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This article is written by Mahesh Chauhan of 3rd Semester of Lloyd Law College, an intern under Legal Vidhiya

ABSTRACT

This Research paper explores the complex dynamics between principal creditors and debtors while focusing on their respective rights and duties. The study finds the legal and financial frameworks that govern these relationships, aiming to clarify the obligations and entitlements of each party to enhance understanding and compliance in financial transactions. The Key areas covered in this research paper are Rights of Principal Creditors including the right to repayment of the principal and interest, the right to enforce repayment through legal means; Duties of Principal debtors such as adhering to repayment schedules; Mutual Obligations and Conflict Resolution, this paper highlights the importance of transparent communication and good faith in maintaining a creditor and debtor relationship and ways for resolving such conflicts through Negotiation, Mediation and if necessary from litigation. The Research provides a comprehensive analysis of these aspects, and aims to contribute a better understanding of the legal and ethical standards governing creditor-debtor relationships.

KEYWORDS

Creditor, Debtor, Rights, Duties, Contract, Conflict, Mediation, Negotiation, Litigation

INTRODUCTION

Debt is the money borrowed by one party from another party or person to serve a financial need that otherwise cannot be met outright.  It simply refers to the borrowing or lending resources or you can say money, with a condition to repay them within a specific period and at an agreed interest rate. The party who borrows the money or financial resources is liable to repay the amount taken are called the Principal Debtor and the party who has given the amount to borrower and stands to receive it back is called a Creditor.[1]

The liability between the principal and debtor and creditor generally arises from the debt agreement or the contract which is wholly legally binding on both the parties. The contract generally defines the terms of the debt, like the amount, interest, repayment time period, and consequences of non-payment. The involvement of debtor and creditor can also be seen in the contract of guarantee under contract law; hence having a significant role in the contract law. Thus, their rights, duties, obligations and legal remedies for the enforcement of the contracts are governed under the law of contract.

Contracts play a very important role in our daily lives. Many a time, we enter into contracts without even realizing it. Even when one buys a Newspaper, there is a contract. Similarly there is an implied contract when one opens the door of a vacant taxi and announces his destination.

Even though a common man seldom takes the trouble of knowing as to what he is doing from the legal point of view. To a man of business, the law relating to contracts is of vital importance. His whole business and most of his transaction are based upon contracts. All such transactions, whether of laymen or businessmen, show that they are based on agreements creating mutual rights and obligations.[2]

We have understood the importance of relationship between the Debtor and Creditor. Now we will be discussing the various rights and duties of both parties in this article.

WHO ARE PRINCIPAL DEBTOR AND CREDITOR?

Principal debtors are individuals or entities that borrow money from another party to meet their financial needs, and they are obligated to repay this amount within a designated time frame. In the contract law, debtors often referred to as promisers and hold specific rights and duties as outlined in their agreements. Below, we discuss the rights and duties of the principal debtor.

While the Principal creditor grants or lend the funds to the debtor and expects to be paid back with interest according to the terms set by the creditor. In this agreement or contract, the debtor also agrees to meet the obligations as set by the creditor, such as a repayment schedule or interest fees.[3]

RIGHTS AND DUTIES

Rights and duties are essential elements of any legal framework, establishing authority for individuals and a structure for responsible behavior that fosters social order and respect for others. Legal rights are enforceable claims recognized by the law, while legal duties are obligations to act or refrain from acting in specific ways. These duties often arise from statutes, common law, or contractual agreements, serving to protect the rights of others and uphold social order.

The relationship between rights and duties is reciprocal; the exercise of one’s rights frequently depends on fulfilling corresponding duties to others. For instance, parties entering into a legally binding contract have the right to perform their obligations while also bearing the duty to uphold those contractual commitments.

RIGHTS OF THE PRINCIPAL DEBTOR

  • Right to Fair Debt Collection Practices:

Principal debtors have the right to be treated with dignity and to be shielded from oppressive or deceptive debt collection methods, guaranteeing the preservation of their rights as consumers.

  • Ability to Dismiss Agreements Obtained by Unjust Methods:

If a contract was established by fraud, deception, lack of free assent, or undue influence, the debtor may view it as voidable.

  • Notice of Breach Right:

The principal debtor is entitled to a notice of breach in the event that a creditor defaults on their contractual duties. This notice gives the principal debtor a chance to address the problem and make amends.

  • The Right to a Specific Performance:

If a creditor violates the terms of the agreement, the debtor may request a court order for particular.

  •  Right to Terminate the Contract:

In certain situations, such as a material creditor violation or a major change in the circumstances surrounding the agreement, the principal debtor may end the contract.

  • Ability to set off:

This right gives a debtor a defense against nonpayment by enabling them to offset the amount due to a creditor against whatever amount the creditor owes them from a separate transaction.[4]

DUTIES OF THE PRINCIPAL DEBTOR

  1. Repayment Obligation: According to the terms of the contract, the principal debtor’s main responsibility is to repay the debt. Regardless of who borrowed the money first, both parties are accountable for repayment in joint liability situations.
  2. Compliance with Agreed Terms: It is legally required of debtors to follow the terms of their responsibilities because defaulting can lead to financial fines, contract violations, and a bad credit rating.
  3. Maintaining Collateral: In secured loan arrangements, debtors must keep collateral in good condition to ensure its value is preserved, allowing the lender to liquidate it easily in case of default.
  4. Duty to Notify of Anticipatory Breach: It is the duty of Debtors to inform creditors as soon as possible if they anticipate being unable to fulfill their obligations within the agreed time period.
  5. Duty to Mitigate Damage: If a debtor cannot perform according to the contract, they must take reasonable steps to minimize any losses incurred by the creditor due to their non-performance.

RIGHTS AND DUTIES OF CREDITORS

Rights of the Creditor

  1. Right to Receive Payment: It is the fundamental right of creditors to receive payment in the debtor-creditor relationship. This right safeguard the interest of creditors so that creditor can get repaid the full amount owed, including principal, interest, fees, and any late payment penalties as stipulated in their agreements.
  2. Right to Legal Recourse: Creditors have the important rights and remedy to take legal action if a debtor fails to secure their contractual obligations. This empowers creditors to protect their assets and recover the funds owed to them.
  3. Right to Enforce Security or Collateral: In the context of debt, creditors possess the right to security or collateral, which mitigates their risk and enhances their negotiating position. In cases of default, this right allows them to seize specific assets owned by the debtor to recover the owed amount.
  4. Right to Claim Damages: This right enables creditors to seek compensation for losses incurred due to the debtor’s negligence or breach of contract. It allows creditors to recover additional costs, lost opportunities, and any emotional distress caused by the debtor’s failure to meet their obligations.
  5. Right to Demand Specific Performance: When monetary compensation is inadequate, creditors can request specific performance, compelling the debtor to fulfill their contractual duties as agreed, thereby protecting the creditor from harm due to the debtor’s non-compliance.
  6. Right to Mitigate Damages: Under contract law, creditors have the right to take reasonable actions to minimize losses resulting from a debtor’s breach, ensuring that they actively work to reduce the impact of any defaults.

Duties of the Creditor

  1. Fair and Honest Practices: While creditors have a valid right in obtaining repayment, but they must prioritize treating debtors with dignity and fairness by adopting ethical practices. The creditors contribute to a more sustainable financial system that fosters trust and mutual benefit.
  2. Consideration of Debtor’s Circumstances: Creditors should take into consideration the debtor’s situation and circumstances when making lending decisions. This consideration could be helpful and can lead to better repayment rates, reduced harm, and a more stable financial environment, promoting cooperation and understanding between Principal Creditor and the Debtor.
  3. Charging Fair Interest Rates: Although there is no legal obligation to charge fair interest rates universally, ethical lending practices advocate for reasonable rates that align with market standards, benefiting both creditors and debtors.
  4. Performance of Anticipatory Breach: Creditors must promptly inform debtors of any actions that may lead to a breach of contract. This proactive communication helps mitigate losses for both parties and prevents abrupt contract terminations.
  5. Providing Clear Documentation: It is essential for creditors to produce clear and comprehensive documentation of loan agreements. This transparency ensures that all parties understand the terms and conditions, reduces misunderstandings, and protects the interests of both the lender and the borrower.

By fulfilling these duties, creditors contribute to a more transparent, fair, and effective financial ecosystem for all involved parties.

LEGAL ACTION AND REMEDIES AGAINST DEBT RECOVERY

When a debtor is unable to pay their debt to a creditor, several remedies can be taken by the creditor depending upon the existing legal framework and the circumstances of the situation. Here are some common remedies available to creditors:

  1. Negotiation: Creditors may negotiate with the debtor to restructure the payment terms. This could involve extending the repayment period, reducing the interest rate, or altering the payment schedule to make it more manageable for the debtor.
  2. Legal Action:  In case the borrowers fails to respond or refuse to cooperate after receiving the legal notice, a creditor can file a lawsuit against the debtor to recover the borrowed amount. If successful, the court may issue a judgment against the debtor by enabling the creditor to pursue further collection actions.
  3. Seizure of Assets: If a borrower fails to comply with a notice within the specified period and does not raise any valid objections, In this case, the creditor is entitled to take possession of the secured assets. This right allows the creditor to act in order to protect their interest in the collateral. Once in possession, the creditor can choose to assign and even transfer the assets either to itself or to another party in whom the secured interest is vested.
  4. [5]Insolvency and Bankruptcy Code (IBC), 2016: The Insolvency and Bankruptcy Code (IBC), enacted in 2016, provides a comprehensive legal framework for resolving insolvency and bankruptcy cases in India and more specifically targeting corporate defaulters. The primary & important objective of the IBC is to ensure a speedy and effective resolution of insolvency and bankruptcy issues in a clear and transparent manner by streamlining the insolvency process, the IBC helps in the ease of doing business, protects creditors’ rights, and provides a structured method for rehabilitating financially distressed companies.
  5. Debt Settlement: Creditors might agree to settle the debt for a lesser amount than owed, especially if they believe that full recovery is unlikely. This can provide the debtor with a most efficient way to resolve their financial obligations.
  6. [6]Mediation or Arbitration: In agreements or contracts that include an arbitration clause, creditors have the option to initiate arbitration proceedings against defaulting borrowers to recover money. By filing an interim application under Section 9 of the Arbitration and Conciliation Act, 1996, creditors can seek interim relief at the outset of the arbitration process.

Arbitration gives several advantages, including expedited proceedings and a more efficient resolution compared to traditional court litigation. The arbitral awards issued in these proceedings are treated as enforceable decrees, facilitating their execution in a manner similar to court judgments. This mechanism provides lenders with a streamlined path to recover their dues while ensuring that disputes are resolved fairly and effectively.

While a debtor’s inability to pay can create significant challenges, there are multiple remedies available to creditors. Each remedy has its own implications and effectiveness, and it often depends on the specific circumstances of the debtor and the nature of the debt. Engaging in open communication and understanding each other situation can sometimes lead to satisfactory resolutions for both parties.

SECTIONS WHICH TALKS ABOUT RIGHTS AND DUTIES OF PRINCIPAL DEBTORS AND CREDITORS

  • 2(g): It defines “promisor” as a person or an individual, who makes the proposal, and “promisee” as a person to whom the proposal is made. These definitions establish the statutory roles of the parties involved in a contract and can be easily inferred as debtor and creditor.
  • Section 38: This Section covers the effect of acceptance of an offer of a promise to refrain from doing something.
  • Section 141: This section talks about the Surety’s Right to benefit of Creditor’s Securities. The surety is a person who accepts the pledge that the principal debtor will return the money back. The surety is also called a guarantor. The creditor can ask the surety to repay the loan if the principal debtor fails to pay the loan. A person have right of surety against the creditor and debtor.[7]
  • Section 135: It talks about the duty of principal debtor to fulfill the obligation of the creditor which includes Debt Repayment.

CONCLUSION

By concluding, we can say that, the rights and duties of both principal debtors and creditors are very critical to the contract law landscape. The relationship between these two serves as the foundation for various financial transactions, varying from the personal loans to International trade. Understanding these rights and duties is very important for ensuring a smooth, secure, and ethical exchange of resources. This Research paper has elucidated the mutual obligations, highlighting that while creditors are entitled to timely repayment and can enforce their claims through legal mechanisms on the other hand debtors are afforded certain protections that prevent exploitative practices. The balance of these rights and duties is essential to maintaining trust and stability in financial systems. Ultimately, the relationship between a principal debtor and creditor is symbiotic rather than competitive. A transaction built on mutual respect, clear expectations, and a shared commitment to justice and accountability benefits both parties. By fulfilling their respective responsibilities, individuals can confidently navigate the complexities of credit relationships and fostering a more equitable and stable financial environment for everyone.

REFERENCES

  1. . JAMES CHEN, What Is a Debtor and How Is It Different from a Creditor, https://blog.ipleaders.in/rights-of-a-surety/#Parties_to_a_contract_of_guarantee,
  2. PIYUSH GUPT, RIGHTS AND DUTIES OF PRINCIAL CREDITOR AND DEBITOR, https://legalvidhiya.com/rights-and-duties-of-principal-debtor-creditor/#:~:text=The%20party%20who%20borrows%20or,back%20is%20called%20a%20Creditor.,
  3. RACHIT GARG, RIGHTS OF A SURETY, https://blog.ipleaders.in/rights-of-a-surety/#Parties_to_a_contract_of_guarantee,
  4. RIGHTS AND DUTIES OF PRINCIAL CREDITOR AND DEBITOR, https://legalvidhiya.com/rights-and-duties-of-principal-debtor-creditor/#:~:text=Generally%2C%20the%20principal%20debtor%20bears,who%20borrowed%20the%20money%20initially,
  5. Debt Recovery Laws: Legal Actions and Remedies against Loan Defaulters, https://settleloan.in/blog/settleloan/settle-loan/debt-recovery-laws/#:~:text=FILING%20A%20LAWSUIT%3A%20In%20case,court%20where%20the%20jurisdiction%20lies.,
  6. Understanding the IBC, https://ibbi.gov.in/uploads/whatsnew/e42fddce80e99d28b683a7e21c81110e.pdf,

[1] https://www.investopedia.com/terms/d/debtor.asp

[2] https://www.volody.com/resource/what-is-a-contract-definition-importance/

[3] https://www.chaserhq.com/blog/what-is-a-debtor-and-what-is-a-creditor

[4] https://www.lawshelf.com/videocoursesmoduleview/debtors-and-creditors-module-1-of-5

[5] https://www.indiacode.nic.in/handle/123456789/2154

[6] https://blog.ipleaders.in/difference-between-mediation-and-arbitration/

[7] https://www.indiacode.nic.in/show-data?actid=AC_CEN_3_20_00035_187209_1523268996428&sectionId=38697&sectionno=141&orderno=142

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