It is incumbent on Banks to be earnest in their efforts so that valuable security is not disposed of to the prejudice of borrower: Delhi HC

Read Judgment: Pushpa Builders vs. Vaish Cooperative Adarsh Bank Ltd.

Pankaj Bajpai

New Delhi, September 7, 2021: The Delhi High Court has opined that while the attempt of the banks and financial institutions to minimize their losses makes good business sense, 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, which are worth multiple times the value of the loan.

The Single Bench of Justice Asha Menon observed that non-payment of loans cannot be countenanced, but where, the Banks such as the respondent, seek to sell the immovable properties that are provided as security including through mortgage, it is incumbent on them to be earnest in their efforts so that the valuable security is not disposed of to the prejudice of the borrower.

The background of the case was that the petitioner had secured a loan of Rs. 20 lakhs from the respondent against the mortgage of Plot No M-5, G.K.II, New Delhi.Since the petitioner defaulted in the repayment of the loan, a suit was filed in the High Court by the respondent for the recovery of Rs.20,19,158.65/- along with interest @ 18% p.a. from the date of filing of the suit till recovery, with a further prayer for the sale of the mortgaged property in case of non-payment.

“These days, the attempt is to ensure that a business entity is not pushed into liquidation or insolvency when they are unable to repay the loans. To this end, the Insolvency and Bankruptcy Code, 2016 (IBC) as amended from time to time was passed by the Parliament. The objects and reasons for passing of the IBC included maximization of the value of the assets of the borrowers. It was also intended to ensure availability of credit while balancing the interest of all the stake holders”, observed the Bench.

Noticing that when major borrowers of banks and financial institutions have been given this kind of protection where the banks also take a ‘hair cut’ and the value of the assets of the borrowers are maximized, the High Court put up a question as to whether smaller borrowers can be denied the bare minimum of maximization of the value of their assets which have been provided as security to the banks, such as the respondent.

Answering this question, the Court opined that similar balancing of interests of the stake holders would be imperative and there is an obligation on the banks and financial institutions to maximize the value of the assets which have been furnished to them as security by the borrowers while they attempt to minimize their own losses.

Justice Menon went on to reiterate that, when collaterals and securities are provided by borrowers, which would be available to the creditors for sale and transfer to recover outstanding dues, the creditors have the responsibility to get a fair and market value for the said collateral/security/immovable property.

It is quite a common practice to claim that the value of the property has been depressed because the Bank’s attachment/lien exists over the property. However, this kind of argument does not appeal, as the consideration is to be paid by the purchaser as per market rates, to whosoever is entitled to receive it i.e., either the original owner or the creditor, added Justice Menon.

The High Court therefore observed that the Executing Court should not readily agree to the repeated downward revision of the reserved price, and rather exercise caution, bearing in mind the consequences of the action taken, on the interests of the borrowers, and to see that these are not prejudiced.

Justice Menon noted that in the present case, prime commercial property originally worth more than Rs.24 crores had been purportedly sold for almost half the price with no one responsible.

Highlighting that it is incumbent on all Receivers of immovable property/security to maintain them in good condition and not to allow the property to waste, Justice Menon said that the creditor cannot later on claim that the property under its custody had become dilapidated and therefore, cannot command the market value.

The creditor would be responsible for the loss of such value and such practices that lead to distress sales below par have to be completely rooted out not just discouraged, added Justice Menon.

Accordingly, the High Court directed the Executing Court to record satisfaction of Preliminary Decree and the Final Decree, while issuing the Sale Certificate to the auction purchaser recording that no further dues against this loan remains outstanding and payable by the petitioner to the respondent.