Recovering Uncollectible Bad Debts: Why It’s a Growing Challenge in India

Indian businesses, particularly MSMEs and mid-sized companies, are increasingly struggling with recovering uncollectible bad debts. These aren’t just delayed payments they’re outstanding dues that seem legally and financially irrecoverable. A chronic bad debt problem caused by non-paying customers and defaulted commercial loans silently eats away at cash flow, working capital, and long-term growth.

But the situation is not without hope. Through legal intelligence, proper documentation, and a proactive approach, businesses can use both litigation and out-of-court tools to address even the most challenging debt recovery cases. Whether you’re preparing for a legal battle or seeking a last resort debt collection solution, this article offers a complete roadmap Customised to the Indian legal landscape.

Why Recovering Uncollectible Bad Debts Is So Common in Indian Business Ecosystems

The causes behind India’s widespread debt recovery issues are complex:

Over-reliance on informal verbal agreements
Weak contract enforcement
Delayed legal action
Lack of thorough credit checks
Procedural delays in Indian courts and tribunals
Cultural hesitation toward litigation

India’s RBI data shows an increasing reliance on unsecured credit, and that’s alarming. With non-paying customers and rising default rates, especially post-pandemic, Indian businesses are at greater risk than ever.

Legal Framework for Recovering Uncollectible Bad Debts in India

Indian law offers multiple legal pathways to recover bad debts depending on the type of default, debtor status, and amount involved.

Indian Contract Act, 1872

The legal foundation for enforcing contracts and obligations. If a debtor breaches the agreement, you can initiate civil action.

Code of Civil Procedure, 1908 (CPC)

You can file a summary suit under Order XXXVII for fast-track resolution of undisputed debts. This is ideal for contracts with clear documentation.

Negotiable Instruments Act, 1881 (Section 138)

If a cheque issued by the debtor bounces, this Act allows you to file criminal proceedings. It’s one of the strongest tools for recovering dues from non-paying customers.

Insolvency and Bankruptcy Code (IBC), 2016

Under Section 9 (operational creditors) and Section 7 (financial creditors), you can initiate insolvency proceedings for defaulted commercial loans. This can lead to restructuring or liquidation.

Recovery of Debts and Bankruptcy Act, 1993

For banks and financial institutions, Debt Recovery Tribunals (DRTs) handle cases above ₹20 lakhs.

SARFAESI Act, 2002

Applicable only to secured creditors, this allows recovery without court intervention by taking possession of secured assets.

MSMED Act, 2006

Especially useful for MSMEs, this mandates payment within 45 days and includes interest penalties for delays. MSMEs can register complaints through the MSME Samadhaan Portal.

Commercial Courts Act, 2015

For high-value commercial disputes, these courts ensure time-bound resolution through a streamlined process.

Judgments That Impact Recovering Uncollectible Bad Debts

Mobilox Innovations v. Kirusa Software

The Supreme Court clarified that only genuine disputes prevent IBC admission. Creditors must act fast and submit complete applications.

Balkrishna Rama Tarle (LRS) v. Phoenix ARC Pvt. Ltd. (2022)

Under Section 14 of SARFAESI, the court ruled that District Magistrates must assist secured creditors without delaying possession faster recovery for banks and NBFCs.

Bank of Baroda v. Indian Overseas Bank (2019)

Secured creditors received priority under IBC, emphasising the need for proper documentation and early legal intervention.

Shree Ram Urban Infrastructure Ltd. v. Union Bank of India

Confirmed DRT’s power to attach assets, reinforcing creditor rights under RDDBFI Act.

Step-by-Step Plan for Recovering Uncollectible Bad Debts

Due Diligence – Collect contracts, invoices, email chains, payment records
Issue Demand Notice – Send a legally valid notice outlining dues and warning of legal action
Attempt Mediation/Settlement – Engage in out-of-court negotiations where feasible
File Legal Proceedings – Choose the right forum (civil court, IBC, DRT, etc.)
Monitor Limitation Periods – Generally 3 years from the date of default

Best Practices to Avoid Chronic Bad Debt Problems

Conduct creditworthiness checks before onboarding clients
Use legally vetted contracts with payment timelines, penalties, and dispute resolution clauses
Include arbitration and mediation clauses in agreements
Maintain proper documentation and payment trails
Avoid relying solely on trust or verbal commitments

When All Else Fails: Last Resort Debt Collection Tactics

If conventional efforts fail, stronger legal tools can be used:

IBC Proceedings – Compel resolution or liquidation
Criminal Complaints – File under Section 138 of NI Act, or Sections 406/420 IPC
DRT Action – Suitable for larger corporate and financial creditors
Litigation Finance – Work with partners like LawCrust who take up strong cases on a success-fee basis

Outlook: The Future of Recovering Uncollectible Bad Debts in India

AI-powered early warning systems will help flag risky clients
Digital courts and ODR (online dispute resolution) will speed up hearings
Pre-litigation mediation will become standard practice
Litigation funding models will give smaller companies access to justice
Stricter debt recovery regulations will ensure ethical, compliant collections

Indian businesses must adapt to this evolving environment by using smart contracts, better credit governance, and legal readiness.

About LawCrust Legal Consulting

LawCrust Legal Consulting, a subsidiary of LawCrust Global Consulting Ltd., is a trusted legal partner for NRIs and Indians across the globe. Backed by a team of over 70 expert lawyers and more than 25 empanelled law firms, we offer a wide range of legal services both in India and internationally. Our expertise spans across legal finance, litigation management, matrimonial disputes, property matters, estate planning, heirship certificates, RERA, and builder-related legal issues.

In addition to personal legal matters, LawCrust also provides expert support in complex corporate areas such as foreign direct investment (FDI), foreign institutional investment (FII), mergers & acquisitions, and fundraising. We also assist clients with OCI and immigration matters, startup solutions, and hybrid consulting solutions. Consistently ranked among the top legal consulting firms in India, LawCrust proudly delivers customised legal solutions across the UK, USA, Canada, Europe, Australia, APAC, and EMEA, offering culturally informed and cross-border expertise to meet the unique needs of the global Indian community.

Recovering Uncollectible Bad Debts in India: Strategies and Legal Remedies for Businesses