• Understanding the law, its application, and suspension

On 26 February, the Cabinet of Ministers made the decision to suspend all Parate executions until 15 December. This has sparked severe criticism from Sri Lankan banks as the Sri Lanka Banks’ Association (SLBA) stated that this decision appears “to be in response to strong lobbying by a small group of individuals who have defaulted on their debt obligations for a prolonged period.”

This Cabinet decision is based upon a proposal furnished by President Ranil Wickremesinghe, in his capacity as the Minister of Finance, following a request made by Minister of Justice Dr. Wijeyadasa Rajapakshe and Minister of Industries Dr. Ramesh Pathirana. The controversy surrounding this decision has brought attention to the important role that the law of Parate executions plays in the country’s economy.

What is Parate execution?

Parate execution allows licensed banks to publicly auction mortgaged properties without court intervention to recover defaulted loans. This is enshrined in The Recovery of Loans by Banks (Special Provisions) Act No. 4 of 1990. If the property in question is not sold at the public auction, then the bank is empowered to buy the property at the auction and re-sell the property later, in order to recover the defaulted loan.

The Roman-Dutch Law, which constitutes the common law of the country, historically frowned upon practices which allowed lenders to bypass courts. Nevertheless, Parate execution was codified in our law amidst an unsatisfactory debt recovery climate which saw banks raise concerns about the length of the court proceedings required to seize the collateral given to secure non-performing loans. While state banks such as the People’s Bank and Bank of Ceylon have had the power to implement Parate execution for much longer, private banks were only granted this power by way of the abovementioned 1990 Act.

Bank loans are necessary for the sustenance and growth of any modern economy. Loans are required by the public for, among other things, the establishment and growth of businesses, which make up the lifeblood of modern economies. The rationale behind Parate execution is that banks should be given other options to recover unpaid loans. The availability of recourse to Parate execution incentivises banks to be amicable when granting loans as they can recover any unpaid secured loans by publicly auctioning collateral, without having to go through lengthy and expensive court proceedings.

Parate execution in essence reduces the risks faced by banks in granting secured loans and thereby encourages the grant of more loans to the public.

Legal framework

Before any property can be seized and auctioned under the Parate execution procedure, the conditions set out in the Recovery of Loans by Banks (Special Provisions) Act No. 4 of 1990 should be satisfied.

Under Section 4, the board of directors of the bank should first pass a resolution to auction the relevant property in order to recover the unpaid portion of a defaulted loan. This can only be done after the bank has already sent its final notice to the borrower.

Notice of the resolution should be published in the gazette and in at least three Sinhala, Tamil, and English newspapers. The notice should also be dispatched to the borrower. Publication and dispatching of the notice should be at least 14 days before the date fixed for the public auction. This notice period exists primarily to allow the borrower time to either repay the loan or negotiate a repayment scheme with the bank, before the public auction (Section 8).

The board of the bank is restricted from going ahead with the public auction if, before the date of the auction, the borrower pays the whole of the unpaid portion of the loan together with other specified recoverable sums such as the costs of publishing notices (Section 10(1)).

Discretion is granted to the bank to cancel the scheduled public auction if the borrower pays the instalment of the loan in respect of which default was made, together with the costs of publishing notices and other specified dues (Section 10(2)).

The bank may fix an ‘upset price’ below which the property shall not be sold to anyone other than to the bank itself (Section 11).

Once the property is sold, the board of directors of the bank shall issue a Certificate of Sale to the purchaser (Section 15). This Certificate of Sale is to be considered conclusive proof that all provisions of the 1990 Act have been complied with in the sale of the property and that such sale is valid in law. In fact, the judiciary has specifically upheld the conclusiveness of the Certificate of Sale in cases such as Haji Omar versus Wickremasinghe (2002) 1SLR 113 and SC Appeal No: 126/2012 Liyanage versus Sampath Bank PLC.

If the bank itself purchases the property (due to no sale being made at the public auction), then the bank is empowered to cancel the purchase if the borrower pays the due amount and any interest to the bank (Section 17).

The bank is also empowered to re-sell any property that it has purchased under the 1990 Act to recover the loan amount that is due (Section 18).

Section 19 places a requirement on banks to not hold any such property bought under the 1990 Act for a longer period than necessary to re-sell the property and recover the loan.

It is notable that despite banks being empowered to auction collateral property without court intervention as set out above, borrowers have the freedom to obtain an interim injunction from court to prevent a public auction. However, injunctions are equitable remedies that are at the discretion of the court. To obtain an injunction, a borrower would have to satisfy the court that there is a serious issue to be heard by court in relation to the defaulted loan, that the balance of convenience is on the side of the borrower, and that irreparable harm will occur to the borrower if the scheduled public auction is not stopped.

Current suspension of Parate execution procedure

Due to the economic crisis plaguing the country, micro, small, and medium enterprises (MSMEs) with outstanding loans have not been able to repay their loans. This has led to a recent increase in the number of Parate executions carried out by banks, which led to the Cabinet decision to suspend Parate executions with the stated objective of protecting MSMEs. This suspension is to be followed by proposals for amendments to the 1990 Act; however, specifics regarding the said amendments have not been disclosed as of yet.

While MSMEs should definitely be protected, especially in the context of the current economic crisis, it is also important to not lose sight of the objective of the Parate execution procedure. The SLBA has highlighted the fact that the current suspension is a unilateral move by the Government, carried out with no consultation whatsoever with banks. This might also indicate that the Government is overreaching in an effort to appease certain sections of the electorate during an election year.

The Ceylon Chamber of Commerce has also indicated its concerns by stating that the suspension of Parate executions “could lead to higher borrowing costs due to the increase in risk premiums arising from delays in releasing collateral and the reluctance of the banking sector to lend to genuine, non-defaulting business due to the perceived challenges of foreclosure related to tangible security.”

It is critical to note that the banks also had to bear the economic costs of events such as the Easter attacks 2019, Covid-19 pandemic, and the current economic crisis, as banks were directed to provide moratoriums on loans to assist MSMEs and other borrowers during these events. While the suspension might grant immediate short-term relief to borrowers, in the long-term, such a blanket suspension will have a negative impact on the economy as banks will be more selective in granting loans and will also increase interest rates in relation to the repayment of loans.

A permanent solution to this issue lies beyond the scope of this article but it is clear that such a solution does not involve the blanket suspension of the Parate execution procedure without any consultation with all the relevant stakeholders.

(The writer is an Attorney at Law with experience in commercial and labour law and interest in public policy. He is also a Fellow of St. Stephen’s College, Delhi – public policy and leadership)

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The views and opinions expressed in this column are those of the author, and do not necessarily reflect those of this publication.