Banks and financial institutions have an obligation to maximize the value of borrowers’ securities while attempting to minimize their losses: Delhi High Court
The Delhi High Court has stated that banks and financial institutions have an obligation to increase the value of the securities provided to them by borrowers while attempting to minimize their losses in order to balance the interests of stakeholders. While banks seek collateral and securities to minimize losses, it is acceptable to expect them to respect the rights of borrowers in order to maximize their profits from the sale of such securities by banks, according to Justice Asha Menon. The observations were made in a petition Pushpa Builders LTD v The Vaish Cooperative Adarsh Bank LTD filed by a construction company seeking to have a District Judge’s order quashed. The Petitioner was the Judgement Debtor, and the respondent bank, Vaish Cooperative Adarsh Bank, was the Decree-Holder, seeking the execution of a Final Decree dated August 20, 1996. According to the Petitioner, the negotiated rate of interest was 18 per cent simple interest per year. Furthermore, it was asserted that the Petitioner was inadvertently impeding the sale of the property by filing several applications, but the courts have never accepted the Petitioner’s request to suspend the auction proceedings. The Court said the bank’s objections had validity, it 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.” The question before the Court was whether borrowers would have no protection against banks and financial organizations selling their mortgaged houses at cheap prices arbitrarily. The Court was of the view that “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.” “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? This Court is of the view 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.”
IN THE HIGH COURT OF DELHI AT NEW DELHI Pronounced on: 2nd September 2021 CM(M) 281 2020 & CM APPL. 8357 2020PUSHPA BUILDERS LTD Petitioner Through Mr. Anant Aggarwal Advocate THE VAISH COOPERATIVE ADARSH BANK LTD Respondent Through Mr. Surender Chauhan Adv. with Mr. Sunil Jain DGM and Sh. Sunil Dogra ManagerHON BLE MS. JUSTICE ASHA MENON JUDGMENT This petition has been filed under Article 227 of the Constitution of India for quashing setting aside of the order dated 13th January 2020 passed by the learned Additional District Judge Executing Court Saket Courts in Ex. No. 337 2017. The petitioner is the Judgement Debtor and the respondent as the Decree Holder has sought the execution of the Final Decree dated 20th August 1996. Some of the relevant facts may be noted at this juncture. The petitioner had on 4th November 1987 secured a loan of Rs 20 lakhs from the respondent against the mortgage of Plot No M 5 G.K.II New Delhi. CM(M) 281 2020 A Mortgage Deed was executed on 15th January 1988. The agreed rate of interest according to the petitioner was 18% simple interest per annum. Since the petitioner defaulted in the repayment of the loan a suit was filed in the High CourtNo. 1174 1991] 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. A preliminary decree was passed on 21st February 1992 upon an application filed under Order XXIII Rules 1 & 3 CPC. In terms of the said preliminary decree based on a compromise arrived at between the parties the petitioner had agreed to pay by 30th June 1995 a sum of Rs.23 37 177 along with costs of proceedings amounting Rs.22 688.75 The petitioner claims that the interest upon the decretal amount was simple and subject to RBI Guidelines. In 1994 the petitioner went into liquidation and defaulted in making payments. This resulted in a final decree being passed on 20th August 1996 directing the sale of the mortgaged property. Execution was filed on 26th May 1997 being Ex. P. No. 180 1997 for the recovery of Rs.57 04 365.90 as on 31st March 1997. The petitioner was directed vide orders dated 28th July 2010 to deposit the decretal amount along with simple interest. This order of the Single Bench of this court was upheld by the Division Bench vide order dated 2nd April 2013. A Special Leave Petition was filed by the petitioner which was dismissed by the Supreme Court on 21st April 2014 when the CM(M) 281 2020 petitioner failed to comply with the earlier order dated 30th September 2013 whereby the petitioner was directed to deposit a sum of Rs. One crore as it could deposit only Rs.50 lakhs. Due to the enhancement in the pecuniary jurisdiction of this court the Execution Petition was transferred to the District Court. An order of attachment of the property was issued on 12th March 2018 and the possession taken on 13th April 2018. The valuers at the behest of the respondent submitted a valuation report dated 18th May 2018 valuing the property at Rs. 24 16 78 125 . 7. Mr. Anant Aggarwal the learned counsel for the petitioner has submitted that the grievance of the petitioner is two fold. One is that the respondent has wrongly calculated the interest liability of the petitioner by taking a compound rate and thus exceeding 18% which is the upper limit fixed by the RBI under its Guidelines. Attention has also been drawn to the Circular of the RBI dated 26th August 2002that provided that the effective rate of interest should not be exceeded whereas here it was 18%. Secondly the learned counsel has argued that despite the respondent’s valuer fixing the valuation of the property at more than Rs 24 crores when the property was to be put for auction it reduced the reserve price to Rs.16 00 00 000 from Rs. 18 13 00 000 and thereafter during Covid 19 pandemic times when real estate prices were depressed chose to seek court directions to reduce the price further to Rs.13 75 00 000 . Learned counsel for the petitioner submitted that the rights of the CM(M) 281 2020 petitioner had been severely affected on account of the reduction in value of the property by about 40 45 percent from the valuation made by the respondent itself. It was also submitted that since already Rs. 4 crores had been paid against the loan of Rs.20 lakhs the respondent had no reason to reduce the reserve price even below the distress valuation of Rs 16 crores. 9. Mr. Surender Chauhan learned counsel for the respondent on the other hand submitted that the petitioner was repeatedly raising the issue of interest rates even after this court had held that the respondent was entitled to compound interest. It was submitted that the respondent’s Manager had on 16th October 2018 made a statement before the Executing Court that in case the petitioner was willing to abide by its undertaking given before the court on that day then the respondent would not charge any interest from that day onwards on the outstanding amount of Rs.10 62 96 813.15 which was the amount payable calculated up to 30th September 2018. Learned counsel submitted that since the petitioner failed to abide by that undertaking the respondent became entitled to claim the interest i.e. at the rate of 18% which was in terms of the RBI Circular. Thus now a sum of Rs.15 12 36 049.45 was due as on 30th September 2020.281 2020 due and rejecting the calculation of the petitioner that the amount due was Rs.7 51 15 440 This order was not challenged by the petitioner. Thus the learned counsel for the respondent submitted that the issue of interest cannot be re agitated at this juncture. 11. Learned counsel for the respondent also submitted that the petitioner has been malafidely blocking the sale of the property by continuously moving applications but the courts have never accepted the plea of the petitioner to stay the auction proceedings. As a result the sale has already been effected of the property for a sum of Rs.13 75 00 000 except that the Sale Certificate had to be issued. Learned counsel for the respondent prayed that the petition be therefore dismissed. 12. There is weight in the contention of the learned counsel for the respondent that the issue of calculation and the interest rate cannot be agitated now. This court had in its order dated 02nd April 2013 reiterated that the compromise was clear and specific in its stipulation of the charging of interest with quarterly rests and that interest was therefore to be charged on compound interest basis. As regards the RBI Circular which has been placed on record the learned counsel for the petitioner has not been able to explain how the interest being charged by the respondent was violative of this Circular. It is just another attempt to get over the terms of the compromise by raising a vague plea that the Circular of the RBI was being violated particularly in view of the observations of this court on this plea in the order dated 02nd April 2013. The petitioner remains bound by the terms of the compromise on the basis of which the preliminary decree dated 21st February 1992 was CM(M) 281 2020 passed. 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. 13. However with regard to the grievance of the petitioner that the value of the property has been arbitrarily depressed causing immense loss to the petitioner requires some consideration. Though it cannot be overlooked that the petitioner is singularly responsible for the amount repayable to the respondent increasing exponentially over decades by not adhering to its undertakings for making payments on time even when the respondent has been open to some accommodation the petitioner cannot be so penalized that it should be made to suffer grave prejudice on account of any arbitrary action taken by the respondent. While it does make business sense for the respondent to minimize its losses this objective cannot authorize the respondent or any other similarly placed institutional decree holders to force penury on its erstwhile customer. 14. On query by this Court the learned counsel for the respondent submitted that by 30th September 2020 the loan which was originally for a sum of Rs.20 lakhs taken on 4th November 1987 had become Rs.15 12 36 049.45p and further submitted that Rs.13 75 00 000 which was the consideration for the mortgaged property would still leave a balance of about Rs.2 crores as due and payable on the loan which the respondent would be recovering from the petitioner against other assets. It is in this context that it has become necessary to consider the question CM(M) 281 2020 whether borrowers would have no protection against arbitrary disposal of the properties mortgaged to banks and financial institutions at low prices. 15. 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. 16. Business entities take loans no doubt at commercial rates of interest in order to conduct their business activities. The Banks such as the respondent thrive on the business of lending. If the Banks have to survive then borrowers must exist and not mere borrowers but productive borrowers. The Banks seek collaterals and security to prevent losses to themselves. It is but reasonable to expect the Banks such as the respondent to also respect the right of the borrowers to maximize their profits from the sale of collaterals securities by the banks. 17. The non payment of loans is of course not to 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. 18. 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 2016as CM(M) 281 2020 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. 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 This Court is of the view 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. 19. 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. 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. It is also incumbent on all Receivers of property security to maintain them in good condition and not to allow the CM(M) 281 2020 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. In the present case it is noteworthy that in the year 2018 when the property had been attached and the possession taken by the respondent it had got the property valued. On 18th May 2018 the bank valuer had placed the value of the property at Rs.24 16 78 125 . The record shows that as on 16th October 2018 the Manager of the respondent had stated in court that the outstanding loan amount was Rs.10 62 96 813.15 as on 30th September 2018. Again as on 26th November 2018 the Executing Court had accepted the contention of the respondent that what was due and payable by the petitioner to the respondent was a sum of Rs.9 73 16 217.15 as on 31st March 2018. Thus the value of the property in the year 2018 as assessed by the respondent’s valuer far exceeded the outstanding amount. 21. On 11th January 2019 the respondent moved an application under Order XXI Rule 54(1A) read with Rule 64 read with Section 151 CPC for initiation of the auction proceedings. The order was issued for proclamation and sale with the reserve price of the property at Rs.18 13 00 000 . But on 8th May 2019 the respondent moved an application for re scheduling the proclamation of sale with a revised reserve price of the property. The respondent sought the reduction of reserve price from Rs.18 13 00 000 to Rs.16 00 00 000 . The learned CM(M) 281 2020 Executing Court allowed this reduction rejecting the objections of the petitioner vide order dated 10th July 2019. On 24th October 2019 the respondent again moved the Executing Court for further revising downwards the reserve price to Rs.13 75 00 000 . This was also allowed by the Executing Court vide the impugned order. 22. What this means is that though when the respondent had come into the possession of the mortgaged property on 13th April 2018 and as on 18th May 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 plummeted by about half. It may be that in the Covid 19 pandemic period the Real Estate sector has seen some diminished activities but it cannot be overlooked that it was in the year 2019 itself that the respondent had sought to revise downwards the value of the mortgaged property from Rs.24 16 78 125 to Rs.18 13 00 000 to Rs.16 crores and thereafter to Rs.13 75 00 000 . 23. The property in question is a commercial buildingconsisting of a basement ground Mezzanine 1st 2nd and 3rd floors located in Greater Kailash II. It is also to be noticed that when the impugned order was passed on 13th January 2020 the pandemic was not so virulent. The plea taken by the respondent that the Covid situation had caused the depression in valuation cannot be accepted. This Court is of the view that the Executing Court ought not to have so readily agreed to the repeated downward revision of the reserved price between 2019 and 13th January 2020 281 2020 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. In the present case prime commercial property originally worth more than Rs.24 crores has 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. 24. Turning to the case at hand as on 30th September 2020 the outstanding was more than Rs.15 crores. Had the property been sold even for a sum of Rs.16 crores clearly the Bank would have recovered all its outstanding dues while the petitioner would have also had around Rs.75 lakhs in its kitty. Now the outstanding would have crossed another crore. But the Bank claims to have received only Rs.13 75 00 000 from the sale of the mortgaged property. Thus an outstanding amount of almost Rs.2.5 crores remains. This the respondent will now seek to recover from the petitioner. The unjustness is writ large. 25. As this Court had allowed the auction to continue at the reserve price of Rs.13 75 00 000 subject to final orders in this petition there are only two options now available. One is to direct the purchaser to pay a sum of Rs.16 crores towards the sale purchase subject to which the Sale Certificate be issued. The other option is to direct the Executing Court to record a satisfaction of the Preliminary Decree dated 21st February 1992 and the Final Decree dated 20th August 1996 for a sum of Rs.13 75 00 000 at which the mortgaged property has been auctioned. CM(M) 281 2020 26. This Court is inclined to adopt the second course of action. The petition is accordingly disposed of along with pending application 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. 27. The parties are directed to appear before the learned Executing Court on 6th September 2021 for this purpose. 28. Copy of this order be sent electronically to the learned Executing Court. 29. The judgment be uploaded on the website forthwith. ASHA MENON) SEPTEMBER 02 2021 CM(M) 281 2020 