A fuller bench of Sri Lanka’s Supreme Court (more than five judges) has been tasked with deciding on an issue of whether a bank can sell off a property owned by a shareholder of the borrowing company that was offered as mortgage in lieu of a loan in a situation where the bank is unable [...]

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Bank’s move to seize private property challenged; Fuller bench of SC to decide

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A fuller bench of Sri Lanka’s Supreme Court (more than five judges) has been tasked with deciding on an issue of whether a bank can sell off a property owned by a shareholder of the borrowing company that was offered as mortgage in lieu of a loan in a situation where the bank is unable to recover the loan.

The issue was referred to a fuller bench after a 3-judge bench of the Court examined a case where a borrower is seeking an injunction against the DFCC Bank to prevent it auctioning his personal property. The bench comprising Justice Buwaneka Aluvihare, Justice A.H.M.D. Nawaz and Justice Mahinda Samayawardhena, referred the matter to a fuller bench after it was pointed out that there were two conflicting views given in two previous Supreme Court judgments pertaining to the sale of property pledged by individuals as collateral for a bank loan.

The issue at hand is not when a borrowing company pledges its property as collateral, but when the shareholders or directors pledge their own property as guarantors of the loan. The case in question is where Suntech Engineering Pvt Ltd and its Managing Director Mr. Ranath Jayaweera are seeking an injunction to prevent the lender-bank from auctioning Mr. Jayaweera’s property that was pledged as mortgage. The court looked into the question of whether a lending bank could auction the property which belonged to a Shareholder/Director which has been mortgaged to the bank to recover a loan granted to the borrower in terms of the Recovery of Loans by Banks (Special provisions) Act 4 of 1990.

After it was revealed that there were two conflicting views on this issue, the court granted leave to appeal and referred the matter to a fuller bench to determine the issue. The application to stay the auction was allowed till the final determination of the appeal which is fixed for argument on June 30.

With reference to the conflicting views, in one Supreme Court verdict, it held that the ‘corporate veil’ could be removed and the property auctioned while in another case, the view held was that the ‘corporate veil’ cannot be removed. ‘Corporate veil’ is a legal term which separates the actions of an organisation from that of its shareholder. It protects shareholders from being liable for the company’s actions. Under this definition, a court can decide whether to hold the shareholders responsible or not.

Legal sources said that some other banks are likely to intervene in the appeal as it raises important issues regarding the lending policy of banks.

Mr. Rohan Sahabandu PC with Mr. Hasitha Amerasinghe appeared for the petitioners while Mr. Kaushalya Nawaratne appeared for the DFCC Bank.

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