Obligation of Banks and Financial Institutions to Maximize the Value of Borrowers’ Securities While Attempting to Minimize Their Losses: Delhi High Court

In order to balance the interests of stakeholders, the Delhi High Court has held that banks and financial institutions have an obligation to maximize the value of the securities provided to them by borrowers while trying to minimize their losses. Justice Asha Menon also added that as banks seek collateral and securities to avoid their losses, it is reasonable to expect …

In order to balance the interests of stakeholders, the Delhi High Court has held that banks and financial institutions have an obligation to maximize the value of the securities provided to them by borrowers while trying to minimize their losses.

Justice Asha Menon also added that although banks look for collateral and securities to avoid their losses, it is reasonable to expect them to respect the rights of borrowers in order to maximize their profits from the sale of these securities by banks .

“To reiterate, when collateral and collateral is provided by borrowers, which would be available to creditors for sale and transfer to collect unpaid assessments, creditors have a responsibility to obtain a fair market value for said collateral. guarantee / real estate, “ said the court.

He added :

“It is also the responsibility of all receivers of real estate / guarantees to keep them in good condition and not to allow the assets to deteriorate. The creditor can no longer subsequently claim that the goods in his custody have become obsolete and, therefore, cannot control the market. value. The creditor would be responsible for the loss of such value and such practices which lead to below par distress sales should be eliminated, not just discouraged. “

The observations came in a petition filed by a construction company seeking to set aside an order of a district judge in which it was the judgment debtor and the defendant bank, namely Vaish Cooperative Adarsh ​​Bank , was the holder of the decree which had requested the execution of a final decree dated August 20. , 1996. The interest rate agreed according to the petitioner was 18% simple interest per annum.

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

According to the petitioner, it was argued that the bank miscalculated the interest payable by taking a compound rate and thus exceeding 18%, which is the upper limit set by the RBI under its guidelines.

It was also argued that although the appraiser set the property’s valuation at over Rs 24 crore, when the property was to be auctioned, the bank reduced the reserve price to Rs.16, 00,00,000 from Rs. 18,13,00,000.

On the other hand, in the case of a bank, the applicant company repeatedly raised the issue of interest rates, even after the High Court had ruled that the bank was entitled to charge interest.

Additionally, it has been argued that the Peititoner is maliciously blocking the sale of the property by continually shifting claims, but the courts have never accepted his plea to stay the auction process.

Noting the merits of the bank’s observations, the Court declared “Although the petitioner repeatedly made efforts to have the interest conditions changed by the tribunal, he repeatedly failed to obtain a favorable interpretation from that tribunal. rejected and is thus rejected.

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

In view of this, the Court ruled on whether if borrowers would have no protection against arbitrary alienation of mortgaged property to banks and low-cost financial institutions?

“This Court is of the opinion that even if the attempt by banks and financial institutions such as the respondent to minimize their losses makes good business sense, there can be no free course for them at the expense of the borrowers who have mortgaged or provided valuable property as collateral to secure repayment, which is several times the value of the loan, “ said the court.

“When large borrowers from banks and financial institutions have been given this type of protection where banks are also doing a ‘haircut’ and borrowers’ asset values ​​are maximized, can small borrowers be denied the bare minimum? maximizing the value of their assets which were provided as collateral to banks, such as the Respondent? ” The court added.

The Court also observed that the executing court must always exercise caution and circumspection in handling such requests, bearing in mind the consequences of the measures taken, on the interests of the borrowers, and to ensure that that they are not harmed.

“The request is therefore closed with the pending request, requiring the executing court to note the satisfaction of the preliminary decree dated February 21, 1992 and the final decree dated August 20, 1996 while issuing the certificate of sale to the ‘auction buyer recording that no other contributions on this loan remain unpaid and payable by the claimant to the defendant ” the Court ordered, ruling on the plea.

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

Click here to read the order


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Marianne R. Winn

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