You gave a friendly loan to a family member or friend or acquaintance and they have conveniently ignored, delayed or denied to return your hard earned money that you gave out with such generosity? What can you legally do in such situations and how can you avoid a scenario where you are left remediless? Fret not, this article will answer these questions for you.
The main problem with friendly loans is that the exchange of money between the lender and the borrower is based on mutual trust. Such loans are unsecured as the terms and conditions involved are either loosely/informally decided, or not decided at all. In such cases, there is no evidence of a transaction between the two parties, thus making the recovery of loan an extremely difficult process.
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You should always give a friendly loan in one of the two following ways:
1. Promissory Note
2. Loan Agreement
1. Promissory Note
A promissory note is essentially an instrument in writing that contains an unconditional undertaking. It is signed by the maker to pay a certain amount of money only to a particular person (or the bearer of the instrument/lender). It only consists of simple terms and conditions and no specific clauses like in an agreement. A promissory note is a valid legal document as per the Negotiable Instruments Act, 1881 and is accepted by Legal authorities/Courts in case any dispute arises.
2. Loan Agreement
A loan agreement consists of several terms and conditions, such as the reason for loan, the interest rate applicable on the loan amount, the duration or term of the loan, any security for the loan, how and when the loan is to be returned etc. These terms and conditions decide the give and take of the amount, thus making the borrowing and lending of a friendly loan formal. With an agreement, the parties can decide variables and add other important terms, rather than a mere promise to repay. A loan agreement (fulfilling the conditions in Section 10 of the Indian Contract Act, 1872) is a formal contract and is thus legally enforceable.
A lender should also send a formal letter to the borrower. This letter should consist of specificities regarding the debt/loan, the amount of debt, the date on which the loan was taken, the date of the last payment and the amount that is due to be paid back to the lender.
Consult: Top Recovery Lawyers in India
Steps involved in legally recovering your friendly loan
1. Meet a lawyer
The first thing you should do after you have decided to legally recover your friendly loan is to meet with a lawyer. A lawyer will be able to help you and guide you after understanding the facts and circumstances of your matter.
2. Ensure that you can approach the Court in your matter
One can approach the court only when the money that has been lent to the other individual is wholly a debt, and in no form a penalty arising out of any engagement.
A suit can be filed in either High Court, City Civil Court, Courts of Small Causes and any other appropriate court as the case may be.
3. Ensure no triable issue will hamper your matter
A lender can file a summary suit in order to get a friendly loan back . If any triable issues are present in your matter, your leave could be denied by the court.
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4. Summary Suit
The civil remedy for recovering money is by way of instituting a suit in the court of appropriate jurisdiction. The suit can be filed under Order 37 of the CPC. A summary suit is a unique legal procedure used for enforcing a right in an efficacious manner - where the courts pass judgment without hearing out the defence. This kind of procedure is applicable only on limited subject matters.
Procedure of Summary Suit under Order 37 takes effect faster than ordinary suits. The procedure for filing a summary suit has been stated below-
a. Institution of the suit: The first step to filing a summary suit is the institution of the suit (by way of plaint). A suit for summary procedure can be filed for bills of exchange, hundies and promissory suits, along with suits in which the plaintiff seeks to recover a debt or liquidated demand in money payable by the defendant, with or without interest arising
On a contract in writing, or
On an enactment where the amount that is to be recovered is a fixed sum of money, or a debt other than a penalty, or
Guarantee, where the claim against the principal is in respect of a debt or for liquidated demand only, or
Suit for recovery of receivables.
The plaint should be accompanied by supporting documents such as the contract between the lender and borrower, particulars of claim and any correspondences between the parties. The plaint shall be accompanied by an affidavit. It is required to be proved by verification of facts.
The Court fee is also required to be paid by the Plaintiff. A suit will be returned in case the apt court fee is not paid.
b. Summoning the borrower / defaulter: After the suit is filed, the Court will examine the suit/plaint and its admissibility and then issue summons to be served on the opposite party/defendant(s). Once the summons are served, the defendant/opposite party is required to enter appearance within 10 days from the date of service. Once the defendant enters his/her appearance, the plaintiff will have to serve a summons for judgment on the defendant. The defendant will thereafter have 10 days to apply for leave to defend the suit. The Court can grant leave to defend to the defendant, either unconditionally or upon such terms that the Court may deem fit.
If the defendant does not apply for leave to defend, or if the application for leave to defend has been refused, the plaintiff becomes entitled to judgement, in his/her rightful capacity. If the conditions on which leave to defend are not complied with by the defendant, in such case as well, the plaintiff becomes entitled to judgment forthwith.
c. Trial and Arguments: If the leave to defend is granted, then, the suit will proceed just as an ordinary suit and decree is granted as per Code of Civil Procedure. The procedure of trial commences after the aforementioned steps. Once the arguments (as the case may be) are presented, the Court makes its decision.
d. Decree: As has been stated earlier, if the defendant fails to enter appearance within 10 days of service of summons, or if the defendant is unable to make out a case even after his/her appearance, a decree is passed in favour of the plaintiff. In a summary suit, the plaintiff is entitled to a decision/decree of an amount not exceeding the sum mentioned in the plaint.
Consult: Top Recovery Lawyers in India
Precautions to be taken in order to avoid being left remediless
A stitch in time saves nine- this holds true for friendly loans as well. Given below are some precautions you must take, lest you are left remediless.
1. Do not give the loan in cash
Advancing money to the debtor/borrower in cash is a big no since you will not have any solid evidence in case you are wronged. Giving in cash doesn’t allow you to have actual proof of transfer of money. Instead, you must make use of cheques for such transfers.
2. Make a pronote or an agreement
Even if it is a friendly loan, in order to safeguard your interests and seal the deal officially, you must make a promissory note or an agreement for the loan. A promissory note is a written promise to pay a determinate sum of money (debt), from one individual to another. The promise to pay could be at a decided future time, or upon the demand of a payee. It should always be in writing and must also state the etent of the liability (i.e. the emount), the maker's and the payee's names and how and when it is to be repaid.
3. Acknowledgment letter or receipt
You must convince the debtor/borrower to give you a receipt or a letter or even an email, acknowledging that a loan has been taken. Exact details of the amount, names of the debtor/borrower and the lender, the date on which the loan was given etc, should be mentioned.
4. Check creditworthiness of the borrower
Always check the creditworthiness of the individual you are planning to lend your hard earned money to. If you doubt the credibility of such a person, you should rather not give the loan. It is important to do a background check and then decide whether to go ahead with the giving of the loan.
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Offences related to non-repayment of loan
1. Criminal Breach of Trust
If an individual is entrusted with property or possession of it and if he/she dishonestly uses the property to his own use, criminal breach of trust is committed. Therefore, if a person grants a certain amount as loan to another, that property (amount) is entrusted to the borrower, and when he/she does not repay the amount and instead misappropriates it, commits the offence of criminal breach of trust.
It is a crime under the Indian Penal Code, 1860, and is punishable with imprisonment which may extend to three years, or with fine, or with both.
2. Cheating
When a person dishonestly induces another person by deceiving him/her to either deliver any property to any person (including himself) commits the offence of cheating. Cheating is punishable under Section 420 of the Indian Penal Code, 1860. For cheating, the offender can be punished with imprisonment for a term extending upto 7 years and shall also be liable to fine.
Although, most reliefs that are granted are civil in nature, a careful examination is required before going for criminal reliefs/punishments.
Consult: Top Recovery Lawyers in India
How can a lawyer help?
One of the first and the most important steps that you must undertake is to hire a lawyer. A lawyer will save you better than you can yourself, for obvious reasons. A lawyer has the necessary legal knowledge and experience to handle such matters. He/She will be able to guide according to your particular matter - keeping in mind your matter’s strong and weak points. Hiring a good lawyer in order to attain legal relief is a prerequisite and will help you in more ways than one.
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