Sunpac Engineers (Private) Limited and one other Vs DFCC Bank PLC and others (SC/Appeal/11/2021)
A bench comprising of His Lordship the Chief Justice and six Justices of the Supreme Court of Sri Lanka ( the ‘SC’) overruling the Judgment of Ramachandran and Others V Hatton National Bank (2006) 1 SLR 393 (‘R Vs HNB’) held unanimously, that the ‘Recovery of Loans by Banks (Special Provisions) Act, No. 4 of 1990 as amended (the ‘Act’) empowering Parate Execution, applies to any property mortgaged to a bank as security for a loan in respect of which a default lies, irrespective of whether the ‘mortgagor’ is the ‘borrower’ or a ‘3rd party’.
The Judgment of 13th November 2023, on an appeal from an Order of the Commercial High Court (Civil) (‘CHC’) refusing an Interim Order seeking to prevent the DFCC Bank PLC (‘DFCC’) a licensed commercial bank from enforcing a Parate execution for recovery of a loan granted to the 1st Plaintiff company ( ‘1st P Co’), as against the property mortgaged as security by the 2nd Plaintiff ( ‘2nd P’). The 1st P Co having defaulted in settlement of the loan with the 2nd P being one of its two directors and the DFCC having taken the necessary steps in terms of the Act.
The Judgment widening the scope of the application of the Act, by overruling the majority judgment in Ramachandran and Others V Hatton National Bank (2006) 1 SLR 393 (‘R Vs HNB’) which held that the right of Parate Execution as enabled under the Act is not available without the intervention of Court, as against a ‘mortgagor’ who is not the ‘borrower’ or as against what is commonly termed ‘third-party mortgages.
The Learned Justices in reaching a determination examined inter-alia the following questions of law: –
- Did the Commercial High Court err in law in determining that the 2nd Plaintiff is a borrower within the meaning of the Recovery of Loans by Banks (Special Provisions) Act, No. 4 of 1990 as amended
Answering in the negative, the Court opined inter-alia that, it was unacceptable that only the property mortgaged by the borrower would be liable to parate execution as such an interpretation would restrict the ambit of the substantive sections of the Act and that such an interpretation will “do violence to the symmetry of this special law.”
The word ‘borrower’ must be given a purposive/harmonious interpretation and accordingly the procedural sections of the Act should be interpreted in order to facilitate the operative sections of the Act. - Is the Ratio in the case HNB v Jayawardhena [2007] 1 SLR 181 that the director of a corporate entity who mortgages his property for a loan obtained by that corporate entity a ‘borrower’ within the meaning of the Act.
The case under reference sought to restrict the majority judgment in R Vs HNB by holding that when directors of a company are the mortgagors, they cannot be treated as ‘third party mortgagors’ as they have directly benefited from the financial facility made available to the company.
The Court answering, stated that ‘any director who mortgages his property would be a borrower within the meaning of the Act in terms of the answer to the first question of law’.
The Court upholding the Order of the CHC, dismissed the appeal of the Plaintiff-Appellants.
Lending institutions have welcomed the Judgment allowing for more dynamic opportunities in financing credit, not being bound by the limitation of only accepting mortgages from actual borrowers. This very timely and significant decision allowing not only for securing collateral from third parties but also enabling for the more efficient recovery of dues in the event of default, by sale of the property at auction with no court intervention and so supporting a more robust financial system.
For further information, please contact:
Manjula Sirimane, Partner, D.L.&F. De Saram.
desaram@desaram.com
