Legal recourse when a borrower defaults on loan

Legal recourse when a borrower defaults on loan

Legal & Compliance

Vakilsearch Staff

Vakilsearch Staff

10 Jan 2020, 16:26 — 5 min read

Background: Default is the failure to repay a loan. A default can occur when a borrower is unable to make timely payments, misses payments, or avoids or stops making payments.In their previous article, Vakilsearch shared MCA guidelines for accounting and auditing for private limited companies. Here in this article they explain what legal action can be taken against a loan defaulter.

The scariest thing about lending money to people is the fear of them not returning your money back. Generally, the lender has to issue a gentle reminder about the repayment of the loan. The lender may also suggest certain money returning plan, for instance, a monthly EMI plan or a quarterly plan to the person. In spite of all this, if the person is not repaying the money, then the lender has to send a letter or a legal notice stating the date of the loan, the exact amount borrowed and also the repayment terms. The letter should be certified and should demand a response. If none of the above steps works out, then s/he has to consult a lawyer and file a suit against the person who has not repaid.

Legal actions to be taken

The lender should lend the money only after signing the promissory note or the loan agreement which has the terms and conditions stated clearly. In case of default in the payment of money, the lender can approach the court and file a civil suit for recovery of money or a criminal suit for fraud/ breach of an agreement.

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Civil Suit

The lender can file a civil suit for recovering the money he owed through promissory note or loan agreement. He can do so under Order 37 of CPC which allows the lender to file a summary suit. S/he can file this suit in any high court, City Civil Court, Magistrate Court, Small Causes Court. This suit consists of an important declaration stating the specific relief the lender pleas and the relief should not be beyond the ambit of the order as final relief. The first step is drafting the summary suit and then it should be summoned to the person who borrowed money. The court requires a certain document to produce before them, along with the plain copy and summons. Once the suit is filed, the defendant will be asked to appear before the court within 10 days. If the person failed to appear, the lender has to show the summons he sent before and then the court orders him to send another summon. If the person has any defence s/he can claim before the court, if not the court will assume the lender’s allegation as true and reward the judgment accordingly.

The lender can also file a suit under the Negotiable Instrument Act. This can be filed only for people who did not return the money which was borrowed by the lender via cheques, bills of exchange etc. For instance, the person returned the money through cheque to the lender and later if s/he found it has bounced, the lender can file a suit under Sec 138 of NI Act and the person has to repay within 30 days. If the person fails, the lender can further file a criminal suit against him/her. If the court finds the person guilty, the s/h will be imprisoned for two years and also has to pay double the amount of the cheque issued.

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Criminal Suit

The lender has to prove that the person had committed criminal breach of trust and had not returned back the money. So s/he can file a suit under Sec 420 of IPC as the person whom s/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 they borrowed. Generally, the court takes a long time for the cases filed under this section.

Out of court settlement

The lender may opt for out of court settlement for recovering the money dues through arbitration, conciliation or Lok Adalat. It is one of the economical and fastest ways for recovering. For out of court settlement both the parties should be willing and has to appear for the hearing. The arbitrators generally hear from both the parties and the award will be given. Once the award pronounces they cannot appeal, unless if the award is invalid or the person cannot repay within the specified time.

Also read: Why Privacy Policy is important for a business


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