BANKING LAWS RELATING TO FORECLOSURE AND SALE OF MORTGAGED PROPERTY

BANKING LAWS RELATING TO FORECLOSURE BANKING LAWS RELATING TO FORECLOSURE AND SALE OF MORTGAGED PROPERTY BY Hamza I. Ali, Barrister-at-Law, Karachi The law governing mortgages is embodied in Chapter IV of Transfer of Property Act, 1882' which is spread over sections 58 to 104. Right to foreclosure or sale is specifically provided in section 67 of the said Act which reads as follows:-‑ "67. Right to foreclosure or sale.---In the absence of a contract to the contrary, the mortgagee has at any time after the mortgage-money become due to him, and before a decree has been made for the redemption of the mortgaged property, or the mortgage-money has been paid or deposited as hereinafter provided, a right to obtain from the Court a decree that the mortgagor shall be absolutely debarred of his right to redeem the property, or a decree that the property be sold. A suit to obtain a decree that a mortgagor shall be absolutely debarred of his right to redeem the mortgaged property is called a suit for foreclosure. Nothing in this section shall be deemed (a) to authorize any mortgagee other than a mortgagee by conditional sale or a mortgagee under an anomalous mortgage by the terms of which he is entitled to foreclosure, to institute a suit for foreclosure, or an usufructuary mortgagee as such or a mortgagee by conditional sale as such to institute a suit for sale; or (b) to authorize a mortgagor who holds the mortgagee's rights as his trustee or legal representative, and who may sue for a sale of the property, to institute a suit for foreclosure; or (c) to authorize the mortgagee of a railway, canal or other work in the maintenance of which the public is interested, to institute a suit for foreclosure or sale; or 1. Transfer of Property Act, 1882 does not apply to the Punjab and the N.-W.F.P. and agricultural lands in Balochistan, but its principles apply. Bhagwan v. Bunyadi 1902 PR 85; Ganda Singh v. Secretary of State 152 IC 231; Manzoor Hussain v. Legal Representatives of Shah Jehan PLD 1975 Quetta 22. (d) to authorize a person interested in part only of the mortgage-money to institute a suit relating only to a corresponding part of the mortgaged property, unless the mortgagees have, with the consent of the mortgagor, severed their interests under the mortgage." 2. The procedure to enforce the aforesaid right is laid down in Order XXXIV of Code of Civil Procedure, 1908 ('C.P.C.'). Rules 2 and 3 of Order XXXIV, C.P.C. deal with suit for foreclosure and rules 4 and 5 of the said Order apply to suit for sale. 3. The above provisions of law and procedure for enforcement of right of a mortgagee for foreclosure or sale of property have been modified by successive statutes relating to Banking Law. 4. Banking Companies (Recovery of Loans) Ordinance, 1979 (XIX of 1979) established Special Courts to try `banking cases' including mortgage suits. Although procedure laid down in Order XXXIV, C.P.C. was made generally applicable to a mortgage suit filed under the aforesaid Ordinance, yet such suit was to proceed under Order XXXVII of C.P.C. as a summary suit requiring the mortgagor to obtain leave to defend at the initial stage of the trial (vide section 7 of the Ordinance). (a) Banking Tribunals Ordinance, 1984 (LVIII of 1984), esiablished Banking Tribunals for trial of Banking suits based on interest-free finance. 'Under the aforesaid Ordinance procedure laid down in Order XXXIV, C.P.C. was generally to be followed in mortgage suits with one vital deviation, namely, that 'preliminary decree' allowing 6 months' time to the mortgagor/ judgment-debtor 'for redemption of mortgage was not required to be passed. `Decree' under the said Ordinance in mortgage suits was to be directly passed as a final decree. (b) Another departure from the procedure laid down in Order 'XXXIV, C.P.C. in a mortgage suit was made by subsection (3) of section 11 of the aforesaid Ordinance which provided for sale of mortgaged property by a Banking Company in execution proceedings without intervention of Court by public auction or private treaty. 6. The Banking Companies (Recovery of Loans, Advances, Credits and Finances) Act, 1997 which consolidated and modified the aforesaid two Ordinances, namely, Banking Companies (Recovery of Loans) Ordinance, 1979 and Banking Tribunals Ordinance, 1984 also provided for summary procedure (denying right to defend without first obtaining leave of the Court) in mortgage suits for foreclosure or sale. Section 14 of the Act of 1997 also provided for passing of a final decree without the necessity of passing a preliminary decree in a suit for foreclosure or sale. Right to sell mortgaged property without intervention of Court in execution of a decree was provided by section 18(2) of the Act of 1997. 7. The Banking Companies (Recovery of Loans, Advances, Credits and Finances) Act, 1997 was repealed by Financial Institutions (Recovery of Finances) Ordinance, 2001 ('Ordinance') which holds the field. This Ordinance also provides for summary procedure in a mortgage suit by a financial institution and for a final decree for foreclosure or sale without passing of a preliminary decree (vide section 14 of the Ordinance). Power of sale of mortgaged property in execution without intervention of the Court is provided in section 19 of the Ordinance. 8. However, the most significant innovation in the law has been made by introduction of section 15 in the Ordinance which empowers a financial institution to sell mortgaged property without intervention of the Court in case of a default in payment by a customer after serving three successive notices of demand as provided in section 15(2) of the Ordinance followed by publication of notice in the newspapers as stipulated in the proviso to subsection (4) of section 15 of the Ordinance. 9. Section 15(2) of Ordinance pertaining to three notices is inadroitly drafted and is confusing. According to the said provision: (i) the First Notice is to be served on the mortgagor demanding payment of the outstanding mortgage money within 14'days of service of notice; (ii) the Second Notice is to be served on the customer on failure of compliance of the first notice, demanding payment of the outstanding amount within 14 days of service of such notice; and (iii) the Third Notice, if the default in payment continues despite the second notice, is to be served on mortgagor demanding payment of outstanding mortgage money within 30 days from the service of the final notice on the customer. 10. Logically all notices should go to the mortgagor because action is contemplated against his property. But the second notice under section 15(2) of the Ordinance is required to be served on the 'customer'. The final notice is to be served on the mortgagor but the notice is supposed to be received by the 'customer'. This is an obvious error on the part of the legislature. If the notice is sent to the mortgagor, it is the mortgagor who receives it and not the customer. Although a customer can mortgage his own property to secure his debt and thus be a customer and a mortgagor at the same time. But legislature as a general rule, does not employ two different terms to denote the same thing or person in the same provision of law. 'Customer' and 'mortgagor' in section 15(2) of the Ordinance should therefore be taken to refer to two distinct entities. On whom should the notices be served? By way of abundant caution, on both: The 'customer' and the 'mortgagor' separately (unless the customer is also the mortgagor). 11. Subsection (3) of section 15 of the Ordinance empowers a financial institution after service of notice of demand on the mortgagor to receive rent and profits from the mortgaged property to which the mortgagor is entitled till such notice is withdrawn. It adds a proviso to the effect that if the property is in possession of a tenant/occupier, the said tenant/occupier on receipt of a notice in that behalf shall pay rent or lease money or other consideration to the financial institution during the continuance of the lease. No. Court order appears to be necessary under this provision of law. 12. The tenant is bound to pay rent to the Financial Institution after receiving a notice from the Financial Institution as provided in section 15(3) of the Ordinance even if the mortgaged property falls into the category of "premises" within the meaning of the Sindh Rented Premises Ordinance, 1979 which governs rights and liabilities of landlords and tenants of 'premises' in the Province of Sindh. This is because of the non obstante clause namely section 4 of the Ordinance XLVI of 2001. The said clause/section has an' overriding effect and it would apply not only to properties which are "premises" but also all other kinds of properties. 13. Under subsection (6) of section 15 of the Ordinance, the financial institution or the purchaser of the mortgaged property can obtain possession of the property by making an application to the Banking Court having jurisdiction in the matter seeking eviction or removal of the mortgagor or any other person in possession of the property on his behalf. The proviso to the said subsection provides that a bona fide tenant of the property during the continuance of his lease cannot be dispossessed under the said subsection. A lease made after creation of mortgage with a view to defeating the rights of the Financial Institution will not protect the lessee under the proviso. No procedure has been prescribed for operation of the said subsection after an application is filed to obtain possession. The Court may use any procedure that it .may deem fit. However, under section 7(2) of the Ordinance provisions of C.P.C. may be resorted to. Such provisions are rules 35 and 36 of Order XXI of C.P.C. 14. One of the questions which arises is whether a financial institution during the pendency of a recovery suit, has an option to sell the mortgaged property. My humble opinion is that a mortgage suit under Order XXXIV, C.P.C. and a sale under section 15 of the Ordinance without intervention of the Court are mutually exclusive and during the pendency of a suit, option to sell the mortgaged property under section 15 of the Ordinance cannot be availed. I have dealt with this question more fully in an article published in CLD 2002 Journal page 33. 15. A similar question may be asked about options of a Financial Institution after it obtains a decree for sale of a mortgaged property. Under section 19 of the Ordinance, it can, without making an execution application in Court, directly sell the mortgaged property either by a public auction or by inviting sealed tenders and appropriate the proceeds towards total or partial satisfaction of the decree. But does the Financial Institution after filing the execution application have an option to sell the mortgaged property without intervention of the Court? I think it does not. My reasoning is the same as in the case of a sale under section 15 of the Ordinance because the two sections are pari materia. 16. Section 15(12) of the Ordinance does not permit even a High Court to grant injunction restraining the sale or proposed sale of a mortgaged property except under certain restricted circumstances specified in clauses (a), (b) and (c) of the said section. 17. The above is a brief survey of Banking Laws relating to foreclosure and sale of mortgaged property. -----