Whether Bank Can Auction Property of Customer/Borrower Without Intervention of the Court?



Whether Bank Can Auction Property of Customer/Borrower Without Intervention of the Court?

In the intricate landscape of banking, disputes between financial institutions and customers regarding loans are not uncommon. The Financial Institution (Recovery of Finances) Ordinance, 2001, plays a pivotal role in regulating these matters through the establishment of the Banking Court. Section 2(d) of the Ordinance provides an expansive definition of “finance,” covering various loan facilities offered by conventional or Islamic banks. This encompasses personal loans like Home Loans and Credit Cards, as well as business loans such as Running/Current Finance and Bank Guarantees.

Banking Court to adjudicate Loan Matters

The Banking Court, as empowered by Section 3(2) of the Ordinance, holds the exclusive authority to determine customer defaults. In case of loan repayment defaults, the bank can file a suit for recovery, seeking court decree in relation to amount lent along with mark-up/profit as per the contractual agreement.

Power of Bank to Auction Mortgaged Property

However, when a bank secures a loan through mortgaged property, Section 15 of the Ordinance grants the bank the authority to auction the property without court intervention. This means the bank can proceed with the auction without obtaining a court decree against the customer.

 The Step-by-Step Auction Procedure

The procedure for auctioning mortgaged property is outlined meticulously in Section 15:

1. Determining Liability: The bank engages a reputable Chartered Accountant who offers the customer seven days to provide necessary material for determining their actual liability.

2. Notice of Demand: The process begins with a First Notice of Demand, providing the customer 14 days to settle the outstanding amount.

3. Second Notice: If the payment remains unpaid, a Second Notice is issued, again allowing a 14-day window for settlement.

4. Final Notice: After the expiration of the second notice, a Final Notice is issued, granting the customer 30 days to address payment concerns.

5. Property Evaluation: An approved evaluator from the Pakistan Banks’ Association assesses the property.

6. Publication: The sale is publicly announced in English and Urdu newspapers with wide circulation.

7. Public Auction: Taking place at least three days after publication, the auction allows the bank to purchase the property if the sale price exceeds the final bid by 10%, with notice to the customer/owner.

8. Order of Possession: If the mortgagor refuses to hand over possession, the bank obtains an Order of Possession, unless there is a bona fide lease, in which case only a competent court can order eviction.

9. Execution of Sale/Registration: Acting as the authorized attorney of the owner, the bank executes the sale/registration, with a mandatory seven-day waiting period after the public auction.

10. Adjustment of Sale Proceeds: The sale proceeds settle the liability, and any remaining amount is paid to the owner.

11. Filing of Accounts: Proper accounts of the sale proceeds are filed in the Banking Court within 14 days of the sale.

Paramount Requirements and Legal Safeguards

For a bank to auction a property without court involvement, it must ensure three crucial factors:

  • The customer has taken a loan from the bank.
  • The customer has defaulted in repaying the loan as per the contract.
  • The loan is secured through a mortgage.

Banks must strictly adhere to the procedure during auctioning, and they cannot attempt to auction a property for reasons other than the customer’s default in repaying the loan. Failure to follow the procedure or attempting an auction for unjust reasons allows the customer to seek legal intervention and obtain a stay from a court of law.

If you find yourself entangled in loan disputes, our expert banking lawyers are here to provide consultation and guidance.