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Businesses sometimes might not be able to repay the loan that they have borrowed. This is probably because they have run into some financial troubles and have no cash left to pay off the business loan. When you have defaulted on loan repayments and have not been able to pay up even after legal notices being issued, the lender will start a business loan recovery process according to bank loan recovery rules if the lender is a bank.

What is the business loan recovery process?

Business loan recovery is a process governed by the Insolvency and Bankruptcy Code, 2016. This deals with the insolvency and liquidation of corporate debtors/companies where the minimum amount of the default is ₹1 Lakh.

The lender first executes a non-judicial process in case of loan default by sending a demand notice indicating the default amount. If the corporate debtor/company does not respond to the notice, then the lender proceeds with the judicial process.

Also read: Business Debt Consolidation Loan in India: Check companies, How to calculate, debt relief program

How is a business loan recovered after non-payment?

The business loan recovery process in India to be followed by a lender is mentioned in detail in the Insolvency and Bankruptcy Code, 2016. This is the loan recovery process in banks and other financial institutions of India.

As mentioned before, the lender first seeks loan repayment in case of a default through a non-judicial process which means the loan recovery process will be resolved between the lender and the corporate debtor without involving a third party.

Non-judicial process

Let us have a look at the non-judicial process followed for business loan recovery:

Step 1:

“An operational creditor on the occurrence of a default, deliver a demand notice of unpaid operational debtor copy of an invoice demanding payment of the amount involved in the default to the corporate debtor.” This means that the lender will send a demand notice to the company that has defaulted on the business loan.

Demand notice – A demand notice means a notice served by a lender to the corporate debtor demanding repayment of the loan.

Step 2:

The corporate debtor within a period of ten days must make the payment mentioned in the invoice. He/she must then respond to the notice by sending an attested copy of the record of electronic transfer of the unpaid amount or by sending an attested copy of record of the cheque issued by the corporate debtor that the lender has encashed.

Business Loan

If the company has any dispute regarding the demand notice issued by the lender, then the company must notify the existence of a dispute and submit a record of the legal suit or arbitration proceedings filed.

Step 3:

After the expiry of the period of ten days from the date of delivery of the demand notice, if the lender does not receive payment from the corporate debtor or notice of dispute, the lender will file an application before the Debt Recovery Tribunal for initiating a corporate insolvency resolution process.

Judicial process

Under the judicial process, “where any corporate debtor commits a default, a financial creditor, an operational creditor or the corporate debtor itself may initiate corporate insolvency resolution” by sending an application to the Debt Recovery Tribunal of India.

This is the process that is followed in the judicial business loan recovery process:

Step 1:

The financial creditor will submit an application to the Debt Recovery Tribunal along with the documents to indicate the loan default and the name of the resolution professional (an insolvency professional appointed to conduct the corporate insolvency resolution process and includes an interim resolution professional)

Step 2:

The Debt Recovery Tribunal ascertains the existence of a default within fourteen days of the receipt of the application.

Step 3:

The application can be rejected or approved by the Tribunal. In both cases, the Tribunal notifies the corporate debtor and creditor within seven days of acceptance or rejection of such application.

Step 4:

The corporate insolvency resolution process commences from the date of acceptance of the application. The corporate insolvency resolution process will be completed within a period of 180 days from the date of acceptance of the application.

Step 5:

Once the insolvency resolution process starts, the Debt Recovery Tribunal will declare a moratorium prohibiting the company from the following activities:

  • Commencing any legal suit or continuing pending suits against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority.
  • Transferring, encumbering, alienating or disposing of any of the company assets.
  • Any action to foreclose, recover or enforce any security interest created by the company in respect of its business property.
Security interest
Security interest means right, title or interest of any kind other than those specified in Section 31 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.Security interest has the same meaning as collateral. Security interest is created when a “secured asset” like property, machinery, etc., belonging to the company has been pledged to take out a loan.
  • The recovery of any property used by the business for professional purposes by an owner or lessor.

Step 6:

A public announcement of the initiation of corporate insolvency resolution process is made.The public announcement of the corporate insolvency resolution process will contain the following information:

  • Name and address of the corporate debtor under the corporate insolvency resolution process
  • Name of the authority with which the corporate debtor is incorporated or registered
  • The last date for submission of claims (debts owed to the lender)
  • Details of the interim resolution professional who will receive the claims and manage the business loan recovery process until a fixed resolution professional is assigned.
  • Penalties for false or misleading claims
  • The closing date of the corporate insolvency resolution process, the 180th day from the date of the acceptance of the application

Step 7:

An interim resolution professional is assigned. Once in charge the resolution professional will:

  • Manage all affairs of the company
  • Exercise the powers of the board of directors or the partners of the company and suspend the rights of board of directors and partners of the business.
  • Receive help from the officers and managers of the company for all documents required for the proceeding
  • Ask for all the financial documents including all bank accounts related to the business
  • Order all financial institutions providing services to the business enterprise to act on the instructions given as a part of the insolvency proceeding

Also read: Business loan foreclosure charges: SBI, ICICI, HDFC, Bajaj Finserv & more

Step 8:

The interim professional will:

  • Act and execute in the name and on behalf of the corporate debtor all deeds, receipts, and other documents.
  • Collect all information relating to the assets, finances and operations of the corporate debtor
  • Receive and collate all the claims submitted by creditors/lenders
  • Take control and custody of any asset over which the corporate debtor has ownership rights as recorded in the balance sheet of the company

Step 9:

The interim resolution professional will determine the financial position of the corporate debtor.

Step 10:

After collation of all claims received the interim resolution professional will constitute a committee of creditors. He/she will monitor the assets of the corporate debtor and manage its operations until a resolution professional is appointed by the committee of creditors. The committee of creditors shall comprise all financial creditors/lenders of the corporate debtor/company.

Step 11:

The first meeting of the committee of creditors shall be held within seven days of the constitution of the committee of creditors.

Step 12:

The committee of creditors, in the first meeting will appoint the interim resolution professional as the resolution professional or replace him/her with another resolution professional. This is done by casting a vote. A majority vote of not less than 75% of the voting share of the financial creditors is considered.

Step 13:

The resolution professional will conduct the entire corporate insolvency resolution process and manage the operations of the corporate debtor during the corporate insolvency resolution process period. He/she will exercise the same powers and perform the same duties as the interim resolution professional.

Step 14:

The resolution professional submits a resolution plan approved by the committee of creditors to the Debt Recovery Tribunal

Step 15:

Upon approval from the Tribunal, all action items under the plan are executed. Action items are usually liquidating the assets and paying back the lenders.

This completes the non-judicial process of business loan recovery.

It is better for businesses to pay off all business loans on time to maintain a good credit score and goodwill among financial institutions. Always remember a timely business loan can tide any enterprise over financial hardships or fund a business growth plan.

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Also read: Tips to avoid business loan scams in India

Priyanka Babu

Priyanka is a seasoned content marketing professional with more than 6 years of experience crafting various forms of business and technology sector content. Her insightful writing tackles critical issues faced by small-scale manufacturing businesses. Priyanka’s clear and concise communication empowers businesses to make informed decisions and thrive in today’s dynamic business environment.