SC delivers landmark judgment on parate execution
Banks empowered to sell third party mortgaged properties; previous SC ruling overturned by larger bench
A seven-judge bench of the Supreme Court, in a landmark decision, has unanimously held that the properties mortgaged to a bank not only by an actual borrower but also by a third party for the loan granted to the actual borrower can be sold at an auction to recover the unpaid loan and interest thereon.
In effect, the Supreme Court unanimously repudiated the view of a previous fourjudge Supreme Court bench in the HNB v. Chelliah Ramachandran case that it was only possible to sell the property of an actual borrower without the intervention of the Court.
That 2006 decision of HNB v. Chelliah Ramachandran by the bench headed by the then Chief Justice Sarath N. Silva held that it was only the mortgaged property of the actual borrower that could be sold at an auction without the intervention of the Court.
This process of sale, known in RomanDutch law as parate execution, could be effected, according to the previous decision of the Supreme Court, only in respect of properties mortgaged by persons who had borrowed money. If a third-party had mortgaged his property for the loan given to another person, that property could not be sold. This legal position of the previous bench has been finally overturned as erroneous and incorrect by this unanimous decision of the seven-judge bench.
Justice Sarath N. Silva held in the previous judgment that Roman-Dutch law, which is the common law of Sri Lanka, had always viewed parate execution (the sale of mortgaged properties without seeking the assistance of the court) with disfavour, and on its account, the banks should not be permitted to sell properties mortgaged by third-parties.
Repudiating this view as erroneous and citing authorities from Australia, the UK, the US and India, Justice A.H.M.D. Nawaz concluded that Roman-Dutch law which had allegedly looked upon parate execution with opprobrium, cannot look backwards and must move forward casting away its swaddling clothes. Comparing this stratification of Roman-Dutch law to the biblical character of Lot’s wife, the judgment opines to the effect that Roman-Dutch law cannot turn into a pillar of salt as had happened to Lot’s wife and if that happens it is like returning the oak tree to its acorn, so the judgment metaphorically critiques the judgment of the previous SC decision. Justice Nawaz states that the time has come to perform the burial rites of the restrictive decision of Chelliah Ramachandran.
Justice Nawaz with whom Justices S. Thurairaja, E. A. G. R. Amarasekara and Kumudini Wickremasinghe agreed, pronounced in a 68-page judgment that the word borrower in the Recovery of Loans (Special Provisions) by Banks Act No. 4 of 1990 should be given a broad interpretation to include a mortgagor who has not himself borrowed money from the bank. The judgment brings about a paradigmatic change in credit financing by lending institutions and frees the banks from the shackles of a restriction that had insisted on them to take mortgages only from actual borrowers. This judgment paves the way for the banks to not only take security from third parties but also empowers them to sell those properties at an auction without the intervention of the Court when the borrower defaults in payment.
Justice Mahinda Samayawardena also delivered a separate judgment on the same lines with which Justices Buwaneka Aluwihare and Murdu N. B. Fernando agreed.
Justice Sarath N. Silva held in the previous judgment that Roman-Dutch law, which is the common law of Sri Lanka, had always viewed parate execution (the sale of mortgaged properties without seeking the assistance of the court) with disfavour, and on its account, the banks should not be permitted to sell properties mortgaged by third-parties.