India collection profile

Accessing financial information in India is very difficult as most businesses are run through non-incorporated Sole Proprietorship and Partnership models which do not require communicating any financial information to the public.

Information provided by incorporated entities is fairly reliable, otherwise it is necessary to rely on specialized providers. Allianz Trade allocates each company a grade reflecting its financial health and how it conducts business. Allianz Trade grades represent a core of Allianz Trade’ knowledge and analyses, and help clients identify and avoid risk. Data is continuously monitored to offer the most up-to-date information to support management decisions.

Liability for business debts is determined by legal structures, which may be described as follows:

• Sole Proprietorship is available for small businesses managed by an individual and for which no commercial structure is necessary. In this case, the owner is held liable for all business debts. Two or more (up to ten in the banking business, up
  to twenty otherwise) individuals may also decide to share ownership and responsibilities through Partnerships (under the Indian Partnership Act of 1932), in which case the partners
  may be jointly, individually and unlimitedly liable for the actions of the other partners. Limited Liability Partnerships (LLPs) may alternatively offer limited liability to the partners (under the Limited Liability Partnership Act of 2008).
• Private Limited Companies (regulated under the Companies Act of 1956) are in practice the most favoured legal entities because they require no minimum capital funds whilst the partners’ liability is limited to their contribution. Public Limited Companies are rather used for larger structures which capital must be divided into tradable shares. In these entities, the shareholders’ liability is limited to the value of their shares.
• Foreign businesses tend to settle in India through Joint Venture Companies and Wholly Owned Subsidiary Companies (WOS). Representative Offices may also be set up in order to conduct liaison functions without pursuing core business activities
  and income creation. Alternatively, Branch Offices are allowed to conduct business activities under the Foreign Exchange Management Regulations.
• Before the enforcement of the Companies Act, 2013, a single person could not establish a company. If an individual wanted to establish his business, he/she could opt only for a sole proprietorship as there had to be a minimum of two directors and two members to establish a company. The Companies Act, 2013 provides that an individual can form a company with one single member and one director. The director and member can be the same person. Thus, one-person company means one individual who may be a resident or NRI can incorporate his/her business that has the features of a company and the benefits of a sole proprietorship. The OPC receives a separate legal entity status from the member. The separate legal entity of the OPC gives protection to the single individual who has incorporated it. The liability of the member is limited to his/her shares, and he/she is not personally liable for the loss of the company. Thus, the creditors can sue the OPC and not the member or director.
  

The court system in India is not very efficient because it is overly slow. Based on a quasi-federal structure, the country is composed of twenty- eight States which usually possess or share a High Court (twenty-four in total) and of several hundreds of administrative districts which each possess a District Court. As a general rule, commercial disputes must be brought before District Courts where the cause of action arose or where the debtor resides/carries on business or personally works for gain, but the quantum of debt in dispute also matters. The Delhi High Court has original jurisdiction and is also competent to hear recovery suits, however the Bombay High Court (Mumbai) has no authority to deal with such claims. In addition, various specialized courts deal specifically with specific debt recovery issues (bank loans, etc.), competition and anti-trust litigation, consumer protection, etc.

As a general rule, collection costs are not charged to the debtor in India and must be recovered through legal proceedings.

The law entitles a seller to retain ownership over goods until its buyer has paid the invoice in full, as long as a written agreement has been concluded between the parties. Retention of Title (RoT) provisions are fairly common in supply contracts, but it is uncertain whether the courts would in practice recognize the most sophisticated ‘all monies’ provisions aiming at retaining ownership despite transformation or sale of the goods to a third party.

The most common payment methods as follows:

Swift bank transfers are becoming increasingly popular in India as they are fast, secured, and supported by an increasingly developed banking network internationally and domestically. For export transactions, transfers should nonetheless be guaranteed through an Export Credit Insurance, which helps minimizing the risk of sudden or unexpected customer insolvency. Allianz Trade’ worldwide network of risk offices monitors the financial well- being of your customers and grants them a specific credit limit up to which you may trade and claim should something go wrong. Alternatively, Standby Letters of Credit (a bank guarantees the debtor’s credit quality and repayment abilities) constitute reliable guarantees. Irrevocable and confirmed Documentary Letters of Credit (a debtor guarantees that a certain amount of money is made available to a beneficiary through a bank once certain terms specifically agreed by the parties have been met) may also be considered. Such bank guarantees however tend to be expensive, whilst obtaining them requires patience.

As a result, negotiating down payments is common and advisable. Post-dated cheques are also frequent as these constitute a method of payment as well as a debt recognition title allowing the seller to initiate legal (and insolvency) proceedings against the debtor when the cheque remains unpaid.

Because the judicial system is overly slow and costly, amicable settlement opportunities constitute the strongest alternative to formal proceedings. Before starting legal proceedings against a debtor, assessing its assets is essential as it allows verifying whether the latter is still in activity and whether recovery chances are at best. In addition, it is essential to be aware of the debtor’s solvency status: if insolvency proceedings have been initiated, it indeed often becomes impossible to enforce a debt.

In practice, although conciliation and mediation are no prerequisites to conducting legal action, the courts seem to be increasingly involved in helping the parties to reach an amicable settlement. Sometimes, the judges would actually draft the terms of an agreement and leave the parties to decide on their acceptability before referring the case to Alternative Dispute Resolution methods (ADR).

If the amicable phase fails or if the debtor questions the claim, the option of starting legal proceedings remains. No fast-track proceedings are available and the outcome of a lawsuit is haphazard, but the process would nonetheless take place as follows. A claim must be filed with the court, which then serves the debtor with summons if the claim is deemed admissible. The debtor is then given thirty days (sixty days if the respondent is a public entity) to pay or bring a defence. Failure to do so would entitle the claimant to request a default judgment from the court, but in practice the courts are flexible with this time requirement. Hearings would then be organized and evidence would be cross-examined before a judgment is rendered. In addition, judges must give the benefice of the doubt to defendants where the evidence is questionable, so that going to court when the claim is challenged may be extremely risky.

Courts typically award remedies in the form of declaratory decisions (as to a title, a right or a legal status), specific performance, compensatory damages or injunctions. The courts would never award punitive damages.

The following documents would be necessary: Invoices, sales contract, purchase order, bill of lading/airway bill, any email/letter wherein debtor has acknowledged the debt or promised payment. Further the said documents are required in original at the time of initiating legal action or latest at evidence stage.

Commercial claims must be brought before Indian Courts within three years, starting from the invoice due date. The limitation period may be extended for an additional three years if the debtor acknowledges the debt in writing or pays the debt in part.

Otherwise, this limitation is considered a matter of substantive law which the courts have no authority to bypass. Beyond this period, legal action will therefore not be admitted.

Precautionary measures may help to preserve the debtor’s interests pending a final decision. Indeed, the courts may order interim measures or injunctions aiming at protecting assets (attachment orders) or evidence (search orders). The claimant must however demonstrate that it has a prima facie case, that the balance of convenience is in his favour and that ordering such measures would prevent the occurrence of irreparable harm. Same-day orders may be obtained in emergency situations if the courts agree to render ex parte decisions (in the debtor’s absence), but the claimant would be asked to provide security on costs in order to protect the respondent from irresponsible action.

The defeated party may lodge an appeal before a High Court against the decision (decree) rendered in first instance, within thirty days of notification of the court decision. The court would then review the judgment taking questions of law and fact into account. Decisions rendered in second instance may also be appealed against before the Supreme Court within ninety days, but the latter must grant a leave for appeal to this effect and will only consider questions of law of general importance.

Decrees and orders issued in first instance by any High Court may be appealed in the same court within thirty days.

Enforcement of domestic judgments may commence once a judgment is final (i.e. no appeal is lodged within ninety days). If the debtor fails to satisfy the judgment, it is possible to request the court to commend execution by way of an attachment and sale of the debtor’s assets. Action to obtain an enforcement order may be barred after twelve years.

The duration of legal proceedings in India would vary, depending on the type of legal proceedings and the courts before which legal action is initiated. Nonetheless, it would be fairly reasonable to say that legal action could require three to four years on average.

Difficult enforcement conditions in the most complex cases could double this duration.

The courts in India do not differentiate between domestic and International litigation proceedings, therefore no specific delays ought to be expected in this regard.

The winning party may obtain from the court that part of the costs deemed necessary to defend the claim be paid by the defeated party. In practice, the courts have however imposed significant limitations to the benefit of the latter. Significant court fees must be paid whilst initiating a recovery suit against a debtor. The fees may vary importantly from one State to another since, in the absence of uniform regulation, these are not always capped.

The costs of proceedings otherwise include the lawyer’s fees, the fees of process server, the bailiff’s fees, publication costs and other miscellaneous expenses. As far as attorney fees are concerned, conditional arrangements and contingency arrangements whereby legal fees are not paid upfront but rather consist of a percentage of the awarded damages (i.e. ‘no-win-no-fee’) are prohibited by law.

Given the difficulty to obtain court decisions through the ordinary legal process, Alternative Dispute Resolution methods may prove very effective. The Arbitration and Conciliation Act 1996 is based on the UNCITRAL Model Law on International Commercial Arbitration of 1985 and would allow the parties to solve their dispute by either reaching a voluntary compromise (conciliation) or having the dispute decided by a neutral third-party whose decision is binding on the parties (arbitration). These proceedings also bring confidentiality to the dispute settlement proceedings and may thus constitute a serious means of protecting trade or commercial secrets.

Even though recognition and enforcement may be complicated (see below), foreign traders may also escape domestic courts by subjecting business disputes to a foreign forum (i.e. under a foreign law or before a foreign court). Indian courts indeed tend to respect foreign jurisdiction clauses provided that there is no contradiction with Indian regulations or public policy, and that a foreign law does not aim at escaping Indian tax law. If a foreign law is to be applied, Indian courts would nonetheless apply Indian procedural rules as well as Indian rules of evidence.

It is however essential that the agreement be characterized by an international connection (for example, one party has elected domicile in another country, or the place of execution is located abroad), and that a jurisdiction clause is drafted to this effect by a specialist.

As far as arbitration is concerned, domestic proceedings conducted under the Arbitration and Conciliation Act would prevent the parties from applying a foreign law to the dispute. Foreign laws would however be applicable in international arbitration proceedings.

India is a party to the Hague Convention on Foreign Judgments in Civil and Commercial Matters since 2006 but enforcing foreign awards in the country may be a lengthy, costly and haphazard process. When the foreign decision was issued in a country signatory to a reciprocal enforcement agreement with India, the decision is deemed enforceable by District Courts as if it had been issued by an Indian court (Section 44A of the Code of Civil Procedures of 1908). The court would nonetheless verify, amongst other details, whether the issuing court had jurisdiction to decide with the claim in the first place and whether the decision is compatible with Indian and international law. When no reciprocity agreement applies, enforcement requires commencing a new legal action before the District Court of the defendant’s location (Section 13 CPC), which would also verify these points.

India is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958, therefore its domestic courts ought to recognize and enforce awards rendered through international arbitration proceedings.

A debtor is deemed insolvent if it is unlikely to make its net worth exceed the accumulated losses whilst meeting its financial obligations within a reasonable period of time. In addition, a company is deemed ‘sick’ when losses over several years have reduced significantly its average net value or when it has failed to repay debts on a regular basis. Prior to 2016, the insolvency framework in India was made up of several bodies of laws whose overlapping provisions were applied by conflicting public authorities. Thus, it was extremely difficult to work the system.  On 28th May 2016 the Insolvency and Bankruptcy Code 2016 was introduced to safeguard the rights of the creditors in an efficient and systematic legislative manner.

The Code covers insolvencies of “corporate persons” including companies, limited liability partnerships, personal guarantors to the Corporate Debtors, partnership firms, proprietorship firms as well as individuals. It has introduced a number of new concepts including:
•    The creation of the Insolvency Bankruptcy Board of India to act as the insolvency regulator;
•    The creation of the National Company Law Tribunal (NCLT) to rule on matters relating to the insolvency process under the code;
•    The requirement to form a committee of creditors to oversee the reorganisation or winding up process.

Out-of-court settlement may be considered as the Code of Civil Procedure allows parties to settle the matter provided that a judge passes a consent decree.

A financial creditor may institute a Corporate Insolvency Resolution Procedure (CIRP) against a debtor not only in the case of default of its own debt but also in the case of default of any other financial debt of any other financial creditor. An operational creditor, however, is entitled to file an application only in the event of default of its own operational debt, but prior to that is required to issue a statutory demand notice on the debtor.

The NCLT may admit the Application, if:
•    A default has occurred and the Application filed by the Financial Creditor is complete; and
•    There is no proceeding pending against the proposed resolution professional.

The NCLT will then appoint a qualified insolvency/resolution professional to manage the affairs of the company.  The resolution professional has day to day control over the company not the directors. 

After the collation of all claims and determination of the financial position of the corporate debtor, the resolution professional shall constitute the Committee of Creditors. The committee usually comprises of all Financial Creditors and they may approve a plan by 66% majority or choose to liquidate the company. The CIRP process should be completed within 180 days.

A company will be liquidated if the Committee of Creditors of the NCLT rejects the plan, or during the CIRP process the Committee of Creditors decide that saving the company is not viable.

Priority rules normally apply whilst distributing the proceeds to the creditors. These are complex and vary depending on the legal framework considered.

In the bankruptcy and insolvency code the insolvency resolution process costs and liquidation costs rank higher than all other debts. This is followed by debts owed to secure creditors, wages and money owed to employees, debts owed to unsecured creditors and then preference shareholders.

Receivers in reorganization and liquidation proceedings are both entitled to review and apply for cancellation of any suspect transaction conducted by the debtor during a suspect period ranging from three months to five years prior to the beginning of the insolvency proceedings. Typically, transactions favouring one creditor over the others or reducing the estate’s value (etc.) could thus be void.

The total duration for the concluding insolvency proceedings should be 180 day, which may be extended for 90 more days.

Invoices, sales contract, purchase order, bill of lading/airway bill, any email/letter wherein debtor has acknowledged the debt or promised payment. Further the copy of said documents are acceptable, but original may be required in some cases.