The Supreme Court of Sri Lanka Passes a Landmark Judgment on Parate Execution

On 13th November 2023, a seven-judge bench of the Supreme Court of Sri Lanka unanimously held in Sunpac Engineers (Private) Limited & another vs. DFCC Bank & 11 others (SC/Appeal/11/2021) that a bank may in the exercise of its statutory rights under the Recovery of Loans by Banks (Special Provisions) Act No. 4 of 1990, as amended, sell by public auction (i.e. parate execution) without having recourse to court, any property mortgaged to the bank as security for any loan in respect of which default has been made irrespective of whether the mortgagor is the borrower or a third party.

In this groundbreaking judgment, the Supreme Court overruled the majority ruling in Ramachandran v Hatton National Bank ([2006] 1 Sri LR 393) which had held that a bank cannot sell by public auction, the property mortgaged by a person unless he is also the borrower of the loan.

The Supreme Court noted that when enacting the Recovery of Loans by Banks (Special Provisions) Act, ‘Parliament fervently desired to assist the banking sector by facilitating speedy recovery of loans, and it did not intend to limit the expedited process only to cases where the debtor had mortgaged the property’.

The ruling in Sunpac Engineers is significant because banks in Sri Lanka may now lend monies on the security of property belonging to persons other than the borrower with the confidence that in the event of a default, the bank will be entitled to exercise its rights of parate execution without recourse to court. This would facilitate credit growth in the country as intended by the legislature when it enacted the Recovery of Loans by Banks (Special Provisions) Act. The Court extended the same conclusion to the laws establishing the Bank of Ceylon and the People’s Bank.

Authors

Manjula Ellepola
Partner

Nirmala Peiris
Partner