Supreme Court delivers landmark judgement on parate execution

A seven-member judge bench of the Supreme Court unanimously has 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 four-judge bench of the Supreme Court in the case of HNB versus Chelliah Ramachandran that it was only possible to sell the property of an actual borrower without the intervention of Court. 

The 2006 decision of HNB v. Chelliah Ramachandran by a four-judge bench headed by the then Chief Justice Sarath N. Silva had 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 Roman-Dutch 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 could not be sold. This legal position of the previous bench has been finally thrown away as erroneous and incorrect by this unanimous decision of the seven-bench.

Justice A.H.M.D. Nawaz, with whom Justices S. Thurairaja, E.A.G.R. Amarasekara and Kumudini Wickremasinghe agreed, pronounced in a 68-page judgement 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. 

Citing authorities from Australia, The UK, The US and India, Justice A.H.M.D. Nawaz concludes that Roman Dutch law which had looked upon parate execution with disfavour cannot look backwards and move forward casting away its swaddling clothes.

The judgement brings about a paradigm change in the 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 judgement paves the way for the banks not only to take security from third-parties but also empowers them to sell those properties at an auction without the intervention of Court, when the borrower defaults in payment.

Justice Mahinda Samayawardena also delivered a separate judgement on the same lines with which Justices Buwaneka Aluwihare and Murdu N.B. Fernando agreed.