LAHORE: A Lahore High Court verdict that allowed financial institutions to sell mortgaged property to recover a defaulted loan without invoking a banking court, however, set aside a rule which permits auction even in the presence of one bidder.

“We hold that re-enacted section 15 of Financial Institutions (Recovery of Finances) Ordinance, 2001 and its Rules, 2018 are intra-vires and constitutional, however, Rule-3 (c) (iv) of Rules, 2018 is unconstitutional,” said the detailed judgment issued by a five-judge larger bench on a set of petitions. The bench gave the ruling with a majority of four to one.

Chief Justice Mamoon Rashid Sheikh headed the bench with Justice Shahid Waheed, Justice Abid Aziz Sheikh, Justice Jawad Hassan and Justice Asim Hafeez.

Justice Hafeez authored the majority decision while Justice Abid Aziz Sheikh wrote his dissenting note.

Court issues detailed judgement in default loan recovery case

The bench had two challenges before it including power given to financial institutions to sell mortgaged property by deciding the loan claim unilaterally under the section 15 of the ordinance and discriminatory process of auction under rule-3 (c) (iv) of the rules made under the law.

The majority decision holds that the section 15 in question no doubt confers power of sale upon the failure of the mortgagor to pay loan when demanded, but also imposes conditions to be met before power of sale is exercised. It rules that non-judicial sales are not illegal and there is no violation of constitutional principles or guarantees regarding fundamental rights.

“It is permissible for the financial institution to participate and bid, subject to the conditions prescribed,” the verdict states adding the mortgagor may invoke remedies against collusive, fraudulent and manipulative sales before the banking courts.

About the auction rule, the majority judges observe, “We have serious reservations regarding Rule-3 (c) (iv) of Rules, 2018 wherein even in the presence of one bidder the financial institution can proceed with the auction sale.”

“The mechanism provided in the rule is against the very concept of the public auctions unconstitutional as it negates the mandate of Article 24 of the Constitution,” adds the ruling.

The bench also sustains the rules that permit determination of outstanding mortgage money by chartered accountants before initiating the sale process as per the section 15. It is to mention that different single benches had in 2016 suspended the section 15 of the ordinance as it was argued on behalf of the petitioners (industries and individuals) that the section had been reintroduced through Financial Institutions (recovery of finances) Amendment Act 2016 and was not sustainable in light of Supreme Court’s judgments.

The matter remained pending for years as Prime Minister Imran Khan during July 2019 speaking at a ceremony discussed the issue and requested the LHC for early disposal of the petitions.

Published in Dawn, March 12th, 2020