Introduction
“Recovering money owed is not just about persistence, it’s about process”
Recovering bad debts is one of the toughest challenges for Indian businesses. Not only can late payments or defaults impact cash flow, but they also impede the expansion of businesses. Many businesses weaken their recovery efforts by making avoidable mistakes, even though Indian law offers a number of remedies to recover debts, including civil actions, commercial courts, arbitration, and bankruptcy proceedings. Recovery can be made quicker, easier, and more legally sound by being aware of these typical mistakes and learning how to prevent them.
Mistake 1: Informal agreements and inadequate documentation
Depending only on verbal promises or unclear invoices without proper legal documents is a major mistake. Documentary proof is the foundation of your claim in court or arbitration.
How to Avoid
- A written contract or agreement that explicitly outlines the terms of payment, interest on late payments, and dispute resolution procedures should always be executed.
- As evidence, keep accurate purchase orders, delivery challans, invoices, and email exchanges.
- All records should be kept digitally to prevent future disputes.
Mistake 2: Postponing Legal Action Past the Statute of Limitations
A creditor typically has three years from the date of failure to bring a recovery claim under the Limitation Act of 1963. Many companies lose their right to sue because they keep sending reminders instead of taking timely legal action.
How to Avoid
- Keep a careful eye on past-due accounts and take prompt legal action.
- Your case can be strengthened even if you send out a legal notification inside the statute of limitations.
- Seek early legal advice to determine deadlines.
Mistake 3: Failure to Consider Pre-Institution Mediation
The Commercial Courts Act of 2015 requires pre-institution mediation prior to bringing a lawsuit for commercial disputes (claims above ₹3,00,000). If companies skip this step, their case may not even be accepted in court.
How to Avoid
- For prelitigation mediation, get in touch with the District Legal Services Authority (DLSA).
- Keep thorough records of the mediation attempt; even if the other party declines to engage, a nonstarter report will be generated, enabling you to move forward with legal action.
Mistake 4: Choosing the Inappropriate Recovery Forum
Filing a case in the wrong court or forum wastes precious time and delays recovery. For instance, appealing to consumer forums for purely business conflicts or bringing a basic civil complaint when arbitration is specified in the contract.
How to Avoid
- Start arbitration in accordance with the 1996 Arbitration and Conciliation Act if your contract has an arbitration clause.
- To expedite the resolution of claims exceeding ₹3,00,000, employ Commercial Courts.
- For insolvent debtors, consider filing under the Insolvency and Bankruptcy Code (IBC), 2016.
Mistake 5: Not Sending a properly drafted Legal Notice
Some businesses either skip sending a legal notice or send vague notices without proof, which later weakens their case. Later on, a poor notice can weaken your case.
How to Avoid
- Before bringing a case, send a well-written legal notice under contract law or Section 80 CPC (if against government bodies).
- Indicate in detail the amount owed, the contractual duties, and the deadline for compliance.
- Keep the evidence of service (email, courier, or registered post) safe.
Mistake 6: Overlooking Arbitration or Settlement Options
Despite the potential efficiency of arbitration or negotiated settlements, businesses occasionally go right into litigation, which may be expensive and time-consuming.
How to Avoid
- Verify if there is an arbitration clause in your contract and make advantage of it right away.
- Before filing a lawsuit, think about negotiation or mediation to save money and time.
- Use legally enforceable settlement agreements.
Mistake 7: Expecting Instant Recovery Without Enforcement Planning
Winning in court or arbitration does not automatically mean you get the money , enforcement is the real key. Many companies do not use appropriate enforcement measures.
How to Avoid
- Under the Civil Procedure Code (CPC), initiate execution procedures to seize the debtor’s assets, bank accounts, or wages.
- In case of arbitration, use Section 36 of the Arbitration Act to enforce the decision as a decree.
- Consider insolvency proceedings under IBC if recovery through execution is unlikely.
Conclusion
Recovering bad debts is about effectively asserting your rights within the parameters of Indian law, not just about winning a lawsuit. Businesses can greatly increase their prospects of recovery by avoiding mistakes such as inadequate paperwork, not enforcing awards, neglecting prelitigation mediation, or violating limitation deadlines. With timely action, proper documentation, and legal guidance, debt recovery can move from a long struggle to a structured and effective process.
FAQs
Q1. What is the time limit for filing a debt recovery suit in India?
Generally 3 years from the date of default under the Limitation Act, 1963.
Q2. Is prelitigation mediation compulsory in all cases?
It is mandatory for commercial disputes above ₹3,00,000 under the Commercial Courts Act, 2015.
Q3. Can an arbitration award be enforced like a court decree?
Yes, under Section 36 of the Arbitration and Conciliation Act, 1996, an arbitral award is enforceable as a decree of a civil court.
Q4. What happens if the debtor becomes insolvent?
You can file for insolvency under the Insolvency and Bankruptcy Code, 2016, either as an operational creditor or financial creditor.
Q5. Do I always need a lawyer to recover debts?
While not mandatory, having a lawyer ensures compliance with limitation, drafting, and filing procedures, and greatly increases recovery chances.