If you are stuck in such a situation, here is what to do.

Mr. Sameer Khanna, a resident of the bustling city of Amodpur, found himself in a complex financial and legal predicament. Back in 2009, he had taken an education loan from ‘Pragati Bank’ to fund his engineering degree. Due to unforeseen circumstances and a difficult job market, he struggled to make timely payments. By 2018, the loan had become a Non-Performing Asset (NPA). Pragati Bank sold this debt to an Asset Reconstruction Company (ARC) named ‘Pioneer Asset Resolutions’.

Pioneer Asset Resolutions contacted Mr. Khanna and, after some negotiation, issued a settlement letter for the outstanding principal amount of ₹4,20,000. Eager to put this behind him, Mr. Khanna managed to pay ₹3,90,000 towards this settlement but, in a crucial oversight, failed to obtain a ‘No Dues Certificate’ (NDC) from the ARC. He believed the matter was mostly resolved. Years passed, and he heard nothing further. Recently, however, he was shocked to see the old loan reappear on his credit report as ‘delinquent’, with the outstanding amount having ballooned to over ₹8 lakhs due to accumulated interest and penalties. The ARC has now started aggressively pursuing him for this inflated amount, leaving Mr. Khanna stressed and unsure of his legal standing.

Advice in such cases

Dealing with ARCs and old debts requires a strategic and informed approach. Here are some key points to consider:

• Settlement vs. Closure: Understand the difference. A ‘settlement’ means the lender has agreed to accept a lower amount than what was due, and this often reflects negatively on your credit report. A ‘closure’ means the entire due amount has been paid. In your case, you entered a settlement agreement.
• Importance of the No Dues Certificate (NDC): The NDC is the most critical document. It is conclusive proof that you have fulfilled your obligations as per the agreement and that no further dues are pending. Without it, the ARC can legally claim that the account was never fully settled.
• The Limitation Period: As per the Limitation Act, 1963, the period for a lender to file a suit to recover a debt is three years from the date of default or the date of the last payment. Any payment or written acknowledgment of the debt can reset this three-year clock. ARCs often try to get borrowers to make a small payment to reset this limitation period.
• Document Everything: Keep meticulous records of the original loan agreement, the settlement letter from the ARC, proof of the ₹3,90,000 payment, and any communication you have had with the bank or the ARC.
• Do Not Acknowledge Debt in Writing: Avoid making any new promises to pay or acknowledging the debt in writing or via email/SMS to the ARC without legal guidance, as this could legally work against you by resetting the limitation period.
• Consult with Lawyer: The very basic and important step to start is talk to Lawyer / advocate. You should not hesitate in paying his consultation fee i.e. might be in range of Rs. 10,000 to 50,000 depends case to case. He is helping you in this situation of come out. He is expert in the domain and can help you explain the procedure which you might have never explored. A good lawyer can get the issues resolved much faster than you think.

Applicable Sections of Law

This situation is governed by civil laws, primarily:

• The Limitation Act, 1963: This Act prescribes the time limit for initiating legal proceedings. For debt recovery, the period is typically three years. If the ARC has not taken legal action within this period from your last payment, their claim might be time-barred.
• The Indian Contract Act, 1872: The settlement letter you received is a form of contract. Your part-payment and their acceptance form the basis of this agreement. The non-issuance of an NDC after substantial payment can be contested under this Act.
• SARFAESI Act, 2002 (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act): This Act governs the functioning of ARCs. It outlines the legal methods ARCs can use to recover debts. It also provides a framework for borrowers to appeal against wrongful actions by ARCs before the Debt Recovery Tribunal (DRT).

If you are the complainant

If you are the lender or the ARC in such a situation, your legal standing depends on meticulous adherence to procedure:

• Maintain Clear Records: Ensure the deed of assignment from the original bank is legally sound and all communication with the borrower is documented.
• Adhere to Limitation: Be vigilant about the three-year limitation period. Initiate recovery proceedings at the Debt Recovery Tribunal (DRT) or the appropriate civil court before the claim becomes time-barred.
• Issue Proper Notices: All notices sent to the borrower must comply with the legal requirements outlined in the SARFAESI Act and RBI guidelines.
• Honour Agreements: If a settlement agreement has been reached and substantially complied with by the borrower, acting contrary to it can weaken your legal position.
• Consult with Lawyer: The very basic and important step to start is talk to Lawyer / advocate. You should not hesitate in paying his consultation fee i.e. might be in range of Rs. 10,000 to 50,000 depends case to case. He is helping you in this situation of come out. He is expert in the domain and can help you explain the procedure which you might have never explored. A good lawyer can get the issues resolved much faster than you think.

If you are the victim

As the borrower facing this issue, you must act proactively to protect your rights:

• Gather All Evidence: Collect every piece of paper related to the loan – the initial sanction letter, loan agreement, bank statements, the settlement offer from the ARC, and proof of the part-payment you made.
• Do Not Make Hasty Payments: Do not pay any further amount to the ARC without a new, comprehensive written agreement for a full and final settlement that guarantees the issuance of an NDC and the removal of the delinquent entry from your credit report.
• Send a Legal Notice: Through a lawyer, you can send a legal notice to the ARC, stating the facts of the settlement and the payment made, and demand the issuance of an NDC based on the prior agreement or a fresh one-time settlement offer.
• Dispute the Credit Report: You can raise a dispute with the credit bureaus (like CIBIL, Experian, etc.), providing them with the evidence of your settlement agreement and payment.
• Consult with Lawyer: The very basic and important step to start is talk to Lawyer / advocate. You should not hesitate in paying his consultation fee i.e. might be in range of Rs. 10,000 to 50,000 depends case to case. He is helping you in this situation of come out. He is expert in the domain and can help you explain the procedure which you might have never explored. A good lawyer can get the issues resolved much faster than you think.

How the police behave in such cases

Loan default is a civil dispute, not a criminal offence. The police have a very limited role in such matters. They will not register an FIR for non-payment of a loan. Their involvement is only warranted if there is an element of criminality, such as:

• Cheating or Fraud: If the loan was obtained using forged documents.
• Criminal Intimidation: If recovery agents sent by the ARC threaten you or your family with physical harm.
• Harassment: If recovery agents engage in behaviour that amounts to harassment, such as calling at odd hours or using abusive language.

In most cases, if you approach the police, they will advise both parties that it is a civil matter and direct them to the appropriate civil court or tribunal.

FAQs people normally have

What evidence is required?

To build a strong case, you will need:

• The original loan agreement from ‘Pragati Bank’.
• The settlement letter issued by ‘Pioneer Asset Resolutions’.
• Bank statements or receipts proving the payment of ₹3,90,000.
• Any emails, letters, or messages exchanged with the ARC.
• Your latest credit reports from all major bureaus showing the delinquent status.

How long will the investigation take?

This is not a criminal case, so there is no “investigation” in the police sense. It is a civil dispute. The timeline for resolution can vary:

• Negotiation: If handled effectively by a lawyer, a final settlement with the ARC can be negotiated within a few weeks to a couple of months.
• Litigation: If the matter goes to the Debt Recovery Tribunal (DRT) or a civil court, the process can be lengthy, potentially taking several months to years to reach a final decision, depending on the complexity and court backlogs.

Advocate Sudhir Rao, Supreme Court of India