Legal Agreements

Arbitrary Disposal of Property Mortgaged to Banks

There are times in life when we urgently need money. Being a home or plot of landowner in such circumstances proves advantageous because you can readily mortgage your home or plot in exchange for the necessary finances. The biggest benefit of a mortgage loan is that, unlike other loans, you can obtain one with very low-interest rates and without having to leave your property to anybody else. A mortgage loan is easily accessible, has a low-interest rate, and has a 30-year maximum term. The problem arises when you fail to repay the money as accepted. In such a situation, the banks will dispose of the property mortgaged to prevent their losses. Let us understand the arbitrary disposal of the property mortgaged to Banks with related case law.

What is a mortgage?

A mortgage loan is a loan that is secured by the property you own. The property in question can be your home or even a plot of land. Both banks and non-banking financial institutions provide mortgage loans. Your property is used as collateral and remains in the lender’s custody until the loan is fully repaid. As a result, the lender has a legal right to the property for the duration of the loan, and if the borrower fails on the debt, the lender has the authority to seize the property and sell it at auction.

A mortgage loan is often a 30, 20, or 15-year long-term obligation. You will pay back the amount you borrowed plus interest throughout this period. You’ll make payments towards the mortgage, commonly in the form of a monthly payment that includes both principal and interest costs. Each month, part of your mortgage payment will go towards paying off that principal or mortgage balance, and part will go towards interest on the loan.” More of your payment will eventually go towards the principal.

Disposal of the mortgaged property under the Transfer of Property Act, 1882

According to section 60 of the Transfer of Property Act 1882, the mortgagor may tender the principal amount when it becomes due and demand that the mortgagor gives him ownership of the property or the documents. The ability to redeem the property from a mortgagee cannot be refused, the Supreme Court ruled in 2020. It emphasised that equity insists that a mortgage only provides security to a lender. Therefore, mortgagees must exercise caution before selling the mortgagor’s property.

Disposal of the Mortgaged property under CPC

The mortgagee may file for a preliminary decree in action for sale in the Civil Court in accordance with Rule 4 Order 34 of the Code of Civil Procedure, 1908, whereby the mortgagor shall be summoned to pay mortgaged money coupled with other expenses as defined by the Court. If the mortgagee is not paid, the mortgagor will forfeit the right to redeem the mortgaged property, and the mortgagee will be free to sell the property per Rule 5 Order 35 of the Code of Civil Procedure, 1908.

In light of this, the Delhi High Court recently stated that it is only reasonable to expect the right of borrowers to maximise their profits from the sale of securities and collateral by the banks in the case of Pushpa Builder Limited v. Vaish Cooperative Adarsh Bank Limited.

Facts of the case

The respondent granted the petitioner a loan of Rs 20 lakhs in the current case in exchange for the mortgaged plot. The respondent filed a lawsuit after the petitioner defaulted on the payments on the loan and threatened to sell the mortgaged property if the debt wasn’t paid.

The respondents in the current case were Vaish Cooperative Adarsh Bank, which had granted the petitioners a loan of Rs. 20 lakhs in exchange for the mortgage of a plot. The bank filed a lawsuit to sell the mortgaged property because the petitioners had defaulted on their loan. The petitioner entered liquidation in 1994 and fell behind on payments, which resulted in a final decree being issued on August 20, 1996, ordering the sale of the mortgaged property.

Two issues were in the petitioner’s complaint: According to the petitioners, the interest on the decree amount was simple and subject to RBI (Reserve Bank of India)^[1] regulations. Additionally, the petitioners asserted that the respondent erroneously calculated the petitioner’s interest liability by using a compound rate and thereby going over the RBI-imposed upper limit of 18%. The petitioner entered liquidation in 1994 and stopped paying payments. As a result, a final decree ordering the sale of the mortgaged property was issued on August 20, 1996.

Second, even though the respondent’s appraiser determined that the property was worth more than Rs 24 crores when the property was set to be auctioned, the reserve price was reduced from Rs 18,13,000 to Rs 16,00,00,000. During the Covid-19 pandemic, when real estate prices were low, the respondent decided to seek court orders to further lower the price to Rs 13,75,00,000/-.

Analysis and Decision

The Court stated that even though it was clear that the petitioner was to blame for the respondent’s debt accruing enormously over decades, the petitioner cannot be punished for breaching its promises to make timely payments. Any arbitrary action taken by the respondent should cause it to suffer severe prejudice. The Court also stated that while it did not make sense for the respondent to minimise its losses as a financial institution, the borrowers who have mortgaged to them or provided valuable property as security to ensure repayment, which is worth more than the value of the loan, cannot be given a free pass at their expense.

Regarding the petitioner’s complaint that the value of the property had been arbitrarily depressed, causing immense loss to the petitioner, the Bench ruled that even though it cannot be ignored that the petitioner is solely to blame for the amount to be paid back to the respondent increasing exponentially over decades, by failing to uphold its promises to make payments on time, even when the respondent has been open to some accommodation, the petitioner cannot be held liable.

The Court further stated that while it is in the respondent’s best interest to minimise its losses, this goal cannot be used to justify forcing its former customer into poverty or that of any similarly situated institutional decree holders.

Given the foregoing context, the question that needed to be answered was: Would borrowers be protected from the arbitrary sale of the properties that were mortgaged to banks and financial institutions at low prices?

While it makes good business sense for banks and other financial institutions, like the respondent, to try and minimise their losses, Bench emphasised that this cannot come at the expense of the borrowers who have mortgaged to them or provided valuable property as security to ensure repayment, which is worth many times the value of the loan.

The banks look for security and collateral to protect themselves from losses. It is fair to anticipate that Banks, including the respondent, must uphold the borrowers’ right to earn as much money as possible from selling their securities and collateral to the Banks.

Failure to repay loans 

The Court stated that non-payment of the loan could not be tolerated but that banks must be diligent in their efforts if they intend to sell immovable properties that have been pledged as security, including through mortgage, to avoid harming the borrower. It was noticed that the value of the property in 2018, as determined by the respondent’s valuer, was significantly higher than the balance owed.

The Court added to the analysis by pointing out that even though the property was worth more than Rs 24 crores on 13-04-2018 and as of 18-05-2018 when the respondent took possession of the mortgaged property, its value fell by about half while it was still in the respondent’s possession. The real estate market may have experienced some decreased activity during the Covid-19 pandemic. Still, it cannot be denied that the respondent attempted to reduce the value of the mortgaged property as early as 2019 from Rs 24,16,78,125 to Rs 18,13,00,000 to Rs 16 crores, and then to Rs 13,75,00,000/-.

Conclusion

In this instance, it is alleged that no one was to blame for the sale of the prime commercial property, which had an initial value of more than Rs 24 crores. This type of circumstance must be prevented, so the Executing Court will need to keep a close eye on the auction processes.

Last but not least, the High Court decided to give the Executing Court the option of directing them to note that the Preliminary Decree dated 21-02-1992 and the Final Decree dated 20-08-1996 have been satisfied while issuing the Sale Certificate to the auction purchaser and noting that the petitioner has no other debts against this loan that are owing and due from them to the respondent.

Read our Article: Sample Format of Mortgage Deed