Legal Action For Non-Payment Of Invoices In India

In India, unpaid invoices can pose a significant financial burden for businesses, disrupting cash flow and impacting overall operations. To safeguard against such risks, it is essential to understand the legal framework governing invoice payments and the remedies available in case of defaults. From the Indian Contract Act, 1872 to the Insolvency and Bankruptcy Code, 2016, various laws regulate transactions, ensuring that businesses have the legal backing to recover unpaid dues.

Taking legal action for non-payment of invoices in India involves multiple steps, including sending reminder notices, issuing legal notices, and resorting to civil or criminal remedies when necessary. Businesses can leverage civil suits, arbitration, MSME Facilitation Council, and insolvency proceedings to recover unpaid dues. Moreover, preventive measures, such as setting clear payment terms, conducting credit checks, and maintaining thorough documentation, can minimize risks associated with invoice defaults.

This guide provides an in-depth overview of the legal provisions, steps to take before legal action, and the best practices to prevent non-payment issues. Whether you are an MSME or a large enterprise, understanding the legal recourse for unpaid invoices can help protect your business and ensure financial stability.

Legal Provisions Governing Invoice Payments

The regulations that govern invoice payments are:

Indian Contract Act, 1872

The Act regulates all contracts in the country, relating to the sale of goods and services. A contract is deemed to have occurred when an invoice is accepted. Defaulting on these accounts would constitute a breach of contract. Compensation for loss or damage from a breach of contract is addressed in Section 73 of the Indian Contract Act. This allows businesses to file claims for unpaid amounts along with interest and related costs.

Negotiable Instruments Act, 1881

The Act becomes relevant when the invoice is supported by a negotiable instrument, including a cheque or promissory note. Section 138 of the Negotiable Instruments Act provides for the dishonor of a cheque, which is often encountered in cases of non-payment. The criminal liability in cheque dishonor makes this an impactful law for recovering payments.

Civil Procedure Code, 1908

This regulation provides the code to be followed in civil suit filing and conducting such suits in India. It governs the filing of suits for the recovery of money, the main remedy in cases of non-payment of invoices in India. The Civil Procedure Code provides for a number of mechanisms in India for the quick resolution of debt recovery cases, such as the summary suits (Order XXXVII).

Micro, Small and Medium Enterprises Development (MSMED) Act, 2006

This Act protects MSMEs specifically on the delay of payment. The Act clearly states that there's a mandatory requirement to settle any payment to MSMEs within 45 days of the acceptance of goods or services. MSEFC, or Micro and Small Enterprises Facilitation Councils, has been formed as a special forum to settle disputes regarding delayed payment, giving an effective resolution at a lower cost.

Sale of Goods Act, 1930

This law specifies the rights and obligations of buyers and sellers under a sales contract. The law stipulates the specific remedies, like the seller's right to sue for the price and the buyer's right to seek damages. It will also ensure fair dealing by defining specific duties or obligations for both parties. In general, the act seeks to safeguard the interests of both sellers and buyers in trade dealings.

Insolvency and Bankruptcy Code, 2016

The code provides a framework for creditors to recover their money when a debtor company becomes insolvent. It defines an insolvency resolution procedure that will be fair and transparent. As a legal framework, it strives to protect the rights of creditors while dealing with distressed debtors through the process. Another object of the code is to balance the various interests of the stakeholders involved in the insolvency process.

Also Read : What is the bankruptcy insolvency Code in India?

Steps To Take Before Legal Action

Business entities should take the following steps before going for the legal action:

Step 1: Send A Reminder Notice

An official reminder notice, mentioning the amount outstanding, invoice number, and due date, should be sent to the defaulting party. Please record all correspondence.

Step 2: Send A Legal Notice

If no response follows the reminder notice, then consult your lawyer for legal notice. This notice must restate the amount outstanding, the grounds for the legal claim, and demands payment in a stipulated period. This letter would convince the debtor of your seriousness about going to court.

Step 3: Attempt Negotiation And Mediation

Explore the possibility of resolving the dispute through negotiation or mediation. This can save time and money compared with litigation. In some cases, if temporary financial difficulty on the part of the debtor exists, a payment plan may be negotiated.

Step 4: Document Everything

Keep a record of all invoices, bills of lading, emails, and other relevant documentation. These will be important if litigation is necessary.

For professional assistance in recovering unpaid invoices, seek guidance from debt recovery lawyers.

Steps To Take For Non-Payment Of Invoices In India

If pre-legal steps fail, businesses can pursue the following legal remedies:

Civil Remedies

The civil remedies involve the following:

Suit for Recovery of Money

The plaintiff may file suit for recovery of money before the proper civil court. Such a suit should be supported by pieces of evidence, including invoices, delivery receipts, and correspondences. In some cases, it is apt to file a summary suit (Order XXXVII of the Civil Procedure Code) to garner early relief.

Insolvency Proceedings

If the debtor firm is insolvent, proceed under the Insolvency and Bankruptcy Code, 2016. This allows the creditors to recover their dues under the insolvency resolution process.

Arbitration

If the contract contains an arbitration clause, take the case to arbitration under the Arbitration and Conciliation Act, 1996. Arbitration may be faster and more private than a lawsuit.

Criminal Remedies

The criminal remedies involve the following:

Section 138 of the Negotiable Instruments Act, 1881

If the payment is to be made by cheque, and the cheque is dishonored, a criminal charge should be filed under Section 138 of the Negotiable Instruments Act, which may entail imprisonment or a fine on the defaulter.

Criminal Breach of Trust/Cheating

If it is found that there is an intention to defraud the other party, criminal charges may be instituted against the accused under breach of trust or cheating.

Statutory Remedies

It involves the following:

MSME Facilitation Council (MSEFC)

MSMEs may approach the MSEFC for resolution of payment disputes. MSEFC offers conciliation and arbitration in the form of a faster and less costly recourse. The council can instruct the buyer to refund the principal and compound interest.

Best Practices For Preventing Non-Payment Issues

The practices to prevent non-payment issues are:

• Letters of credit on new customers should only be issued after thorough checks of their credit history.
• The contracts should be well-structured, detailed, and in writing, particularly relating to payment conditions.
• Send out invoices immediately after delivery of goods or services to ensure that customers are paying in time.
• Regularly pursue customers for outstanding invoices to avoid late payments.
• Send out gentle reminders just before payments are due so that this can serve as a trigger for the customer to pay in good time.
• The business should encourage secure payments, like wire transfers and online gateways.
• Keep all transactions documented in a ledger so as to maintain financial clarity.
• Lastly, consider credit insurance as a backup plan for your business in case you encounter any losses that are due to non-payment.

Conclusion

Unpaid invoices can severely impact a business's cash flow and financial stability. Understanding the legal provisions and available remedies can help businesses take the right steps to recover their dues efficiently. From civil suits and arbitration to criminal proceedings under the Negotiable Instruments Act, there are multiple legal avenues to address payment defaults. Additionally, MSME Facilitation Councils provide faster dispute resolution for small and medium enterprises facing delayed payments.

Taking legal action for non-payment of invoices in India should be the last resort after exhausting pre-legal measures such as reminder notices, legal notices, and negotiations. Implementing best practices like clear payment terms, regular follow-ups, and secure payment methods can help prevent such issues from arising in the first place. By staying informed and proactive, businesses can safeguard their financial interests and ensure smooth operations in the long run.

FAQs

A few FAQs based on Legal Action For Non-Payment Of Invoices In India are:

Q1. What is a "Suit for Recovery of Money" and how is it different from a criminal case?

A "Suit for Recovery of Money" is a civil legal action filed in a civil court to recover the outstanding debt. It focuses on recovering the money owed. A criminal case, on the other hand, deals with criminal offenses like cheque dishonor or fraud, and can result in fines or imprisonment.

Q2. What is a summary suit (Order XXXVII of the Civil Procedure Code)?

A summary suit is a faster legal process for debt recovery in certain cases, allowing for quicker resolution compared to a regular civil suit.

Q3. What should I do if the debtor company is facing insolvency?

Initiate insolvency proceedings under the Insolvency and Bankruptcy Code, 2016.

Q4. Is arbitration a viable option for resolving invoice payment disputes?

Yes, if the contract contains an arbitration clause, arbitration can be a faster and more confidential alternative to litigation.

Q5. What are some best practices to prevent non-payment issues?

Best practices include conducting credit checks, having clear contracts, issuing invoices promptly, maintaining regular follow-ups, sending payment reminders, using secure payment methods, maintaining records, and considering credit insurance.

Q6. How long does it typically take to resolve a non-payment of invoice issue through legal means?

The time frame can vary significantly depending on the complexity of the case, the court's workload, and whether it's resolved through civil or criminal proceedings. Civil suits can take months or even years, while criminal cases and MSME council resolutions might be faster.