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.”

The Court disposed off the pleading by commenting “The petition, is accordingly disposed of along with pending application, directing the learned Executing Court to record satisfaction of Preliminary Decree dated February 21, 1992 and the Final Decree dated August 20, 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.”

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