Obligation On Banks, Financial Institutions To Maximize Value Of Borrowers' Securities While They Attempt To Minimize Their Losses: Delhi High Court

In view of balancing the interests of stakeholders, the Delhi High Court has held that there is an obligation on banks and financial institutions to maximize value of the securities furnished to them by borrowers while they attempt on minimizing their losses.

Justice Asha Menon also added that while the banks seek collaterals and securities to prevent their losses, it is reasonable to expect from them that they respect right of borrowers in order to maximize their profits from sale of such securities by banks.

"To reiterate, 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," the Court said.

It added:

"It is also incumbent on all Receivers of immovable property/security to maintain them in good condition and not to allow the property to waste. 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 completed rooted out not just discouraged."

The observations came in a petition filed by a builders company seeking quashing of a District Judge's order wherein it was the Judgement Debtor and the respondent bank namely Vaish Cooperative Adarsh Bank was the Decree-Holder who had sought the execution of a Final Decree dated 20th August, 1996. The agreed rate of interest according to the petitioner was 18% simple interest per annum.

The petitioner company had sought a loan of Rs. 20 lakhs from the said bank in 1987 against a mortgage.

According to the petitioner, it was submitted that the bank had wrongly calculated the interest liability by taking a compound rate and thus exceeding 18% which is the upper limit fixed by the RBI under its Guidelines.

It was also submitted that despite it's valuer fixing the valuation of the property at more than Rs 24 crores, when the property was to be put for auction, the bank reduced the reserve price to Rs.16,00,00,000 from Rs. 18,13,00,000.

On the other hand, it was the case of bank that the petitioner company was repeatedly raising the issue of interest rates even after the High Court had held that the bank was entitled to compound interest.

Moreover, it was argued that the Peititoner was malafidely blocking the sale of the property by continuously moving applications but the courts have never accepted it's plea to stay the auction proceedings.

Finding merits in the bank's submissions, the Court said "Though the petitioner has been repeatedly making efforts to get the terms relating to interest modified by the court, it has repeatedly failed to obtain a favourable interpretation from this court. The plea sought to be raised now to again seek a modification is only to be rejected and is so rejected."

However, the Court noted that there would still be a balance of about Rs. 2 crores as due and payable on the loan, which the bank would be recovering from the petitioner against other assets.

In view of this, the Court adjudicated on the question as to whether borrowers would have no protection against arbitrary disposal of the properties mortgaged to banks and financial institutions at low prices?

"This Court is of the view that while the attempt of the banks and financial institutions such as the respondent 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 Court said.

"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, can smaller borrowers 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?" The Court added.

The Court also observed that the Executing Court must always exercise caution and be circumspect while dealing with such applications, bearing in mind the consequences of the action taken, on the interests of the borrowers, and to see that these are not prejudiced. 

"The petition, is accordingly disposed of along with pending application, directing the learned Executing Court to record satisfaction of Preliminary Decree dated 21st February, 1992 and the Final Decree dated 20th August, 1996 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," the Court directed while disposing of the plea.

Title: PUSHPA BUILDERS LTD v. THE VAISH COOPERATIVE ADARSH BANK LTD

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