Consent Decrees: Recording a Settlement under Order XXIII Rule 3

When a creditor and a debtor settle a claim that is already before a court, the settlement can be made a decree of the court. The result is an agreement that carries the enforceability of a judgment. For a creditor, this is often the best form of settlement: the debtor receives time or a reduction, and the creditor receives an order that can be executed at once if the debtor defaults. This note explains how a consent decree is obtained and what the creditor should include in it. It is general information, not advice on a particular suit.

The procedure

Order XXIII Rule 3 of the Code of Civil Procedure, 1908 deals with compromise of a suit. Where it is proved to the satisfaction of the court that a suit has been adjusted wholly or in part by any lawful agreement or compromise, in writing and signed by the parties, the court must order such agreement or compromise to be recorded and pass a decree in accordance with it. Where the compromise concerns only part of the subject matter, the decree is limited to that part. The compromise may include matter that was not the subject of the suit, and the court may pass a decree on the whole of it.

The parties file a joint application with the terms, signed by them and their advocates. The court examines whether the compromise is lawful, and may question the parties. In practice the terms are set out in a schedule to the decree.

Why a creditor prefers a decree

• Execution. The decree is executable under Order XXI without a fresh suit. A default on an instalment gives the creditor the right to move for execution at once.
• Finality. Order XXIII Rule 3A bars a suit to set aside a decree on the ground that the compromise on which it is based was not lawful. The remedy of a party who says that it was misled is to raise the point before the court that passed the decree.
• No appeal. Section 96(3) provides that no appeal lies from a decree passed by the court with the consent of the parties.

What to include

1. The amount to be paid, how it is arrived at, and any part that is waived. A waiver should be stated to depend on the debtor's compliance.
2. The dates of payment, in instalments if need be, and the mode of payment.
3. The default clause. The whole amount originally due, less sums paid, becomes payable if any instalment is missed, and the creditor has liberty to execute for that sum. Courts respect clauses of this kind, but not if the amount is out of proportion; Section 74 of the Contract Act applies.
4. Interest on delay, at a stated rate.
5. Security, such as a charge over property, a guarantee or post-dated cheques, with the manner of enforcement.
6. The treatment of costs and of other proceedings between the parties, such as a cheque complaint or an arbitration.

Registration

A decree that creates or declares rights in immovable property, other than the property that is the subject of the suit, may need to be registered. Under Section 17(2)(vi) of the Registration Act, 1908 a decree or order of a court is exempt from registration, but the exemption does not extend to a compromise decree that includes immovable property outside the subject matter of the suit. The Supreme Court considered this in Bhoop Singh v. Ram Singh Major (1995). A creditor taking a charge over property in a settlement should therefore consider whether registration is necessary.

Other proceedings

• Cheque complaints. Section 147 of the Negotiable Instruments Act makes the offence compoundable. The Supreme Court in Damodar S. Prabhu v. Sayed Babalal H. (2010) provided for costs where compounding takes place late.
• Insolvency applications. After admission, withdrawal is possible only under Section 12A, with the approval of ninety per cent of the committee of creditors. Before admission, a settlement can be recorded and the application withdrawn.
• Debts Recovery Tribunals. A settlement may be recorded by the Tribunal and a recovery certificate issued in its terms.

A consent decree should be drafted by the creditor's advocate with the default, the security and the registration in mind. A settlement that is loosely written can become a second dispute.