take prudent steps in order to prevent further problems and when one gets stuck in this crisis it is important to take necessary and well evaluated decisions in time. Similarly, law has its ways to provide justice to the creditors in case their borrowers do not pay the loan so following the steps which our laws provides is the right thing to do.
Edited by Pragash Boopal
Approved & Published – Sakshi Raje
[i] The Law Dictionary, What is LOAN, https://thelawdictionary.org/loan/ (Last visited July 20, 2019, 8.30 PM)
[ii] The balance, What will happen if I default on my credit cards?, https://www.thebalance.com/what-will-happen-if-i-stop-paying-my-credit-card-960284 (Last visited July 19, 11 PM)
[iv] Scribd, Limitation Period for Recovery of debts, https://www.scribd.com/doc/46548364/Limitation-Period-for-Recovery-of-Debts (Last visited on July 22, 2019, 10.50 PM)
[v] The Insolvency and Bnakruptcy Code, 2016, Sec 4
[vi] VakilSearch, Legal Actions to take if someone hasn’t returned your money, https://vakilsearch.com/advice/legal-actions-take-someone-hasnt-returned-money/ (Last visited July 22, 2019, 9.30 PM)
[vii] Webindia123, Can you be interedted in not paying a loan?, https://www.webindia123.com/law/article.asp?a_no=3130&article=Can+You+Be+Arrested+For+Not+Paying+A+Loan%3F (Last visited on July 20, 2019, 7 PM)