What to do if family member or friend is not repaying borrowed money?
When it comes to family, friends, and relatives, especially when they are in immediate need of funds or money, we never hesitate to lend money or provide friendly loans. Moreover, due to involvement of relations, we even hesitate to create any written document or to ask the borrower to provide any asset as security and that’s why usually these loans, are provided on the verbal promise of repayment or paying back and are generally unsecured. However, things get complicated when the acquaintance or relative who borrowed funds refuses from the repayment of borrowed money. Here, we will discuss the legal remedies and legal steps to be taken for the refusal to repay borrowed money i.e. what to do if family member or friend is not repaying borrowed money and how can you recover your friendly loan?
Is Friendly Loan legal in India?
Friendly Loans are legal in India and can be provided with or without interest. However, there are certain legal considerations which an individual must consider before providing any friendly loan:-
- Total advanced sum if provided in cash should not be more than 20000 rupees.
As per Section 269 SS of Income Tax Act, 1961, a person can lend a sum of Rs. 20000/- (Twenty Thousand Rupees only) in cash to another person in aggregate and should use account payee cheque or account payee draft or electronic clearing system through bank account for the payment more than Rs. 20000/- (Twenty Thousand Rupees only).
However, this rule is not applicable when the lender and the borrower, are farmers, are having only agricultural income and do not have any other taxable Income.
- Tax should be paid on the Interest earned from the friendly Loans.
Although, advancing loan is a non-taxable transaction but, as per Income Tax Laws, Interest earned or accrued on friendly loans will be fully taxable under the head Income from Other Sources and the person making payment of interest can claim deduction for interest paid under Section 24 of the Income Tax Act only if the sum was borrowed for the purpose of construction, reconstruction, acquisition, renewal, or repair of house property. However, it is pertinent to mention that a person can charge only a reasonable rate. If it comes to light that the lender has lent money to various persons and is operating the activity of lending as a business while charging huge interest, without registering himself as Money-lender under money lending laws, applicable to the territory where he is operating, the lender can face legal trouble which might attract punishment including imprisonment and fine.
- An Indian Citizen can advance to, or receive friendly loan from an NRI, OCI or a person of Indian Origin only with certain restrictions but not from any other person living abroad.
Borrowing and lending between persons resident in India and Non-Resident Indians (NRIs) are governed by Section 6 of the FEMA Act, 1999 and Foreign Exchange Management (Borrowing and Lending in Rupees) Regulations, 2000 and RBI guidelines which are amended from time to time to incorporate the changes in the regulatory framework. Hence, these rules and regulations should be abided for a friendly loan to be treated as one of legal nature otherwise the persons involved in the transactions can encounter penalties and repercussions.
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What are the legal remedies for refusal of loan repayment?
Repayment of loan is a moral obligation but availability of the legal remedies for the refusal of loan repayment depends upon the facts and circumstances of each case. In case, a person entered into a loan agreement or promissory note at the time of providing loan to his relative or friendly loan, then he can do one or more of the following act depending upon the facts and circumstances of each case subject to the terms and conditions of the Agreement:-
- Service of Legal Notice upon the defaulter; or
- Institution of Civil Suit in the court of appropriate jurisdiction for recovery of debt or money within three years from date of sum advanced; or
- Institution of Summary suit in the court of appropriate jurisdiction only if he fulfills the certain conditions provided under Order 37 of Civil Procedure Code, 1908 within three years from date of sum advanced ; or
- Suit for foreclosure in case of Mortgages i.e. where the loan was secured by way of an asset or property as per the provisions of Transfer of Property Act under Order 34 of Civil Procedure Code for applying before the Court to absolutely debar the mortgagor from redeeming the mortgaged property or the secured asset.
- Filing an FIR for Cheating and Criminal breach of Trust under Section 420 and Section 406 respectively as soon as the borrower refuses to make payment; or
- Filing a criminal complaint under Section 138 of Negotiable Instrument Act, if the transaction involves case of cheque bounce, where the legally enforceable liability was involved. The notice must be served to the issuer of cheque within 30 days of cheque bounce and if he fails to make payment even after 15 days of receipt of said notice, the complaint must be filed within 30 days after expiry of aforesaid 15 days period.
However, if the loan was provided without entering into any loan agreement or promissory note or without any security, in such cases the person who advanced the money has to prove and provide evidences of, the fact of lending money or friendly loan, the fact that the loan was not a gift and the fact that the borrower was under a legal obligation to repay within a fixed period.
In case the borrower dies, without making any repayment then the legal heirs of borrower are only liable to repay the sum to the extent of the value of the assets they inherit from the deceased borrower.
Judicial Precedents:-
- The High Court of Delhi in Harish Dubey versus Ankur Jain, RSA 279 of 2015, on 23rd March, 2016 held that “only because there was no written agreement with respect to grant of loan, the claim of the respondent/plaintiff could not have been discarded. The respondent, PW-1 and his wife, PW-2 have categorically stated that because of the friendly relation existing between the respondent/plaintiff and the appellant/defendant, Rs.1 lakh loan was given to the appellant. The complaint discloses that initially the appellant demanded financial help of Rs.5 lakhs but later agreed for accepting even Rs.1 lakh for bailing himself out of financial difficulties. More often than not, such friendly loans are given without taking resort to documentation and, therefore, no written agreement need be insisted for in all cases of friendly loan.
- Once the respondent/plaintiff proved his claim of having advanced loan of Rs.1 lakh, in cash, to the appellant/defendant through his oral evidence and the evidence of his wife, PW-2, it would not matter if source of collection of amount for the sum to be disbursed to the appellant/defendant is not disclosed. The judgment of the First Appellate Court reveals that there was no challenge to the capacity or the lack of it of the respondent/plaintiff to advance loan to the appellant/defendant.
- The relationship between the appellant and the respondent were friendly as they were neighbours and residing in the same building. The appellant has admitted before the Court below that he attended the house warming ceremony at the respondent’s house and was also a witness to the documentation for issuance of passport in favour of the respondent/plaintiff. These are sufficient indices of good and cordial relations between the parties. When the aforesaid factors are proved, now, it would be a matter of common knowledge that in a friendly relationship loans are advanced without documentation and without the same being reflected in the Income Tax Returns. The amount, as stated by the respondent was paid in cash.”
- The High Court of Delhi in Commissioner of Income Tax versus Mirdu Hari Dalmia, [1982]133ITR550 (Delhi) has held that “A transaction of a loan implies an agreement to repay the money that is borrowed. Shri Harihar Lal cited a definition at loan from Corpus Jurisdiction Secundum (Volume 54, page 654). According to this passage a loan of money is defined as “a contract by which one delivers a sum of money to another and the latter agrees to return at a future time a sum equivalent that which be borrows”; and again as “the delivery by one party and the receipt by the other party of ‘a given sum of money on an agreement express or implied, to repay- the sum lent with or without interest”. These definitions can accepted as succinctly summarizing or analysing the ingredients of a loan. They are in line with the definitions enunciated by our Supreme Court (vide Lakshmanier & -Sons v. CIT/EPT, MANU/SC/0039/1953: [1953]23ITR202(SC) (2), Badridas Daga v. Cit, MANU/SC/0081/1958 : [1958]34ITR10(SC) (3) and other cases). They make it clear that a loan involves an enforceable agreement between two parties, one of whom is the lender and the other the borrower. The former tends moneys to the latter. The latter received the sum and promises to repay it by an equivalent amount at a future date with or without interest. The essence of a loan is a contract. In our opinion, in the present case, there can be no loan because there can be no contract between the two parties in question. If the transaction is viewed as a loan of money by the assessed to his minor son, that is clearly unenforceable. It is settled law that a contract by a minor is void.”
Conclusion:-
Therefore, in case the friend or relative denies to the repayment of borrowed money or denies from paying back the borrowed money, it will not only create sourness in relations but also a challenge to get that money back especially where huge funds were advanced without any agreement or promissory note and that too in cash. One can get legal advice even at the stage of advancement of friendly loan to avoid future troubles.