017-SLLR-SLLR-2007-V-1-HATTON-NATIONAL-BANK-LTD.-v.-JAYAWARDANE-AND-OTHERS.pdf
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Hatton National Bank Ltd. v Jayawardane and others
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HATTON NATIONAL BANK LTD.v
JAYAWARDANE AND OTHERS
SUPREME COURTJAYASINGHE, J.
TILAKAWARDANE, J.
MARSOOF, J.
SC (CHC) APPEAL 6/06SC LA (CHC) 73/2005CHC 108/2004 (01)
Recovery of Loans by Banks (Sp. Prov.) Act 4 of 1990-Sections 15(1), 15(2),15(3), 16 – Parate Execution – Property of 3rd parties mortgaged – Cannot besold – Directors property mortgaged – Could the property be parate executed?Civil Procedure Code – Section 207. Principle of Laesio Enomes – Notapplicable when Bank re-sells property? Lifting the veil of incorporation.
The respondents were directors of Company N obtained banking facilities andto secure the loans granted hypothecated the properties belonging to therespondent Directors. As the Company defaulted the petitioner Bank adopteda resolution in terms of Law 4 of 1990, to sell the property by way of parateexecution. The defendant-respondents instituted action in the CommercialHigh Court (CHC 252/2001 (1)) and sought an enjoining order to restrain theBank from conducting the public auction. The enjoining order granted was laterdissolved the special leave to appeal application filed in the Supreme Courtagainst the order dissolving the enjoining order was rejected. Later thedefendant-respondents withdrew the action.
Subsequently the property was sold by public auction and purchased by thepetitioner Bank.
The defendant-respondents instituted action again in the Commercial HighCourt and sought an order that, the purported auction sale is a nullity and theauction should be declared null and void on the ground of laesio enomes.
The Commercial High Court granted an interim injunction, holding that therelief claimed in the present case was different from the case – CHC 252/2001and that the ratio in Ramachandra v Hatton National Bank is applicable and
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the petitioner Bank cannot sell the property of the Directors, mortgaged tosecure the loan taken by the petitioner Bank.
Held:
On examination of the reliefs claimed in Case No. 252/2001 (1) andthe relief claimed in the instant case, though they do not appear tobe identical, but based on the resolution adopted by the Bank andthe consequent procedural steps the Bank would take in terms ofthe resolution, the Commercial High Court erred in holding that thereliefs claimed are dissimilar.
Held further
Per Nihal Jayasinghe, J.
“The 1st and 2nd respondents cannot hide behind the veil of incorporation ofCompany N whilst being the alter ego" of the said Company of which the 1strespondent has been the Managing Director and the 2nd respondent who isthe wife of the 1st respondent has been a Director.”
Although the independent personality of the Company is distinctfrom its Directors and shareholders Courts have in appropriatecircumstances lifted the veil of incorporation. In particular Courtshave been vigilant not to allow the veil of incorporation to be usedfor some illegal or improper purpose or as a devise to defraudcreditors.
Per Nihal Jayasinghe, J.
"It is quite obvious that the 1st and 2nd respondents being Directors of theCompany benefited from the facilities made available to the said Company bythe petitioner Bank and to that extent they cannot claim that the mortgageswhich secured the said facilities fall within the category of "third partymortgagee” as contemplated in the majority judgments of the Court inRamachandra v Hatton National Bank'.
Per Nihal Jayasinghe, J.
"It would be an exercise totally illogical to seek to differentiate the 1st and 2ndrespondents as third party mortgagors".
In terms of section19 if the Bank purchased the property the Bankis obliged to resell the property within a reasonable period in orderto recover the amount due to the Bank. Since the actual sale ofproperty purchased by the Bank comes after the resale of theproperty under section 19, and the property is resold by the Bankunder section 10 – there cannot be an application to set aside thesale on the basis of laesio enormis."
APPEAL from an order of the Commercial High Court.
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Hatton National Bank Ltd. v Jayawardane and others
(Nihal Jayasinghe, J.)
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Cases referred to:
Ramachandra v Hatton National Bank – (distinguished)
Haji Omarv Wickremasinghe – 2002 – 1 Sri LR 105
Salomon v A. Salomon and Co. Ltd. – 1897 – AC 22
Merchandise Transport Ltd. v British Transport Commission – 1962 – 2QB173
Jones v Lipman – 1962 1 WLR 832
Atlas Maritime Co. SA v Avalon Maritime Ltd. – 1991 – 4 All ER 769 at 779
Romesh de Silva, PC with Palitha Kumarasinghe PC and Sugath Caldera forappellant.
Mohan Peiris PC with M.C.M. Muneer and Ms. Nuwanthi Dias for respondentsJuly 31,2007
NIHAL JAYASINGHE, J.
The 1st plaintiff-respondent (hereinafter referred to as the 1st 01respondent) was the owner of the property morefully described inschedule 1 of the plaint and the 1st respondent and the 2nd plaintiff(hereinafter referred to as the 2nd respondent) were joint owners ofthe property morefully described in schedule 2 of the plaint. The 1strespondents at all times material to this application was theManaging Director and the 2nd respondent Director of NalinEnterprises Private Limited. The said Nalin Enterprises obtainedcertain banking facilities from the defendant-petitionerBank(hereinafter referred to as the petitioner) against the recovery 10of which, upon default of Nalin Enterprises, the 1st and 2ndrespondents hypothecated the properties described in schedules 1and 2 of the plaint. It was urged on behalf of the plaintiffs-respondents that the 1st and 2nd respondents were not borrowersor beneficiaries of the facilities granted by the petitioner Bank butmerely guarantors to the loan granted to Nalin Enterprises. SinceNalin Enterprises defaulted making payment as agreed upon thepetitioner Bank in terms of section 4 of the Recovery of Loans byBanks (Special Provisions) Act No. 4 of 1990 adopted a Resolutionto sell the properties described in the schedules to the plaint by 20way of Parate Execution at a public auction in order to recover theunpaid loan installments. Accordingly the public auction was fixed
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for 24.10.2001. It is to be noted that 2nd plaintiff as the Attorney ofthe 3rd respondent filed partition action No. 19430/P on the basis thatthe 3rd respondent is the owner of the land and building and soughtan enjoining order preventing the auction scheduled for 24.10.2001.The Court however refused to grant the enjoining order but issuednotice of interim injunction. The District Court of Colombo havingconsidered the Petitioner’s objection in the partition action dismissedthe application for interim injunction and subsequently terminated theproceedings. After the enjoining order was refused on 15.10.2001 the1st and 2nd respondents instituted action No. 252/1 (i) in theCommercial High Court for enjoining order and an interim injunctionpreventing the sale fixed for 24.10.2001 suppressing the filing of thepartition action 19430/P and the refusal of the enjoining order by theDistrict Court and obtained an enjoining order from the CommercialHigh Court. The Commercial High Court after inquiry refused theapplication for interim injunction on the basis of suppression of thepartition action and held that the Bank was entitled to sell theproperty mortgaged to the bank as security for loans in default.Thereafter the 1st and 2nd respondents sought leave to appealSCLA 18/2003 against the said order which was dismissed by theorder dated 26.06.2003 by the Supreme Court. Subsequently thesaid case No. 252/2001 (i) was withdrawn in the Commercial HighCourt and was dismissed and decree entered accordingly.
The petitioner Bank by letter of 11.09.2003 informed therespondents that the petitioner Bank had purchased the saidproperty and certificate of sale issued in petitioner’s favour.
The respondents thereafter instituted another action HC Civil108/04(i) on 31.05.2004 in the Commercial High Court against thepetitioner seeking –
A declaration that the purported auction sale conducted inrespect of the properties referred to in the schedules
to the plaint is null and void.
That the said auction be declared null and void on theground of Laesio Enormis.
The petitioner be restrained from taking any steps to ejectthe occupants including the respondents from thepremises in the 1 st and 2nd schedules to the plaint untilthe final determination of this matter.
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(Niha! Javasinghe, J.)
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The petitioner be restrained by way of interim injunctionfrom selling, alienating or transferring the propertiesdescribed in the 1 st and 2nd schedules to the plaint to thirdparties pending the determination of this action.
The Commercial High Court on 25.10.2005 granted an interiminjunction as prayed for by the respondents. It is against thisorder the petitioner Bank has invoked the jurisdiction of thisCourt.
The petitioner contended that the High Court failed to considerthe fact that the Case No. 252/2001 (i) had been dismissed and by 70the said dismissal the respondents forfeited their right to agitate thesame matter in any other court. That the Court also failed toconsider the fact that the liability of the 1st and 2nd respondents torepay the said facilities was joint and several along with the saidNalin Enterprises Private Limited. That in terms of section 16 of theAct No. 4 of 1990 the petitioner is entitled to make an applicationfor delivery of possession of the property and any interim injunctionissued would be inconsistent with the statutory right of thepetitioner to have vacant possession through judicial intervention. Itis the contention of the petitioner Bank that as there were no 80bidders at the auction held for the sale of the property set out in theschedules the petitioner Bank purchased the property and theBoard of Directors issued a certificate of sale under section 15(1)of the Act.
Section 15(1) provides that –
"If the mortgaged property is sold, the Board shall issue acertificate of sale and thereupon all the right, title, andinterest of the borrower to, and in, the property shall vest inthe purchaser, and thereafter it shall not be competent forany person claiming through or under any disposition 90whatsoever of the right, title or interest of the borrower to, andin, the property made or registered subsequent to the date ofthe mortgage of the property to the bank, in any court tomove or invalidate the sale for any cause whatsoever, or tomaintain any right title or interest to, or in, the property asagainst the purchaser."
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Section 15(2) provides that –
“A certificate signed by the Board under sub section (1) shallbe conclusive proof with respect to the sale of any property,that all the provisions of this Act relating to the sale of thatproperty have been complied with".
Section 16(1) provides that –
"The purchaser of any immovable property sold in pursuanceof the preceding provisions of this Act shall, upon applicationmade to the District Court of Colombo or the District Courthaving jurisdiction over the place where the property is situate,and upon the production of the certificate of sale issued inrespect of that property under section 15 shall be entitled toobtain an order for delivery of possession of that property".
After the respondents supported for notice of interim injunctionon 01.06.2004 and the same served on the petitioner the petitionerfiled its objections and prayed for dismissal of the application forinterim injunction. Parties thereafter agreed to dispose of the saidinquiry by way of written submissions. Subsequently, on theapplication of the petitioner Court permitted the petitioner to tenderadditional written submission in view of the Divisional Benchjudgment Ramachandra v Hatton National Bantt') and in the saidwritten submissions the petitioner contended that –
The 1st and 2nd respondents and the said Nalin Enter-prises instituted action in the Commercial High Court No.252/2001 (i) praying for a declaration that the resolutionadopted by the petitioner is illegal and therefore null andvoid and no force or avail in law and prayed for an interiminjunction preventing the Bank from auctioning theproperty.
That.the learned High Court Judge of the CommercialHigh Court dismissed the respondents' application forinterim injunction.
That the application for leave to appeal against such orderto the Supreme Court No. 18/2003 was dismissed by theSupreme Court.
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Hatton National Bank Ltd. v Jayawardane and others
(Nihal Javasinahe. J.)__
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That the said 252/2001 (i) was dismissed and decreeentered accordingly.
That decree entered in Case No. 252/2001 (i) operates asres judicata.
Section 207 of the Civil Procedure Court enact that
"All decree passed by the Court shall, subject to the appeal,when an appeal is allowed, be final between the parties, anno plaintiff shall hereafter be non-suited.
Explanation – Every right of property, or to money, or to modamages, or to relief of any kind which can be claimed, setup, or put in issue between the parties to an action upon thecause of action for which the action is brought, whether it beactually so claimed, set up, or put in issue or not in theauction, becomes, on the passing of the final decree in theaction, a res adjudicata, which can not afterwards be madethe subject of action for the same cause between the sameparties,"
It is the submission of the petitioner that when there is adecree in an action instituted by a person on a particular property 150right, damage or other relief, the parties to the said action cannotinstitute further proceedings for the same property, right, damage orthe relief whether any matter was put in issue or not. That therespondents who instituted action to set aside the resolutionadopted by the Bank on the basis that the resolution is null and voidcannot institute another action after the dismissal of the previousaction for a declaration that the auction conducted in pursuance ofthe said resolution is null and void. While the said matter waspending for order on the written submissions filed on 04.04.2005the respondents instituted action No. 20693/L in the District Court 160of Colombo for a declaration that the property described in theschedule thereto has not been vested with the petitioner in view ofthe decision of the Divisional Bench in Ramachandra v HattonNational Bank (supra) and prayed for an enjoining order and interiminjunction preventing the petitioner from possessing the property.
The respondents having obtained the enjoining order ex-partedispossessed the petitioner who was in possession of the saidproperty on the strength of the enjoining order. Consequently, the
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District Court dismissed the application 20693/L.
It is in this context that the Commercial High Court by its order 170on 25.10.2005 issued interim injunction:
Preventing the petitioner from ejecting the respondentsand those holding under them and claiming title to theproperty,
Restraining the respondent Bank reselling the propertydescribed in the schedule to the plaint.
The learned High Court Judge held that
"as far as the reliefs prayed by the plaintiffs are concerned itcannot be strictly construed that the reliefs prayed for in this caseand the earlier case are similar or identical in any form. 180Consequently, I should express in my inability to apply section 207as being a bar to the institution and maintainability of this action bythe plaintiff.”
On examination of the reliefs claimed in Case No. 252/2001 (i)and the relief claimed in Case No. 108/2004(1) though they do notappear to be identical, but based on the Resolution adopted by theBank and the consequent procedural steps the Bank would take interms of the Resolution. The learned Judge of the Commercial HighCourt was in error in holding that the reliefs claimed are dissimilar.
It has been urged by the plaintiff-respondents that in terms of 190the judgment in the case of Ramachandra v Hatton National Bank(supra) property mortgaged by a third party who is not a borrowercannot be sold by way of Parare Execution under and in terms ofthe Recovery of Loans by Banks (Special Provisions) Act No. 4 of1990. There is of course as urged by the plaintiff a bar preventingthe petitioner from Parate Execution of the land mortgaged by athird party who is not a borrower after the judgment ofRamachandra. What the plaintiff-respondents are seeking toaccomplish in this application is to invite the Court to adopt thereasoning of Ramachandra v Hatton National Bank (supra) to the 200circumstances of the present case which in my view is a far cry.
The petitioner contended that in view of the certificate of salethat has been issued the matter is finally laid to rest and there
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(Nihal Jayasinghe, J.).
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cannot be any scope for challenging the validity of the certificate ofsale and submitted that even though the property was purchasedfor a sum of Rs. 1000/- for want of competitive buyers, when a sumof Rs. 34 million and interest thereof from 1990 is due and thereforethe sale is void on the ground of laesio enormis is not tenable inlaw. Counsel submitted that laesio enormis is not applicable forpublic auctions conducted with the authority of statute or court andthat in any event Parate Execution is available in terms of Act No.4 of 1990. After Parate Execution and certificate of sale issued,which is enforced under the provisions of Civil Procedure CodeLaesio enormis is not applicable. In HajiOmarv Wickremasinghe®)Supreme Court held that –
"it is my view that where it is not open to a person
claiming through or under any disposition whatsoever of theright, title or interest of the borrower to and in the property tomove to invalidate a sale certainly it cannot be said that theborrower on whose title and interest in the property a thirdparty's claim is based, has right to move the invalidate thesale."
That in terms of section 19 of the Act if the Bank purchased theproperty the Bank is then obliged to resell the property within areasonable period in order to recover the amount due to the Bank.Since the actual sale of property purchased by the Bank comesafter the resale of the property under section 19 and the property isresold by the Bank under section 19 there cannot be an applicationto set aside the sale on the basis of the principle laesio enormis.
In my considered opinion, the 1st and 2nd respondents cannothide behind the veil of incorporation of Nalin Enterprises (Pvt) Ltd,while being the "alter ego" of the said company of which the 1strespondent has been the Managing Director and the 2ndrespondent, who is the wife of the 1st respondent, has been aDirector. Although the independent personality of the company asdistinct from its directors and shareholders has been recognized bythe Courts since the celebrated decision of Salomon v A. Salomonand Co. Ltd.®), Courts have in appropriate circumstances lifted theveil of incorporation. In particular, Courts have been vigilant not toallow the veil of incorporation to be used for some illegal orimproper purpose or as a device to defraud creditors –
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Merchandise Transport Ltd. v British Transport Commission<4> andJones v Lipmari5). As Staughton L.J. observed in Atlas MaritimeCo. SA v Avalon Maritime LtdS6) at 779 –
'To pierce the corporate veil is an expression that I wouldreserve for treating the rights or liabilities or activities of acompany as the rights or liabilities or activities of itsshareholders. To lift the corporate veil or look behind it, on theother hand, should mean to have regard to the shareholding ina company for some legal purpose."250
As far as this case is concerned, it is quite obvious that the 1stand 2nd respondents, being Directors of Nalin Enterprises (Pvt)
Ltd.; benefited from the facilities made available to the saidcompany by the petitioner Bank, and to that extent they cannotclaim that the mortgages which secured the said facilities fall withinthe category of “third party mortgage” as contemplated in themajority judgments of this Court in "Ramachandra v HattonNational Bank (supra).
The 1st and 2nd plaintiff are integrated to Nalin Enterprisesand when Nalin Enterprises sought to obtain facilities from the 260petitioner Bank the borrowers are in fact the said Nalin Enterprisesalong with the 1st and 2nd plaintiffs. It would be an exercise totallyillogical to seek to differentiate the 1st and 2nd plaintiffs as thirdparty mortgagers within the meaning of Ramachandra v HattonNational Bank (supra).
I accordingly set aside the order dated 25.10.2005 of theCommercial High Court marked 'G Application of the plaintiff-respondents for interim injunction as prayed for in the prayer of thepetition is dismissed with costs.
TILAKAWARDANE, J._I agree.
MARSOOF, J._I agree.
Appeal allowed.
Interim injunction vacated.