Ancient India - How they Recovered Debts

The roots of the present day human institutions lie deeply buried in the past. The same is true of a country’s law and legal institutions. The legal system of a country at a given time is not the creation of one man or of one day; it represents the cumulative fruit of the endeavour, experience, thoughtful planning and patient labour of a large number of people through generations. To comprehend, understand and appreciate the present legal system adequately, it is necessary, therefore, to acquire a background knowledge of the course of its growth and development. To explain ‘why it is so’, one has to penetrate deep into the past and take cognizance of the factors, stresses and strains which have moulded and shaped legal development. To understand ‘how it is so’, one must appreciate the problems and the pitfalls which the administrators had to face in the past, and the manner in which they sought to deal with them. If we were to confine our attention exclusively to the law as it is, our understanding of it is bound to be deficient as it is not possible to appreciate its present ordering without some familiarity with its past. We would have a distorted picture of the nature of modern law if we were to take the stand that it began only today, or the day before yesterday. The truth us that the traditions of the past have made our modern legal system what it is, and still live on in it. Without a proper historical background, it may be difficult to appreciate as to why a particular feature of the system is as it is. The historical perspective throws light on the anomalies that exist here and there in the system. That is the reason, the researcher is concentrating the perspective of payment and recovery of debts in ancient India and gradual evolution of it till today.

The concept of payment and recovery of debts was a traditional practice existed in Ancient India also.

"Which debt must be paid, and which may not be paid, by whom, where and in what way to be paid, and the rules governing advancing and recovering of loans constitute the title Runadanam (Payment of Debts)”.

I.. Philosophy behind obligation to repay the debts:-
The law imposing the liability to repay the debt incurred by a person has a philosophical orgin. The concept of and the duty to repay it emanates from the Vedas. In the Vedic literature, the duty to pay off one’s debts has been clearly laid down. But the idea of debt (runa) was not understood in the sense of payment of money or loan taken from another. It was understood as an obligation of an individual to the source from which every type of benefit was received by him including his own coming into existence. Duty towards God (Deva runa), duty towards ancestors ( Pitru runa) and duty towards sages ( Rishi runa ) were three kinds of debts recognized by the Vedas and which were required to be discharged by every person. In fact the entire ancient law of the Hindus, not merely the law regulating ‘payment of debts’, is bases upon the celebrated rule or philosophy of ‘Three Debts’ ( runatraya). In ancient days interpretation (Mimamsa), that the key rule or golden rule of interpretation of any of the provisions of the Dharmasastras was, that interpretation which was in conformity with the rule of the ‘Three Debts’ alone should be given. Later, the Mahabharata refers to another debt i.e., the duty towards society or humanity, which shows that it came to be recognized as the ‘Fourth Debt’.

Rule of three debts-key to interpretation
Jaimini declared that there are three fundamental principles which serve as the key to the interpretation of the Smritis. They are that every Hindu is under a duty to discharge the following three kinds of debt:

(1) Devaruna- Debt due to God by performing religious sacrifices.
(2) Rishiruna- Debt due to saints by the acquisition of and imparting knowledge.
(3) Pitruruna- Debt due to parents by becoming a householder and maintaining the continuity of the family institution and tradition by begetting children.

II. Different types of interest:-
Every person who advanced loan to another was entitled to take interest at the agreed rate but not exceeding the rates authorized by law. The smritis regulated the money transaction by prescribing various restrictions regarding stipulation of interest and recovery of interest. Subject to the law laid in Dharmasastras a debtor in a loan transaction was at liberty to agree to pay interest at any rate. Six types of interest was recognized.

1. Kalika: Interest payable periodically

2. Kayika: Interest to be paid in the form of manual labour.

3. Chakravriddhi: Interest on interest, i.e compound interest.

4. Bhogalabha: Profit derived out of enjoyment of property belonging to the debtor, such as house, field etc.( This is the similar to the loan by effecting mortgage with possession in lieu of interest. The same was called Abhiboga by Gautama, namely a transaction in which the complete enjoyment of the article or mortgaged property is provided in lieu of interest).

5. Shikhavriddhi: The interest payable every day until the principal is paid. In view of its ever growing nature day by day it was called Shikavriddhi (growing like hair).

6. Karita: Interest payable in any other manner as agreed by the debtor.

III. Repayment procedure:-
Rules laid down in the Smirits for regulating repayment of loans were:
a) Acknowledge of part payment: When the debtor made a part- repayment of a loan, the receipt of it must be acknowledged by the creditor in writing at the bottom of the document, or he should issue a separate receipt under his signature.

b) Creditor to return bond or acknowledge receipt after repayment: When the money is repaid, the creditor should return the bond or he must execute a document for having received the amount in full satisfaction of the debt.

c) Repayment in the presence of witnesses:- If a debt was borrowed in the presence of witnesses, the repayment should also be made in the presence of witnesses. The smritis nowhere provide that if repayment is not made in the presence of persons who were witnesses to the loan, the plea of repayment should not be accepted. Therefore, it appears, that the above provision for repayment in the presence of some witnesses was only suggested as a safer course to be adopted by a debtor.

d) Liability for failure to acknowledge receipt: A creditor receiving part payment of a debt must give a receipt for it to the debtor. If he does not give a receipt, although he has been asked to give it, he shall lose the remainder of the sums due. Further, the debtor shall be entitled to interest on the amount so paid, at the same rate at which it was payable to the creditor.

IV. When payment becomes due:- The smritis made a specific provision as to when repayment of a loan should be made:
A loan should be repaid-
(i) on demand if no time for repayment is fixed; or
(ii) when it became due, if it is agreed that it should be repaid after the expiry of any specified period, or
(iv) when interest ceases, on its amount becoming equal to the principal.

The first condition corresponds to a loan advanced taking on demand-note; the second to a term loan, and the third was imposed obviously because of the rule of damdupat, as accrual of further interest would stop from the day when it became equal to the principal and the creditor was, entitled to recover the whole amount or to take a fresh bond by capitalizing the interest with the principal.

V. Mode of recovery of admitted debts:
Specific provisions were made prescribing the procedure for recovery of loans where the debtors, having acknowledged the debts, failed to repay.

A debt which is acknowledged by a debtor might be recovered by the creditor from the debtor in the following manner.
(i) by friendly or moral persuasion i.e., by putting pressure through kinsmen or friends, or by threatening to go on fast unto death;
(ii) by clever methods i.e., by borrowing any article from the debtor and withholding it, or withholding an ‘Anavahita deposit’ if any;
(iii) by the use of physical force such as subjecting the debtor to physical restraint;
(iv) by confining any dependant of the debtor such as his wife, son or cattle;
(v) by extracting manual labour from him, if debtor is indigent;
(vi) by squatting at the door of the debtor.

VI. Installment to be allowed to a debtor in difficulty:-
If a debtor has been disabled to make repayment owing to misfortune, he shall be made to discharge the debt gradually according to his means, as and when he earns the income.

VII. Forcible methods not permitted when debt not admitted:-
When a person refused to admit the debt, the creditor’s remedy was only through legal proceeding and not by self recovery methods.

(i) A debtor, who claims judicial investigation of his liability, shall not be subjected to any restraint by the creditor, i.e., use forcible methods. If the creditor puts the debtor under restraint, he shall be fined according to law.

Explanation: A debtor who states, “What may be found to be justly due I shall pay,” is deemed to be a person who claims judicial investigation.

(ii) Without informing the king, a creditor who proceeds to recover a debt in a doubtful case should be punished and shall also lose his right to recover the amount in a suit.

The above rules indicate that it was lawful for a creditor to adopt various forcible methods to recover his debt. But, at the same time, the provisions specifically restricted the right of a creditor to adopt forcible methods only when the debtor admitted the debt, as is clear from the opening words, “which is acknowledged by the debtor”. Therefore it follows that the moment a debtor disputed his liability totally, or even agreed to pay any amount found due by the court, the creditor had no option except having recourse to a judicial proceeding.

VIII. Penalty for resorting to forcible methods when debt not admitted:-
Adopting forcible methods when the debt or liability was disputed was an act disfavoured by law and the creditor doing so was liable to be punished by the imposition of fine. Rule of Katyayana was stringent against creditors resorting to forcible recovery methods against debtors who claimed investigation into their liability.

A creditor who harasses a debtor who claims investigation in a court would lose his claim and would incur a fine equal to the claim.

The above rule indicates the importance attached by law to judicial proceedings and also sets its face sternly against a creditor circumventing judicial proceedings and taking law into his own hands, by providing penalty for such illegal acts, which was a heavy as double the claim amount i.e., he not only lost his right for the recovery of the debt, but was also liable to pay an equal amount as fine.

IX. Restriction on taking manual work:-
Though one of the methods of recovery of debt was by way of taking manual work from a debtor, provided that a Brahmin debtor should not be forced to do manual work. Katyayana modified this rule and said that a creditor should not compel a debtor belonging to a caste higher than his own to do a manual work. Katyayana provided that even while taking manual work a debtor should not be forced to do dirty work, and a creditor violating this rule was liable to be punished, to undergo the first imbruement and the debtor would be released from the debt.

X. Prohibition of arrest in certain cases:-
There were several restrictions on the right of the creditor to arrest a debtor for forcing the recovery of debt.

One about to marry, one tormented by illness, one about to offer a sacrifice, one afflicted with a calamity, one accused by another, one employed in king’s service, cowherds in tending cattle, cultivators in the act of cultivation, artisans while engaged in their own occupation, soldiers during warfare, an infant, a messenger, one who is about to give charity, one fulfilling a vow( performing a special religious obeisance), one who is harassed (by personal difficulties or calamities) shall neither be liable to be arrested nor summoned by the king to attend the Court during that period.

According to Kautilya also prescribes that agriculturalists when they are actually involved in cultivation, and Government servants when they are on Government duty, should not be arrested or put under restraint for recovery of debts. Though the right of creditor to use forcible methods including the right to arrest a defaulting debtor was recognized by law, it may be seen that even the methods which could be adopted were specified. Use of any other type of force by a creditor not authorized by law would have attracted the provisions of criminal law. Further, the rule prohibiting the use of force when debt was not admitted and immunity from arrest in several cases indicate the anxiety of the law to prevent harassment to debtors at the hands of unscrupulous creditors as also the reasonable and human approach. The rule preventing the use of forcible methods when debt was not admitted virtually left the debtor the choice of subjecting himself to a forcible method on himself. A debtor could either deny the debt or claim an investigation of his liability in a court of law and deprive the creditor’s right to resort to forcible methods lawfully.

Further, rules regarding immunity from arrest prescribed by Narada and Kautilya placed public interest above individual interest. If an agriculturist is arrested during the cultivating season and thereby prevented from cultivating his lands, naturally there would be loss of production of food grains which would not only be a personal loss to the agriculturist but also a loss to the state. Similarly, if Government servants were arrested when they are discharging their official duty, public interest would suffer. Immunity from arrest under other circumstances were based on humanitarian consideration which weighed more with law givers than the personal right of a creditor. Further the prohibition against arresting a person which is accused by another indicates that if the defendant had a counter suit or claim he could not be arrested.

Law made it obligatory to allow repayment by installment by a debtor who was in financial difficulty. We find this principle incorporated in Order 20 Rule 11 of CPC.

XI. Rules regarding priority of debts:-
The smriti texts also made provision for deciding the priority regarding recovery of debts when a person had contracted several loans.

Where several debts are executed in writing on the same day the king should treat them all as equal, so far as the security, protection and enjoyment are concerned; in other cases (i.e where the debts are not of the same day) they should be paid in order ( of dates).

But when there are several debts, whatever is incurred first should be paid first but a debt owned to a king or a kshatriya should be paid after the owned to a Brahmin.

Where a creditor establishes that a particular article was manufactured by the debtor with the money or materials of the creditor, the debtor should give that money recovered by sale of the article to the creditor alone and not otherwise.

In view of these provisions, in case of debts incurred on the same day, creditors were treated equally, and in cases where they were incurred on different dates, the priority of right to recover was to be according to the dates on which the debts were incurred. However, a debt due to a Brahmin or the king prevailed in the same order, above other debts, even if it was later in point of time.

XII. Comparable provisions in modern laws:-
The rule of priority indicates that though it gave priority to the amount due to the State as against debts due to others, it gave greater priority to a Brahmin even above the State. Except this special priority, the necessity of treating all other creditors on an equal footing is recognized and provided for in modern legislation. As far as other creditors were concerned if several debts were contracted by the debtor on the same day under the ancient law, all the creditors were to be treated as equal; in cases where property of the debtor was not sufficient to satisfy all the debts, the creditors were to take on a proportionate basis i.e by ratable distribution. If the debtor had no cash, his property could be sold for satisfying the debts. Provisions similar to these are found in sec.61 of the Provincial Insolvency Act, 1920 which regulates the priority of debts while distributing the assets of the debt or who has been declared insolvent. Under the said section, the first priority is given to debts due to Government, local authority and the salary of servants of the debtor. All other creditors share equally thereafter if there were to be any balance of assets belonging to the debtor and they have to share equally irrespective of debt. Section 48 of Transfer of Property Act gives priority to debts due to the State. Similar provisions are found in every law providing for recovery of money due to Government in the same manner as arrears of land revenue.

The Author observed the concept and payment of recovery of debt existed in ancient India with justice, equity and good conscience to a larger extent.