India: Do Borrowers Have Protection Against Arbitrary Disposal Of Properties Mortgaged To Banks?

BACKGROUND

Section 60 of the Transfer of Property Act, 1882, lays down that after the principal money becomes due, the mortgagor can tender the money and require the mortgagee to deliver the possession of the property or the dead/documents to him¹. In 2020, the Supreme Court held that the right to redeem a property from a mortgagee, cannot be denied². It emphasized that equity insists upon the principle that a mortgage is intended merely to afford security to a lender and thus mortgagees have to be considerate before disposing off the property of mortgagor.

According to Rule 4 Order XXXIV of Code of Civil procedure, 1908, the mortgagee can apply for a preliminary decree in a suit for sale in the Civil Court, wherein the mortgagor shall be summoned to pay mortgaged money together along with other expenses as determined by the Court³. In the event the mortgagor fails to pay the said amount, the mortgagee shall be entitled to obtain/apply for a final decree as per Rule 5 Order XXXIV of the Code of Civil Procedure, 1908, debarring the mortgagor to redeem the mortgaged property and permitting the mortgagee to sell the property⁴.

In light of the same, recently, on September 2^nd, 2021, the Delhi High Court, in the case of Pushpa Builder Limited v. Vaish Cooperative Adarsh Bank Limited., stated that it is, but reasonable, to expect banks, to respect the right of the borrowers to maximize their profits from the sale of collateral and securities by the banks.⁵

FACTS

In the current case, the respondents were Vaish Cooperative Adarsh Bank, who had given a loan amount of Rs. 20 lakhs to the petitioners against the mortgage of a plot. The petitioners had defaulted in their loan and therefore, the bank filed a suit for the sale of the mortgaged property. In 1994, the petitioner had gone into liquidation and had defaulted in making payments, which led to a final decree being passed on 20.08.1996, directing the sale of the mortgaged property.

The petitioners claimed that the interest upon the decretal amount was simple and subject to RBI (Reserve Bank of India), guidelines. Further, the petitioners claimed that the respondent had wrongly calculated the interest liability of the petitioner, by taking a compound rate and therefore exceeding the 18% upper limit, fixed by the RBI. Secondly, the petitioners were of the view that, due to Covid 19, given the fall in real estate prices, the reserve price of the property, on valuation should was further reduced by the respondents.

In view of the above background, the question for consideration was whether borrowers would have no protection against arbitrary disposal of the properties mortgaged to banks and financial institutions at low prices?

ANALYSIS

The Court noted that even-though, it could not be overlooked that the petitioner was responsible for the amount repayable to the respondent increasing exponentially over decades, by not adhering to its undertakings for making payments on time, the petitioner cannot be penalized. That it should be made to suffer grave prejudice on account of any arbitrary action taken by the respondent. Further, the Court added that, while it did not make sense for the respondent, as a financial institution, to minimize its losses, there cannot be a free run for them at the cost of the borrowers who have mortgaged to them or furnished valuable property as security to assure repayment, that is worth multiple times the value of the loan.

On Non-Payment of Loans

The Court expressed that non-payment of loans cannot be tolerated but where banks seek to sell the immovable properties that are provided as security including those of mortgage, it is obligatory on them to make sure that the valuable security is not disposed of to the prejudice of the borrower.

The Court pointed out that when the respondent had come into possession of the mortgaged property in 2018, the property was worth more than Rs. 24 crores. While it remained in the hands of the respondent, the value of the same property had dropped by about half. It may be that due to the Covid-19 pandemic period, the Real Estate sector had diminished activities, but that cannot be overlooked. It was in the year 2019 itself, that the respondent had sought to revise downwards the value of the mortgaged property.

In the current case, the Court was of the opinion that, the prime commercial property was originally worth more than Rs. 24 crores and had been purportedly sold for almost half the price with no one responsible. This kind of situation has to be avoided for which the Executing Court will have to maintain a vigilant eye on the auction proceedings.

Footnotes

1. Section 60, The Transfer of Property Act, 1882

2. Shankar Sakharam Kenjale (Died) through LRs v Narayan Krishna Gade and another, Civil Appeal, 4594 of 2010

3. Rule 4 Order XXXIV of Code of Civil procedure, 1908

4. Rule 5 Order XXXIV of the Code of Civil Procedure, 1908

5. Pushpa Builder Ltd. v. Vaish Cooperative Adarsh Bank Ltd., CM (M) 281 of 2021, decided on 2-09-2021

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