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Recovery of Loans by BANKS (Special Provision) Act NO 4 of 1990
The Act was introduced to make the debt recovery procedure effective
• To effect the recovery of loans granted by banks for the economic development of Sri Lanka and matters connected therewith and incidental thereto.
Under Section 22 “bank” means;
a. A Licensed Commercial Bank within the meaning of the Banking Act No 30 1988
b. Development Finance Corporation of Ceylon (DFCC)
c. National Savings Bank established by the NSB Act.
Does not include
i. The Bank of Ceylon
ii. People’s Bank
iii. Any bank established under the Provisions of the Regional Rural Development Bank Act.
• THIS PROVISION MAINLY DEALS WITH EXECUTING THE MORTAGES WHICH HAVE BEEN KEPT AS A SECURITY FOR LOANS
Section 7 (1)
The provisions of Section 4 apply in the case of any default notwithstanding that
- The borrower is dead
Or
- Any Right , Title , Interest whatsoever in the property mortgaged to the bank as security for the loan has passed to another person by
• The voluntary conveyance
• Operation of law
Section 7 (2)
Where a borrower is dead and the probate of his will or letter of administration to his estate have not been issued to any person. The District Court shall appoint a person to represent the estate of the borrower.
The court must do that
• Upon application made by the bank;
• After service of notice of the application on such persons
• The court being satisfied that the grant of probate or the issuing of letter of administration is likely to be unduly delayed.
(and the provisions of section 4 shall not apply in the case of any default made by such borrower unless and until a parson is appointed under this subsection to represent the estate of such borrower.)
Section 4 (Authorization of the Sale of Mortgaged Property)
• The Board of Directors of the Bank can pass a resolution to sell the mortgaged property in public auction and specify a person to whom such authority is given.
• The bank will do that in order to recover
- The whole of the unpaid portion of the loan
- The interest due thereon upto the date of the sale
- The moneys and costs recoverable under Section 3
Section 5 (Authorization of Manager to take possession of the Mortgaged Property)
Section 3 (Action by Board where Default is made)
Whenever default is made in the payment of any sum due on any loan default is deemed to have been made in respect of;
- The whole of the unpaid portion of the loan.
- The interest due thereon up to date.
And the board may in its discretion take action as specified either in Section 5 or in Section 4.
However where the Board has in any case taken action or commenced to take action nothing is deemed to prevent the Board from taking action subsequently.
Section 8 and 9 (Notice of to the Borrower, Gazette Notification of such Sale).
Section 10 borrower can pay the amount any time before the sale and sale shall be cancelled.
Section 15
• Once the sale has been done by the auctioneer, the Board shall issue a certificate of sale by which all rights, title and interest of property can be vested on the purchaser.
• Hajji Omar v Wickramasinghe – SC decided that a certificate of sale issued in terms of Section 15 is FINAL and CONCLUSIVE PROOF that all the provisions of the Act has been complied with and it cannot be challenged in a court of law.
Section 16
After the certificate has been issued the bank may institute an action by way of a summary procedure in the D.C to recover the possession of the property from the occupier.
Where the bank has purchased the property the sale can be cancelled any time by the Board before it is being sold to a 3rd Party.
Jayawardane V Sampath Bank LTD
• It was held that in terms of Act No 4 of 1990, when there is no buyer for the property above the upset price, the bank can purchase it for a nominal value. However the bank has to resell the property and settle if there is any excess within a reasonable time Section 19 in order to recover the full amount due to the bank.
• The RDL principle of (laesio enormis i.e. the value of the property should not be 3 times than the purchase price) will not apply in such transcation.
• The price paid by the bank is immaterial as the bank is obliged to resell the property in order to recover the full amount due to the bank. Bank has no power to keep the property for itself.
Parate Execution
• Prior to the Act the remedy was available to the Mortgagee under the Roman Dutch Law, known as the Parate Execution. Under this principle the MORTGAGEE HAD THE POWER TO SELL THE MORTGAGE PROPERTY WITHOUT RECOURSE TO A COURT.
HOWEVER,
• Prof. R. W. Lee holds that the sale cannot be effective without the consent of the debtor.
• No prejudice should be caused to the rights of the debtor in carrying out the sale.
RAMACHANDRAN AND ANOTHER V HNB & OTHERS
ANANDASIVA AND ANOTHER V HNB & OTHERS
There are three fundamental rights of ownership referred to by Hon. Sarath N. Silva CJ
a. The right to possess
b. The right to use and enjoy
c. The right to alienate.
Dissenting judgment of Shirani Bandaranayake J;
Her Ladyship observed that,
• The intention of the legislature in regarding to the Act No 4 1990 was to recover loans granted by banks for the economic development.
• Having regards to this intention the provisions of the Act should be broadly interpreted to enable the seizure and sale of the property of the debtor and also the guarantor. (a person other than the borrower).
• In determining whether a Bank is entitled or not to sell by way of parate execution a property mortgaged to the Bank by a person other than a Borrower. Her Ladyship held that Section 3, 4, 5 are the operative sections of the Act with regards to the recovery of loans granted by banks.
• For the purpose of recovering the unpaid loan, the Bank does not differentiate mortgages given by the actual borrower from a mortgage given by a third party.
• A careful perusal of Sections 3, 4, 5 as well as other provisions clearly reveals that these provisions do not give any kind of indication that the Bank could adopt a resolution only in cases where the actual borrower gives the mortgage.
• The Bank is not prohibited from adopting a resolution in a situation where any person other than actual borrower given the mortgage.
• Therefore in such circumstances a broader interpretation to the meaning to the word ‘borrower’ than what is laid down in Section 17 will have to be considered to maintain and uphold the spirit of the Act.
• Her ladyship held that although a mortgagee is not a trustee for the mortgagor, he/she is not prevented from carrying out a sale of the mortgaged property.
• What is required in such an instance is for the mortgagee to act in good faith.
HNB v JAYAWARDENE and 2 others
HELD that-
a. When a Bank sold to itself property in public auction in parate execution proceedings under the Act No 4 1990 (where there was no bidder at the auction) such sale cannot be challenged on the basis of principle of “laesio enormis” as the actual sale takes place when the Bank resells it as required by Section 19 of the said Act.
b. Directors of a company who benefited from facilities obtained by the company from a bank against mortgage of their property cannot hide behind the veil of incorporation and claim that the mortgage is a ‘third party mortgage’ as contemplated in Ramachandran’s case.
The Act was introduced to make the debt recovery procedure effective
• To effect the recovery of loans granted by banks for the economic development of Sri Lanka and matters connected therewith and incidental thereto.
Under Section 22 “bank” means;
a. A Licensed Commercial Bank within the meaning of the Banking Act No 30 1988
b. Development Finance Corporation of Ceylon (DFCC)
c. National Savings Bank established by the NSB Act.
Does not include
i. The Bank of Ceylon
ii. People’s Bank
iii. Any bank established under the Provisions of the Regional Rural Development Bank Act.
• THIS PROVISION MAINLY DEALS WITH EXECUTING THE MORTAGES WHICH HAVE BEEN KEPT AS A SECURITY FOR LOANS
Section 7 (1)
The provisions of Section 4 apply in the case of any default notwithstanding that
- The borrower is dead
Or
- Any Right , Title , Interest whatsoever in the property mortgaged to the bank as security for the loan has passed to another person by
• The voluntary conveyance
• Operation of law
Section 7 (2)
Where a borrower is dead and the probate of his will or letter of administration to his estate have not been issued to any person. The District Court shall appoint a person to represent the estate of the borrower.
The court must do that
• Upon application made by the bank;
• After service of notice of the application on such persons
• The court being satisfied that the grant of probate or the issuing of letter of administration is likely to be unduly delayed.
(and the provisions of section 4 shall not apply in the case of any default made by such borrower unless and until a parson is appointed under this subsection to represent the estate of such borrower.)
Section 4 (Authorization of the Sale of Mortgaged Property)
• The Board of Directors of the Bank can pass a resolution to sell the mortgaged property in public auction and specify a person to whom such authority is given.
• The bank will do that in order to recover
- The whole of the unpaid portion of the loan
- The interest due thereon upto the date of the sale
- The moneys and costs recoverable under Section 3
Section 5 (Authorization of Manager to take possession of the Mortgaged Property)
Section 3 (Action by Board where Default is made)
Whenever default is made in the payment of any sum due on any loan default is deemed to have been made in respect of;
- The whole of the unpaid portion of the loan.
- The interest due thereon up to date.
And the board may in its discretion take action as specified either in Section 5 or in Section 4.
However where the Board has in any case taken action or commenced to take action nothing is deemed to prevent the Board from taking action subsequently.
Section 8 and 9 (Notice of to the Borrower, Gazette Notification of such Sale).
Section 10 borrower can pay the amount any time before the sale and sale shall be cancelled.
Section 15
• Once the sale has been done by the auctioneer, the Board shall issue a certificate of sale by which all rights, title and interest of property can be vested on the purchaser.
• Hajji Omar v Wickramasinghe – SC decided that a certificate of sale issued in terms of Section 15 is FINAL and CONCLUSIVE PROOF that all the provisions of the Act has been complied with and it cannot be challenged in a court of law.
Section 16
After the certificate has been issued the bank may institute an action by way of a summary procedure in the D.C to recover the possession of the property from the occupier.
Where the bank has purchased the property the sale can be cancelled any time by the Board before it is being sold to a 3rd Party.
Jayawardane V Sampath Bank LTD
• It was held that in terms of Act No 4 of 1990, when there is no buyer for the property above the upset price, the bank can purchase it for a nominal value. However the bank has to resell the property and settle if there is any excess within a reasonable time Section 19 in order to recover the full amount due to the bank.
• The RDL principle of (laesio enormis i.e. the value of the property should not be 3 times than the purchase price) will not apply in such transcation.
• The price paid by the bank is immaterial as the bank is obliged to resell the property in order to recover the full amount due to the bank. Bank has no power to keep the property for itself.
Parate Execution
• Prior to the Act the remedy was available to the Mortgagee under the Roman Dutch Law, known as the Parate Execution. Under this principle the MORTGAGEE HAD THE POWER TO SELL THE MORTGAGE PROPERTY WITHOUT RECOURSE TO A COURT.
HOWEVER,
• Prof. R. W. Lee holds that the sale cannot be effective without the consent of the debtor.
• No prejudice should be caused to the rights of the debtor in carrying out the sale.
RAMACHANDRAN AND ANOTHER V HNB & OTHERS
ANANDASIVA AND ANOTHER V HNB & OTHERS
There are three fundamental rights of ownership referred to by Hon. Sarath N. Silva CJ
a. The right to possess
b. The right to use and enjoy
c. The right to alienate.
Dissenting judgment of Shirani Bandaranayake J;
Her Ladyship observed that,
• The intention of the legislature in regarding to the Act No 4 1990 was to recover loans granted by banks for the economic development.
• Having regards to this intention the provisions of the Act should be broadly interpreted to enable the seizure and sale of the property of the debtor and also the guarantor. (a person other than the borrower).
• In determining whether a Bank is entitled or not to sell by way of parate execution a property mortgaged to the Bank by a person other than a Borrower. Her Ladyship held that Section 3, 4, 5 are the operative sections of the Act with regards to the recovery of loans granted by banks.
• For the purpose of recovering the unpaid loan, the Bank does not differentiate mortgages given by the actual borrower from a mortgage given by a third party.
• A careful perusal of Sections 3, 4, 5 as well as other provisions clearly reveals that these provisions do not give any kind of indication that the Bank could adopt a resolution only in cases where the actual borrower gives the mortgage.
• The Bank is not prohibited from adopting a resolution in a situation where any person other than actual borrower given the mortgage.
• Therefore in such circumstances a broader interpretation to the meaning to the word ‘borrower’ than what is laid down in Section 17 will have to be considered to maintain and uphold the spirit of the Act.
• Her ladyship held that although a mortgagee is not a trustee for the mortgagor, he/she is not prevented from carrying out a sale of the mortgaged property.
• What is required in such an instance is for the mortgagee to act in good faith.
HNB v JAYAWARDENE and 2 others
HELD that-
a. When a Bank sold to itself property in public auction in parate execution proceedings under the Act No 4 1990 (where there was no bidder at the auction) such sale cannot be challenged on the basis of principle of “laesio enormis” as the actual sale takes place when the Bank resells it as required by Section 19 of the said Act.
b. Directors of a company who benefited from facilities obtained by the company from a bank against mortgage of their property cannot hide behind the veil of incorporation and claim that the mortgage is a ‘third party mortgage’ as contemplated in Ramachandran’s case.
