Giving loans or money to friends or family members is a frequent happening, usually motivated by
kindness and belief in one another. However, when difficulties with repayment occur, it becomes
essential to navigate through the legal system. This article delves into the legal principles, applicable
laws, and significant court decisions related to recouping money that was loaned to friends or family
members.
I. LEGAL PRINCIPLES:
EXISTENCE OF A LEGAL AGREEMENT:
The foundation of a successful debt recovery often lies in the presence of a legal agreement. While
written contracts are preferable, some jurisdictions recognize verbal contracts under specific
circumstances. It is imperative to understand the legal implications of both written and verbal
agreements.
PROMISSORY NOTES AND WRITTEN CONTRACTS:
Promissory notes under Section 4 of the Negotiable Instruments Act, 1881 and written contracts
provide a concrete legal basis for debt recovery.
A loan promissory note sets out all the terms and details of the loan:
The promissory note form should include:
The names and addresses of the lender and borrower
The amount of money being borrowed and what, if any, collateral is being used
How often payments will be made in and in what amount
of both parties, in order for the note to be enforceable
The collateral referenced above is a property that the lender can seize if the note is not repaid; for
example, when you buy a home, the house is the collateral on the mortgage. This section outlines the
enforceability of such documents and the prerequisites for a valid contract, stressing the importance of
clarity in crafting these agreements.
IN R. BARATHBARAN (DIED) AND OTHERS V. R.NALLARHAMBI S.A. NO. 142 OF 2012
COURT HELD THAT In the written statement, the execution of the pro-note, signature in the pro-
note and issuance of the pro-note are not in dispute. The trial court has rightly invoked the
presumption under the Negotiable Instruments Act and called upon the defendant to repay the
presumption and is filing decreed the suit. However, court find that the lower Appellate Court/learned
Principal District Judge, Namakkal, has not even considered the presumption under the Negotiable
Instruments Act and not followed even burden of proof or onus of proof as stated in the Indian
Evidence Act.
II. COMMUNICATION AND DOCUMENTATION:
EFFECTIVE COMMUNICATION
Clear communication is a powerful tool in resolving disputes. A well-crafted demand letter can serve
as a formal communication method, outlining the debt, terms of repayment, and consequences if not
settled. This section explores the legal implications of a demand letter.
First step is to write a simple (but formal) 'Letter Before Action' which gives your friend a final
chance to settle the debt before court proceedings are started.
As a minimum your letter should include:
A reasonable time-frame for them to repay in full, this should be seven days as a minimum.
Advising them that if payment isn't forthcoming then you intend to issue county court
proceedings.
A summary of the loan including the amount, date started and when it should have been
repaid.
DOCUMENTS AS EVIDENCE:
Thorough documentation is crucial for building a strong case. This includes written
agreements, emails, text messages, or any communication acknowledging the debt.
Understanding the admissibility and importance of documentation in legal proceedings
strengthens the lender's position.
III. OUT OF COURT SETTLEMENT OR ALTERNATIVE DISPUTE
RESOLUTION:
MEDIATION PROCESS:
Mediation offers an alternative to litigation, promoting amicable resolutions through a neutral third
party. Exploring the mediation process, its benefits, and its limitations provides insights into a less
formal and potentially less expensive route for resolving disputes.
ARBITRATION:
Arbitration clauses, if present in agreements, can influence the dispute resolution process. This section
delves into the enforceability and binding nature of arbitration decisions, offering an overview of this
alternative dispute resolution mechanism.
THIS includes a neutral third party in which both joint and separate session takes places and the
confidentiality of the proceedings remains by signing the non-disclosure agreement between the
parties.
IV. SMALL CLAIMS COURT:
Small claims court is the real “People’s Court.” The purpose of small claims court is to provide an
informal, uncomplicated proceeding to resolve small disputes that do not involve enough money to
warrant the expense of formal litigation. Most people who appear in small claims court do not have a
lawyer but represent themselves. In small claims court, the amount you seek to recover cannot exceed
$10,000.
THE SUIT IS FILED AS:
Collect your records, including copies of contracts and agreements. You should also collect the
following information:
a) your complete name and address;
b) the complete name and address of each person or business your claim is against
c) the amount you intend to claim in damages
d) a concise statement of the basis for your claim, stated plainly and without technicalities, including
the date the claim arose and any other relevant date.
A person moves to the court to file the suit. Ask to see the clerk in charge of filing small claims. You
must complete a small claims statement similar to the one that appears in Section 28.012 of the Small
Claims Court Statute.
V. FILING A CIVIL LAWSUIT:
When amounts exceed small claims limits or circumstances warrant a more formal approach,
filing a civil lawsuit becomes necessary. This section outlines the steps involved in initiating a
civil lawsuit, providing guidance for lenders considering legal escalation.
legal notice to reclaim the money for that process. If that is unsuccessful, you may file a money
suit or a summary suit per Order 37 of the Civil Procedure Code, 1908.
File a recovery suit under Order IV of CPC
Documents needed for a legal notice for recovery of money
When preparing a legal notice for money recovery, these relevant documents must always be carefully
examined:
Affidavit of evidence of money owed or loaned to a friend, relative, etc..
Additional supporting documentation that you might use to support your case in a dispute
relating to the recovery of money.
In India, there is only a three-year window in which one can file a civil recovery claim after the cause
of action has arisen. A lawsuit filed after the statute of limitations has passed will not be considered.
The grounds for obtaining the exemption must be indicated if the case is filed after the limitation
period has passed.
The territorial jurisdiction are where a lawsuit may be brought in accordance with the ‘code of civil
procedure,1908’:
where the defendant (the money defaulter) resides,
where the action’s cause is found (completely or in part).
When a cheque is drawn to fully or partially satisfy a debt or other obligation, and the bank
disburses the cheque, Section 138 of the Negotiable Instruments Act, 1881, states the criminal
and civil penalties associated with the dishonour of the cheque. In the event that the cheque is not
honoured, the drawee’s bank will send a ‘Cheque Return Memo’ describing the cause of non-
payment to the drawee’s bank.
The purpose of Section 138 of the Act is to penalise the person who intentionally draws a cheque with
no intention of cashing it and causes it to bounce. In the case of a dishonest drawer of a cheque,
Section 138 of the Act also imposes criminal penalties in addition to civil liability.
Section 73 and Section 74 of The Indian Contract Act, 1872 may be used to
seek compensation for loss or damage brought on by a breach of contract if a
person commits fraud under Section 17, misrepresents under Section 18, or is
unable to carry out his or her obligations because of a serious liquidity crisis and
possible insolvency.
The fundamental idea behind Section 73 of the Indian Contract Act is to evaluate a party’s contractual
actions and/or inactions in order to determine the amount of compensation owed to the non-defaulting
party as a result of the other party’s non performance in terms of putting the non-defaulting party in
the same position financially as it would have been if the contract’s promise had been kept. As a
consequence, the compensation usually corresponds to the expectation that follows from the
fulfillment of the contractual promise.
The Indian Contract Act of 1872, however, qualifies the general principle by
stating that in order to be eligible for damages, a loss or damage must have
resulted from the breach in the ordinary course of events, or the parties should
have been aware that such a loss or damage might occur later when they entered
into the contract.
The Indian Penal Code (IPC), 1860, provides a variety of provisions that offer
remedies to those whose money has been overdue for one reason or another.
Cheating (Section 415): The maximum penalty for cheating is a year in jail, a fine, or both.
Criminal Misappropriation (Section 403): The penalty is up to two years in jail, a fine, or both.
Criminal Breach of Trust: (Section 405): When someone dishonestly misappropriates or
converts another person’s property for their own benefit, it is considered a criminal breach of
trust. Criminal misappropriation and criminal breach of trust are the same, but in this case, the
person is entrusted with the property.
CONCLUSION:
In conclusion, recovering money lent to friends or relatives involves a multifaceted approach,
combining legal principles, effective communication, and an understanding of alternative
dispute resolution mechanisms. The legal landscape is complex and varies across
jurisdictions, emphasizing the need for tailored strategies and professional legal advice. By
navigating these avenues judiciously, lenders can increase their chances of successful debt
recovery while maintaining relationships with friends and relatives.
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