Recover Loans or Advances Given to Another Business

Can you go to court to get a business loan or advance back?

Yes. Money lent to a business becomes a debt once the repayment date arrives, or once the purpose of the payment fails. It doesn't matter whether your books call it a loan, an inter-corporate deposit (ICD) or an advance. If it isn't repaid, you can file a civil suit for the principal, interest and costs. And where there's a signed agreement, a promissory note or a cheque behind it, the suit can often go in as a summary suit. In that kind of suit the borrower can't even defend without the court's permission.

What makes loan cases harder than invoice cases is the paperwork. Businesses lend to each other on trust. Group companies do it, so do old trade partners, and often there's nothing but a bank transfer and a handful of emails. A supplier has a trail of challans and receipts. A lender sometimes has one RTGS entry. So the whole case can turn on proving the money was a loan, and not a gift, an investment or payment for something else.

This page deals with loans and advances given by one business to another. For unpaid invoices, see our page on the money recovery suit. Banks and financial institutions recover through the Debts Recovery Tribunal. That's a different forum altogether.

Loan, deposit, advance or investment? The label can decide the case

Judges don't stop at what your ledger calls the money. They ask what the two of you actually agreed. Roughly, a loan is money handed over on a promise to repay it, interest or no interest. An inter-corporate deposit is what companies call a short-term loan to one another, usually for a fixed term at a fixed rate. An advance is paid before a supply or a job, and you're entitled to it back when the goods or work never turn up. Shares are a different animal. Share capital isn't a debt, and a shareholder can't sue to get it back the way a lender can.

Get the label wrong and a lot follows from it: the limitation period, the court, whether a summary suit is open to you, whether the NCLT is even an option. Money lent to a company is financial debt. An advance for goods looks more like a trade claim. Equity is neither. Put money into a startup through a convertible instrument and it's the instrument, not your intentions, that tells you whether repayment can be claimed.

Advocate B.K. Singh opens every such file by asking for the borrower's books, because whatever they call the money is what the borrower will say in court. If the agreement, the bank narration, both ledgers, the TDS records and the emails all say 'loan', it's a fairly clean case. Books that show 'advance against supply' or 'share application money' mean a fight is coming. Get ready for it early.

The law behind your claim

Is a loan between two businesses a commercial dispute?

Usually. Not always. Section 2(1)(c)(i) of the Commercial Courts Act covers the ordinary transactions of merchants, bankers, financiers and traders. A loan from one trading company to another in the course of business will usually fall inside it. So will an inter-corporate deposit placed by a company with surplus cash, or an advance paid under a supply or construction contract, since the advance is part of a contract that's commercial in itself.

A one-off loan by an individual to a friend's business, with no trade link at all, is less certain. Courts look at what the transaction was and who the parties were, and the amount alone won't settle it. If it isn't commercial, you file an ordinary civil suit. No Section 12A mediation, no strict 120-day limit on the defence, but none of the commercial court's tighter case management either. File in the wrong court and you can lose months. Decide this at the very start. Our page on which court will hear your case goes through value and territory.

The time limit, and when your three years start

The basic period is three years. When it starts is the tricky part, and it's where a lot of loan claims are lost. Under Article 19, a suit for money lent has to be filed within three years from the day the money was lent. Loans repayable on demand get no better treatment, because Article 21 starts their clock on that same day. Lend on demand in March 2023 and, going by those terms alone, your last date to sue is March 2026, even if you first asked for repayment only last month. Clients are often caught out by that.

Where the agreement sets a repayment date, courts generally treat the claim as arising on that date. Lots of ICDs are for six or twelve months. There's room for argument about which article applies in the grey cases. We wouldn't stake a claim on it. Take the earlier date as your deadline.

Plenty of stale-looking loan claims are saved by an acknowledgment. Section 18 gives you a new three years from any written admission of the debt the borrower signs before time expires. Balance confirmations have been accepted, as have emails from the borrower's finance head admitting the figure, and occasionally entries in its audited balance sheet. Section 19 does the same for a part payment of principal or interest, provided it's recorded in writing signed by the payer. There's more in our guide on the time limit to recover unpaid dues.

Ways to recover, and when each one makes sense

• Legal notice. A firm demand to repay within a fixed time, with interest. It often brings a payment plan out of the borrower. It also smokes out their defence and, where the agreement is silent, starts interest running. More on our page about the legal notice for recovery.
• Summary suit under Order XXXVII. Works where you've got a signed loan agreement, a promissory note, an acknowledgment of a specific sum or a bounced cheque. The borrower has to show a real defence before it's allowed to defend. See our page on the summary suit.
• Regular commercial suit. For loans you can prove only through transfers, emails and ledgers, with no signed document. Also where you're claiming damages or other reliefs along with the money.
• Cheque bounce case running alongside. If the repayment cheque bounces, you can file a criminal complaint under Section 138 of the Negotiable Instruments Act, 1881 at the same time as the suit. How the two fit together is on our page about cheque bounce and civil recovery together.
• Insolvency. If you lent to a company, you're a financial creditor. Where the default is Rs 1 crore or more, you can apply to the NCLT under Section 7 of the Insolvency and Bankruptcy Code, 2016. Be clear about what that does, though. It puts the company into a resolution process that touches every creditor. It doesn't collect your debt for you. Details on ncltlawyers.in.
• Arbitration. If there's an arbitration clause in the loan agreement, the claim normally goes to an arbitrator and not to a commercial court.

How a loan recovery case moves, one step at a time

1. Gather the paper trail and reconcile it

   Get the bank entries for each amount lent and each amount repaid. Add your ledger, and anything from the borrower's end: balance confirmations, emails, TDS entries. From these you work out the principal still due, interest at the agreed rate, and the date each sum fell due. Catching a mismatch now is cheap. In the witness box, it's expensive.

2. Fix your limitation date and the court

   Find the earliest date limitation could have begun, then see whether an acknowledgment or part payment has moved it. After that, three questions. Is it commercial? Is it Rs 3 lakh or more? And which court has territorial jurisdiction, looking at the agreement and Section 20 of the Code of Civil Procedure?

3. Send the legal notice

   Ask for the full outstanding with interest, usually within 15 days. Refer to the cheques, guarantees or security in your hands. Send it by post and email, and keep proof of both.

4. Try pre-institution mediation

   Unless you're after urgent relief, a commercial claim goes first to the Legal Services Authority under Section 12A of the Commercial Courts Act. Borrowers often don't show up, and when that happens a non-starter report usually comes within weeks. See our page on pre-institution mediation.

5. File

   A summary suit if your documents support one. If they don't, a regular commercial suit. Either way it goes in with every document, a statement of truth and the court fee. And if the borrower is moving assets, add an application for attachment before judgment, because genuine urgency of that kind can let you skip mediation and go straight to court.

6. Leave to defend, or the written statement

   A summary suit forces the borrower to ask for leave to defend. Refused leave means a decree. Conditional leave, such as a part deposit, that the borrower doesn't honour also ends in a decree. In a regular suit, the written statement has to come within 30 days. The outer limit is 120. Not a day more.

7. Summary judgment, or a full trial

   A thin defence can be dealt with even in a regular suit, through summary judgment under Order XIIIA, without going to trial. Otherwise you're into case management, evidence and final arguments.

8. Execution

   Order XXI is how a money decree gets enforced: attachment of the borrower's bank accounts, receivables, property and other assets. We cover it on our page on execution of decree.

How long it takes, and what it costs apart from our fee

The papers that win or lose loan cases

Where to file: which court, by value and by place

Two things decide where you file. The first is value, and that includes interest claimed up to the day of filing. In Delhi a commercial suit up to Rs 2 crore goes before the District Judge (Commercial Court) of the right district, at Saket, Patiala House, Tis Hazari, Karkardooma, Rohini or Dwarka. Over Rs 2 crore, it's the Commercial Division of the Delhi High Court. There's been a proposal since late 2025 to raise that district limit. Check the current figure. Across the border in UP and Haryana, the suit goes to whichever court is designated Commercial Court for the district, say Ghaziabad, Gautam Buddh Nagar, Gurugram or Faridabad.

The second is place. Section 20 of the Code of Civil Procedure lets you sue where the borrower lives or works, or where any part of the cause of action arose. For a loan that can mean the city where the agreement was signed, where the money was handed over, or where it had to be paid back. An exclusive jurisdiction clause pointing to one city's courts is usually enforced, as long as that city had some genuine link to the transaction.

Loans under Rs 3 lakh, and loans that aren't commercial at all, go to the ordinary civil court at the right pecuniary level. A summary suit can still be filed there if the papers allow.

Interest: the contract rate, the court's discretion, and your tax records

Think of interest in three slices. The first runs up to the day you file, at the agreed rate. If there's an ICD letter saying 12 or 15 percent, there's nothing to argue about. If the agreement is silent, the Interest Act, 1978 lets the court allow interest from the date of a written notice that told the borrower interest would be claimed. Yet another reason the legal notice matters. The other two slices, during the suit and after the decree, are for the court to fix under Section 34 CPC.

Default or penal interest on top of the normal rate is a different story. Judges look at it through Section 74 of the Contract Act, and an excessive default rate may be trimmed down to reasonable compensation. Ask for it. Don't make it the centrepiece.

One thing lenders tend to forget. If the borrower paid interest in the early months and deducted TDS against your PAN, that's powerful evidence the money was a loan and not an investment. Keep those records safe. And interest is part of the suit's value, and so of the court fee. Pump up the interest and you pay more court fee, and settlement gets harder. Our guide on how much interest you can claim shows how courts usually look at rates.

Getting back an advance paid for goods or work

When a supplier, contractor or service provider takes your advance and doesn't perform, you can get it back. The claim is for a refund, normally with interest, plus whatever extra you had to spend buying the same thing elsewhere. It's founded on the contract. Sections 73 and 74 of the Contract Act cover the loss, and if the agreement is void or later becomes void, Section 65 applies.

Everything turns on who was in breach. Expect the supplier to say you kept changing the specification, held up approvals, or didn't pay the next instalment. So keep the purchase order, approval emails and delivery schedule together. Record every delay in writing as it happens, even briefly. Two lines like 'material not received by the agreed date of 15 March; please confirm a new date or refund the advance' will do you more good than a five-page notice six months down the line.

Time for an advance usually runs from when delivery was due, or when the contract came to an end. Your payment date isn't the trigger. If the supplier holds on to the money and goes silent, terminate in writing and ask for the refund with interest. If nothing comes, it's mediation and then the suit.

Directors, promoters and guarantors: who can you actually sue?

In law a company is its own person. Lend to a private limited company and it's the company that owes you, not the people running it. Signing the cheque or managing the business doesn't make a director personally liable. For that you need something more: a personal guarantee, a promissory note signed in the director's own name, or money obtained by fraud. The corporate veil gets lifted only where fraud or sham is clear. We don't see it often.

So if you know the promoters, get their personal guarantee when you lend. Asking afterwards rarely works. Section 128 of the Contract Act makes the guarantor's liability co-extensive with the borrower's, which means the guarantor can be joined in the same suit and you don't have to exhaust your remedies against the company first. With a sole proprietorship, the owner and the business are one, so the owner is personally liable. Partners answer jointly and severally for a firm's debts.

Where a director got the loan by lying about facts, a cheating complaint under the Bharatiya Nyaya Sanhita, 2023 may be possible. But a business that simply ran out of money hasn't committed a crime, and using the police as a lever in that situation backfires. Courts quash complaints that dress up a civil default as a criminal one. A weak complaint can damage your suit as well.

Stopping the borrower from emptying the company

Selling off property, closing accounts, quietly moving the business into a new company: if you see any of this, apply for attachment before judgment under Order XXXVIII Rule 5 CPC. Suspicion isn't enough. You need material showing the defendant intends to obstruct or delay a decree by disposing of or removing its property. If satisfied, the court can direct the borrower to furnish security and, failing that, attach specified property. What judges want to see is set out on our page on freezing assets before judgment.

Because attachment is urgent interim relief, the suit seeking it can skip pre-institution mediation. The urgency must be genuine, though, and the plaint must show it. Advocate B.K. Singh's first step on these applications is a list of the borrower's known assets, with addresses and account details. Nobody can attach property that hasn't been identified.

There's also the Order XXXIX injunction, which can stop the borrower transferring one particular asset, for instance a property that was informally promised to you as security. And if the debt is big and the company is clearly sinking, a collective process might protect creditors better than everyone racing to attach first.

What borrowers usually say in defence, and how it tends to go

• 'It was an investment, not a loan.' This usually fails where the emails, the ledger entries and TDS on interest all point to a loan. It gets more traction where no interest was ever paid and the lender was involved in running the business.
• 'We repaid it in cash' or 'it was adjusted against supplies'. The borrower has to prove it. As a lender, check that no trade dues were actually set off, and have a clean reconciliation ready.
• 'The claim is time-barred.' The most dangerous one by far. You answer it with the acknowledgment or part payment that restarted time, and you file that with the plaint.
• 'A director took the loan personally, not the company.' The bank trail answers this, showing the money landed in the company's account and the company used it.
• 'The lending company didn't comply with Section 186 of the Companies Act, 2013.' Non-compliance has consequences for the lender under company law, and borrowers do raise it. Courts have generally been slow, though, to let a borrower that used the money keep it on that ground. Keep your board approvals on file anyway.
• 'WhatsApp messages aren't proof.' They are, once proved with a certificate under Section 63 of the Bharatiya Sakshya Adhiniyam, 2023. Hang on to the phone, and export the chats properly before the case begins.
• 'The interest rate is a penalty.' A court may cut down an excessive default rate. Your principal isn't touched.

How it plays out for lenders, investors, MSMEs and big companies

Trading companies and MSMEs mostly lend to people they already deal with, customers or suppliers, and usually without much formality. So their cases live or die on the paper trail. One common mistake. The MSMED Act's interest at three times the bank rate is for unpaid supplies by registered micro and small enterprises, and it has nothing to say about loans, so an MSME that lent money has to use the ordinary routes on this page.

Investors and angel lenders who put bridge money into a startup should read the instrument first. A plain loan, or a convertible note that has fallen due for repayment, is a debt you can sue on. Once it has converted into shares, it isn't. Startups rarely own much you could attach, which is why speed and early mediation usually matter more to these lenders than a long, careful trial. Large corporates and group companies are the opposite case. They tend to have proper ICD letters and a clean board trail, and summary suits work well for them. Their borrowers, though, often have deep pockets. And counter-claims.

The law is the same in Delhi, Uttar Pradesh and Haryana. Court fee isn't, because each state sets its own schedule, and neither is the speed at which matters get listed. Delhi's district commercial courts carry a heavy load of recovery suits. In Ghaziabad, Gautam Buddh Nagar, Gurugram and Faridabad, the designated courts hear a lot of business-to-business disputes from their own industrial belts.

What to do this week

This week, collect the bank entries and every paper that describes the money as a loan. Pin down the date the loan became due. Then look for anything signed by the borrower since that date which admits the debt. If you've got six months or less left on limitation, move now, because the notice and the mediation application can go out in the same week. And if assets are being shifted, note down what you know about them, with dates, before you decide on an urgent application.

One warning. Don't accept new post-dated cheques or a revised schedule unless the borrower first signs an acknowledgment of the whole balance. That one sheet may end up worth more than the cheques. If you'd like your loan papers checked before a notice goes or a suit is filed, send them to Advocate B.K. Singh's team through our contact page.