Collections, Recoveries and Law

Companies are facing considerable hindrance in recoveries of their bad  debts. The issue is very simple yet taxing . Customer uses the services and if deny to pay the bills then collection department comes in to play.  Collection Department of any corporation is normally responsible for the collections from customers. When the customer stops responding to collection follow ups then customer account falls under category of ‘default account’ and then matter referred to recovery section. Recovery section deploys outside agencies  for recovery. The defaulter have to face follow ups for payment. Once agency  fails  to  recover the amount then default accounts transferred to legal function.  At this stage law comes into play.  

Ashish Gupta, An Area Collection Manage in Leading MNC  shared his experience in filed of corporate collections. He says collection is  real challenging world. It is  made for people having solid legal and practical experiences in this filed.  Here are few points pertaining to efficient methodology of collections, recoveries and law.

Draw a efficient credit policy:  The efficient credit policy of the company can reduce the risk of bad debt to a minimum level. The checks and balances of credit policy, criteria of credits, classes of customers, customer differentiation etc.  are few  basic points which  should be considered thoroughly while developing  the credit policy. Credit policies are industry specific which differs from industry to industry and company to company.  Robust Credit policy reduces the risk of bad debt to considerable extent.

Capture at the first warning signal: Every potential default have initial warning signal for default. Concerned department should draw the methodology to identify the signals of potential default and such account should be under intense supervision. An alert should be initiated at every increasing possibility of default.  It is a fire-fighting sort of stage where you know that customer is a potential default and same can be restricted to a lower level if appropriate actions applied.  

Tele-calling and Follow ups: It is the way to remind the customer about defaults and pursue for payments. Tele-calling is very effective tool and cost-effective as well for large number of customers. Follow ups can be made through appointed agencies. The tele-caller should be trained and licensed for tele-calling activity. They should have complete hands-on information to update the customer about the amount.

Reminder Letters from collection department: Collection department send  reminder letters to customer for payments. The letters should be carefully  drafted in a way not to offend the customers and to avoid customer dissatisfaction in case he has paid already. The wording should be polite but the message should be clear which communicates to customer that he/she should pay without  further delay.

Advocate Notice: After the reminder letter, the matter normally refer to legal cells. Legal cell initiate the lawyer’s notice through lawyers  which contain the facts of the account/ details of default/ legal implication of continuance of default etc. The lawyer’s notice is a useful tool which gives  message to customer that company is intended to recover the amount and ready to exercise its legal rights in case of continuance of default.

Filling of Pre-litigation case: Legal services authorities (Amendment ) act 2002 is  a very useful tool which provide an early opportunity to exercise  legal rights at a minimal cost and speedy disposal of cases.   It is a way of alternative dispute resolution. An application can be filled  U/s section 22 of  the Act and submit the matter before actual civil litigation. The Permanent Lok Adalat shall, while conducting conciliation proceedings or deciding a dispute on merit under this Act, be guided by the principles of natural justice, objectivity, fair play, equity and other prin iples of justice, and shall not be bound by the Code of Civil Procedure, 1908 (5 of 1908 ) and the Indian Evidence Act, 1872 (1 of 1872 ). Every award of the Permanent Lok Adalat under this Act shall be deemed to be a decree of a civil court. This tool helps to sort out many cases.

Filling of Summary Civil Suits: When the matter does not get sort out through pre-litigation method the summary civil suits are also are very useful  tool. Civil procedure code Order XXXVII has the provision of summary civil suits. These suits are application to  suits upon bills of exchange, hundies and promissory notes; 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,-(i) 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 se liquidated demand only.

Arbitration Application: Where there is arbitration clause between company and customer then arbitration procedure can also be invoked. An application to initiate arbitration proceeding can be filed under section 11 of Arbitration Act and there after the procedure will govern through the provision of arbitration act and the clause for arbitration captured in the agreement. Once plaintiff secure the arbitral award then same can be executed through District court.  Interim relief can be availed under section 9 of Act through filling application before District court.  A careful consideration is required while drafting the arbitration clause the agreement keeping in view of potential exposure of default and the cost of arbitration activity.

Regular Civil Suit: If there is neither an arbitration clause nor the case falls under category of summary civil suite Order 39 CPC then the only civil remedy remain is the regular civil suit under Order 2 Rule 2 of  Civil procedure code. Companies can file the recovery suit on prescribed court fees. The only draw back in the process it the delay and linger on tactics by defendants. It is very effective but a long process. It required the special knowledge of Civil procedure code  and sound experience  in Courts functioning.

Filling of  F.I.R. : In case fraud, the criminal remedy  can be used for adjudication of a crime where defaulter is the willful defaulter and committed default through forged documents,, false information or may be absconding.  If police does not entertain to file a FIR then private criminal complaint can also be filed and orders from court can be secured under section 156 cr.p.c. for investigation in the matter. It is useful mode where offense are compoundable.

For Banking Industry :  Banks have special remedy for speedy recovery through SERFASI Act and in few states Revenue Recovery certificate  through Tehsildar. These special act which provide speedy remedies for recovery. Wide powers are provided to banking sector for recovery of bad debts under these special acts.

Do’s and Don’t of collection & recovery:

1) Do not offend the customer while communicating with him.

2) Do not use abusive language or physical threats.

3) Follow the code of conduct of the regulatory norms of the industry.

4) Do not make false statement.

5) Sort of customer query on payable amount.

6) Use of registered and certified professional and equipment.

7) Maintain customer confidentiality at any cost.

8) Do not make defamatory statements.

9) Follow ethical and legally approved means only.

Conclusion: No doubt , collection is highly challenging world. It is the  game of possession where defaulter do not wish to pay, questioned the default amount and the plaintiff  put all the means  for recovery.  One who is really dedicated towards his goal and having clear understanding for legalities would certainly get success. At the same time, statutory and regulatory guidelines should be respected and an customer education should be promoted efficient use of credit facilities and minimize defaults.

Thanks & regards

Ambrish