Supreme Court: Charging “interest on interest” on a borrower’s debt is illegal

The Supreme Court of Azerbaijan has ruled that charging interest on already accrued interest on a borrower’s debt is illegal, Report informs. This position is enshrined in a Supreme Court decision that established uniform judicial practice on the issue of calculating interest for late debt repayment.

The case arose from a dispute in which the plaintiff demanded that the debtor pay additional interest for late payment, accruing it on the total amount of the principal debt and the interest previously awarded by the court. The courts of first instance and appellate courts dismissed the claim, after which the case was heard in cassation.

The Supreme Court stated that, in accordance with the provisions of the Civil Code, interest for late payment may only be charged on the outstanding principal amount and only until the day it is repaid. Charging new interest on previously collected interest effectively amounts to “interest on interest,” which is expressly prohibited by law.

It was also emphasized that even if interest is collected pursuant to a court decision, it does not become the principal debt. Demanding interest on interest unreasonably worsens the debtor’s position and is contrary to the principle of fairness.

Ultimately, the Supreme Court upheld the appellate court’s decision, dismissing the plaintiff’s cassation appeal.

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