NATIONAL DEVELOPMENT BANK OF SRI LANKA v. SERENDIB ASIA (PVT) LTD. AND ANO

007-SLLR-SLLR-1999-V-2-NATIONAL-DEVELOPMENT-BANK-OF-SRI-LANKA-v.-SERENDIB-ASIA-PVT-LTD.-AND-ANO.pdf


56
Sri Lanka Law Reports
[1999] 2 Sri LR.
NATIONAL DEVELOPMENT BANK OF SRI LANKA
v.SERENDIB ASIA (PVT) LTD. AND ANOTHER
SUPREME COURTAMERASINGHE, J.,
GUNAWARDANA, J. ANDGUNASEKERA, J.
S.C. APPEAL (CHC) NO. 16/98
C. (CIVIL) NO. 33/97/1OCTOBER 21. 1998
Jurisdiction – Statutory ouster of jurisdiction – Sections 46 and 50 of NationaDevelopment Bank Act, No. 2 of 1979 – Jurisdiction of the court to determentthe validity of a purchase by the Bank of property mortgaged to the Bank. '
!
The appellant Bank decided under section 41 of the National Development BalkAct, No. 2 of 1979 to sell by public auction immovable and movatleproperty mortgaged to the Bank on three mortgage bonds as security for a Iranof Rs.10,900,000. At the auction there were no bidders, whereupon the Binkpurported to purchase the properties at the price of Rs.1,000 for the propertycovered by each bond. The respondent debtors filed action in the High Courtseeking to set aside the purchase made by the Bank alleging inter-alia thaj theBank had acted *wrongfully and fraudulently in abuse of its powers undef theNational Development Bank Act" and for an interim injunction restraining thedisposition of the properties.
Held:
Sections 46, 50 (1) and 50 (2) of Act No. 2 of 1979 did not oust thejurisdiction of the High Court to hear and determine the action.
Section 50 (1) precludes any person claiming through or under theborrower under any disposition made after the date of the mortgage fromseeking to invalidate the sale of mortgaged property in any court.That section is not a bar against the borrower from moving the court toinvalidate the sale.
Section 46 of the Act empowers the Board of Directors to fix the upsetprice of the property which would bind persons other than the Bank.Section 50 (2) provides that the certificate of the General Manager is
sc
National Development Bank of Sri Larika v.
Serendib Asia (Pvt) Ltd, and Another (Amerasinghe, J.)
57
conclusive evidence of the sale and that the provisions of the Actrelating to the sale have been complied with. These provisions do notpreclude the court considering whether the Bank acted lawfully, in goodfaith and in a commercially reasonable manner.
APPEAL from the judgment of the High Court.
Romesh de Silva, PC with Geethaka Gunawardana for the defendant-apppellant.
A. P. Niles with Arjuna Kurukulasuriya for the plaintiffs-respondents.
Cur. adv. vult.
January 26, 1999.
AMERASINGHE, J.
The appellant is the National Development Bank of Sri Lanka. Thefirst respondent is a company and the second respondent is theManaging Director of that company. The second respondent intendedto set up a beer brewery and restaurant. He applied to the appellantfor a loan of Rs. 10,900,000 to enable him to meet the expenses ofthat project. The appellant agreed to provide the required sum ofmoney on condition there was adequate security for the loan. Securitywas provided by the execution of two mortagage bonds : (a) mortgagebond No. 337 offered a land as security to cover a sum ofRs. 9,400,000; and (b) mortgage bond No. 338 offered the machineryand accessories of the project to cover a sum of Rs. 1,500,000. Theloan of Rs. 10,900,000 was granted.
According to the respondents, when a request was made for afurther sum of Rs. 5,000,000 for the project, the appellant said it wouldconsider the proposal if additional security was offered. The secondrespondent and his brothers then executed mortgage bond No. 359.Mortgage bond No. 359 makes no reference to the need to securethe additional loan of Rs. 5,000,000.
The appellant's case is that mortgage bond No. 359 was executedto provide additional security in respect of the loan of Rs. 10,900,000.
58
Sri Lanka Law Reports
11999) 2 Sri LR.
From a perusal of document X4, it seems that the appellant wasconcerned with the lack of progress in the implementation of the projectand indeed its very viability and therefore required “further security"(vide X6). On the other hand, it seems that the respondents werein fact seeking "additional finance” from the appellant “to completethe project” (vide X8). The addtional capital required by the respondent,was not provided and the project was not completed. The exact natureof what transpired between the parties would need to be establishedby evidence elicited in the main trial. These observations andconclusions are based on preliminary evidence and therefore of atentative nature.
The mortgagors it seems failed to liquidate their debt as agreedupon between themselves and the mortgagee and therefore themortgagee, the defendant-appellant, it seems took the steps prescribedby law to sell the mortgaged properties with a view to paying itselfout of the proceeds. The prescribed steps included the passing ofBoard Resolutions on the 27th of December, 1991, in terms of section41 of the National Development Bank of Sri Lanka Act, No. 2 of 1979,to sell the mortgaged properties by public auction for the recoveryof the debts owed to the appellant (vide X9 and X10) and thepublication in newspapers of such resolutions (vide X11,12,13) andin the Gazette (vide X14). The authorized auctioneer advertised thesale in the newspapers (vide X15 and X16). The auction was fixedfor the 23rd of March, 1993. However, the sale could not be conductedas a result of an enjoining order sought and obtined by the plaintiffs-respondents in case Nos. 3688/Spl. and 3689/Spl. After due inquirybetween the parties, the enjoining order was vacated and the interiminjunction was removed. An attempt to move the Court of Appealby way of revision and leave to-appeal against the order of refusalto grant the interim injunction was unsuccessful. (CA Appl.Nos. 11/93 and 112/93 CA Minutes, 31st December, 1993).
Free to proceed, or so it was supposed, the defendant-appellantagain advertised the sale of the properties on the 2nd of September,1993. However, due to an enjoining order obtained on the 1st ofSeptember, 1993, in case No. 3782/Spl., the sale did not take place.But, after hearing both parties, the court vacated the enjoining order
SCNational Development Bank of Sri Lanka v.
Serendib Asia (Pvt) Ltd, and Another (Amerasinghe, J.)59
on the 2nd of November, 1993. The appellant once again fixedand advertised the sale of the properties mortgaged under bondsNo. 337 and 359 to take place on the 21st of September, 1994. Theproperty mortgaged under bond No. 338 was to be sold on the 21stof April, 1995.
According to the appellant, the market values of the immovableproperties mortgaged under bonds No. 337 and 359 were, upon thebasis of a valuation obtained from an independent source (vide X26)assessed at Rs. 11,250,000 and Rs. 27,500,000, respectively. Theywere determined by the Board of Directors of the appellant as the"upset" – the minimum price. There does not appear to have beensuch an evaluation in respect of the movable properties secured bybond No. 338.
What happened at the auction sales? According to the appellant,there were "no bidders". The appellant purchased the immovableproperties mortgaged under bonds No. 337 and 359 and the movableproperties mortgaged under bond No. 338. The purchase price forthe properties covered by the three bonds was Rs. 1,000 each.
The respondents then filed action in the Provincial High Court ofthe Western Province praying, inter alia, for a declaration that thepurchases by the appellant were invalid; that any resale or dispositionof the properties shall be null and void; for an injunction restrainingthe resale or disposition of the properties; and for an interim injunctionrestraining the appellant from reselling or disposing of the propertiesuntil the determination of the action. By its order dated the 11th ofNovember, 1997, the Court allowed the application for the interiminjunction prayed for.
Leave to appeal was granted on the following questions:
Did the High Court misdirect itself in the application of theprovisions contained in section 46 with sections 50 (1) and-50 (2) of the National Development Bank Act, No. 2 of 1979as, amended by Act No. 10 of 1990 and Act No. 10 of 1992?
60
Sri Lanka Law Reports
[1999] 2 Sri L ft.
Did the High Court have jurisdiction to hear nd determine thismatter?
In the circumstances of this case, as set cut in the plaint andstatement of objections, was the plaintiff in any event entitledto an interim injunction?
Act No. 10 of 1990 and Act No. 10 of 1992 have no bearing onthe matters before the High Court. The relevant provisions aresections 46 and 50 (1) and 50 (2) of Act No. 2 of 1979. Section46 states as follows: "The Board of Directors may fix an upset pricebelow which the property shall not be sold to any person other thanthe Bank". Section 50 (1) states: "If the mortgaged property is sold,the General Manager on a specific authorization by the Board ofDirectors shall issue a certificate of sale and thereupon the right, titleand interest of the borrower to and in the property shall vest in thepurchaser; and thereafter it shall not be competent for any personclaiming through or under any disposition whatsoever of the right, titleor interest of the borrower to and in the property made or registeredafter the date of the mortgage of the property to the Bank, in anyCourt to move to invalidate the sale for any cause whatsoever, orto maintain any right, title or interest to or in the property as againstthe purchaser". Section 50 (2) states: "A certificate signed by theGeneral Manager under sub-section (1) shall be conclusive proof, withrespect to the sale of any property, that all the provisions of this Actrelating to the sale of that property have been complied with".
In the matter before us, the General Manager, on a specificauthorization by the Board of Directors, issued a certificate of sale.The contention of the appellant is that once a certificate of sale isissued, it is not open to any person, including a borrower, to challengethe right, title or interest of the purchaser; the appellant in this case,therefore,' cannot have and maintain this action. The Court has nojurisdiction to inquire into the matter. The learned Judge of the HighCourt, however, was of the view that sections 50 (1) and (2) did notoust the jurisdiction of the Court. The view of the learned Judge ofthe High Court was that a certificate issued in terms of section 50
vests the right, title and interest in the purchaser and thereafter
SCNational Development Bank of Sri Lanka v.
Serendib Asia (Pvt) Ltd, and Another (Amerasinghe, J.)61
it shall not be competent for (1) any person claiming through or underany disposition whatsoever of the right, title or interest of the borrowerto and in the property; (2) made or registered after the date of themortgage to the Bank, to move to invalidate the sale. The sectiondoes not preclude the borrower from moving the Court to invalidatea sale. I find myself in agreement with the view of the learned Judgeof the High Court, for that is the plain meaning of the words insection 50.
Learned counsel for the appellant submitted that section 46 readwith sections 50 (1) and (2) precluded the plaintiffs-respondents frommaintaining an application for an interim injunction. Admittedly section50 (2) states that the certificates signed by the General Manager undersection 50 (1) shall be conclusive proof, with respect to its sale ofthe property, that all the provisions of the National Development BankAct relating to the sales of the mortgaged properties had been compliedwith. Yet, in my view, it does not preclude the Court from consideringwhether both in fixing the upset price under section 46 and inpurchasing the properties at Rs.1,000 under each of the three bondsthe appellant had acted lawfully, in good faith and in a commerciallyreasonable manner, although in terms of section 46, the appellant wasnot bound by the upset price.
The plaintiffs-respondents seek to set aside the purchases madeby the defendant-appellant alleging, inter alia, that the defendant-appellant had acted "wrongfully and fraudulently in abuse ofits powers under the National Development Bank Act". These arematters that the Court will have to consider in the circumstances ofthe case established by evidence having regard to the relevant principlesof law that are applicable.
The only question that remains is whether, in the circumstancesof this case, as set out in the plaint and statement of objections, theplaintiffs-respondents are entitled to the interim injunction prayed for.The plaintiffs-respondents allege unlawful conduct, fraud, abuse ofauthority and commercial unreasonableness. There are certainly seriousquestions of law and fact in the sense that they are not frivolous orvexatious questions to be tried: There is a prima facie case made
62
Sri Lanka Law Reports
[1999] 2 Sri LR.
out, in the sense that the plaintiffs-respondents seem to havesomewhat more than an arguable case, although at the end of thetrial the learned Judge of the High Court may legitimately arrive atdifferent conclusions on the law and the facts. Perhaps, as learnedcounsel for the defendant-appellant has submitted, the viewsexpressed by the learned Judge in granting the injunction on thequestions of unjust enrichment, trust, excess and so on, may proveto be unwarranted. The learned Judge was certainly not required to,and was not, passing any concluded views on the substantivequestions of law or fact; he was expressing preliminary and primafacie impressions, as was appropriate at this stage. On the questionsof balance of convenience and equities, learned counsel for theappellant submitted that the respondents were defaulters who owedthe Bank a large sum of money and had made no attempt whateverto liquidate their debts. On the other hand, if the properties are soldby the appellant, without adequately protecting the interests of theplaintiffs-respondents, grave prejudice is likely to be caused to thedebtor, if the case stated by the plaintiff is established. I agree withthe appellant that "a wrongdoer should not benefit from the wrongdoing".
However, the application of that principle would in my view, bemore appropriate when the trial had been concluded and thewrongdoer and wrong doing have been identified with greatercertainty.
For the reasons set out in my judgment, I dismiss the appeal withcosts and affirm the order of the High Court dated the 11th ofNovember, 1997.
GUNAWARDANA, J. – I agree.GUNASEKERA, J. – I agree.
Appeal dismissed.