Debt recovery act sri lanka pdf

Commercial credit and security is a sine-qua-non in the global commercial activities. Loans granted to various business ventures fall under the category of commercial credit. Commercial credit may also be referred to as commercial lending or even as business credit. The word "security" used in business world could be defined as a right or interest in property given to a creditor so that in the event of the debtor failing to pay his debt, as and when it is due, the creditor may reimburse him for the debt, out of the property charged.

Facilities such as credit or advances could be granted by lending institutions or by individual money lenders or even by way of pawning. Whatever the way in which money is lent, it has a great impact on the economy of a country. Its contribution to the country depends upon the quality and quantity of services it provides to the people. Thus lenders play a vital role in the development of the economy of a country.

Therefore it is incumbent on the Governments to provide adequate rules and regulations to assure the smooth functioning of the said lending institutions. In other words, there should be adequate laws to recover the loans granted by these lending institutions. If the lending institutions, including the banks are not in a position to recover their dues without unnecessary delay, such lending institutions would find difficult to run their businesses. Moreover, if the banks are not functioning smoothly the general public too may refrain from investing their money in these institutions and that may cause a great impact on the economy of a country. Therefore it is necessary to have adequate laws to recover the monies given as loans by the lenders.

In the Sri Lankan context, loans are given mostly by the banks or by the lending institutions registered with the Monitory Board of the Central Bank of Sri Lanka. The Parliament has taken a keen interest in the recent past in providing sufficient legislation enabling these institutions to recover the dues as soon as possible when a default has been made. These laws were made focusing mainly on the recovery of debts speedily, deviating from the traditional way of Regular Procedure stipulated in the Civil Procedure Code which is generally being adopted to file civil actions.

Even though, the aforesaid Civil Procedure Code was enacted on the 02nd of August 1890, its provisions are still in force and it is the main Code that governs the procedure in a civil suit. Basically the cases are being heard and determined adopting a procedure known as the Regular Procedure. When the Regular Procedure is followed, a heavy burden is cast upon the plaintiff to prove material facts in order to succeed in an action.

Actions are filed by the lenders to recover monies when a default is made by filing a plaint either in the District Court or in the Commercial High Court. Once a plaint is filed, summonses are issued on the defendants and they are given an opportunity to file answer. Thereafter the case is fixed for trial if there is no claim in reconvention. The judgment is delivered only after a long drawn up trial. This process is time consuming and is also very expensive. Therefore the creditors do not wish to file actions under this Regular Procedure, as they could resort to file actions under the special provisions made in the Civil Procedure Code itself or to the provisions made in the other enactments such as Debt Recovery (Special Provisions) Act No. 02 of 1990 and Recovery of Loans by Banks (Special Provisions) Act No. 04 of 1990.

In Sri Lanka, the lenders generally file actions under and in terms of the provisions of the following enactments to recover their dues.

(5) Provisions similar to the above Recovery of Loans by Banks (Special Provisions) Act No.04 of 1990 found in the Bank of Ceylon Act, Peoples Bank Act, Mortgage Bank Act and Development Finance Credit Corporation Act.

Chapter LIII of the Civil Procedure Code deals with the topic commonly known as 'Summary Procedure on Liquid Claims'. Where the claim is for a debt or liquidated demand in money arising upon a Bill of Exchange, Promissory Note, or Cheque or Instrument or contract in writing for a liquidated amount of money, or on a guarantee where the claim against the principal is in respect of such debt or liquidated demand, Bill, Note, or Cheque, an action is instituted by presenting a plaint in the prescribed form by the Code.1

When instituting actions in the aforesaid manner, the plaintiff also must file an affidavit stating that the sum which he claims is justly due to him from the defendant.2

He also must produce the instrument on which he sues, along with the plaint and affidavit at the time of filing action.3 Once summons is served on the defendant it is the duty of the defendant to make an application to court requesting leave to appear and to defend the action. He shall make this application within the period mentioned in the summons and it is reckoned from the date of service of the summons, if he desires to appear and defend the action. If the defendant does not make an application to court to obtain leave to appear, the plaintiff is entitled to get a decree as prayed for in the plaint.4 However, it is also mentioned in law that if the defendant pays into court the sum mentioned in the summons court has no discretion but to give leave to appear and to defend the action.

If the defendant does not deposit the money in court as mentioned before, he may file an affidavit to satisfy court disclosing an acceptable defence or in the affidavit he may disclose sufficient material to support the application. When such application is made by the defendant, the Judge need not be satisfied that the defence, the defendant has taken up be succeeded but he should merely consider whether there is a triable issue is disclosed.5 This was reiterated in the case of C.W. Mackie & Co. Ltd Vs. Trans Lanka Investments Ltd.6 In this case Dr. Ranaraja J. said 'The court is required by this Section, to consider the petition and affidavit together with any documents filed, and decide whether the defendant has a prima facie sustainable defence. Even though there appears to be such a defence, if court is doubtful of its genuineness, the defendant may be ordered to give security before being permitted to appear and defend. At this stage court is not called upon to inquire in to the merits of the cases of either party.'

In view of the law as mentioned before, court shall make an order for such terms as to security and allow the defendant to appear and defend the case. If a valid defence that may give rise to a dismissal of the action is disclosed, judge may allow the defendant to appear and defend the case even without making an order for security.7

Therefore it is very clear that unlike in the actions filed under the Regular Procedure stipulated in the Civil Procedure Code, a defendant in an action filed under Section 703, will have to make a special application supported by an affidavit to defend his or her action and be required to deposit security or must deposit the amount claimed in full. If the defendant fails to comply with this requirement a decree in favour of the plaintiff will be entered for default and the case will not be taken up for trial.

These provisions are made to ensure that sufficient funds are available to recover the dues in the event the plaintiff succeeds in the action at the time the decree is entered after the trial proper. Even though this process is rather cumbersome, there is an assurance of getting the decree executed rather than having a decree limited to just a paper.

The object of the legislature in enacting the Mortgage Act was described to some extent by the Court of Appeal in the case of Chandrasena Vs. Leelanona and others.8 In this case it was held by Laxman Weerasekara J. that the thinking of the Legislature has been to see that the bank which is a state lending institution recovered amounts lent by it with interest. Thereby the Legislature assured the lender a quick and effective method of recovery of possession of the properties to be auctioned on a decree entered in a mortgage action.

The Mortgage Act deals with most of the issues that arise when a case is filed. It provides for the matters that may occur from the date of the institution of an action until the dues are recovered finally by auctioning the property hypothecated. The Act is divided into several Parts and Part II is designed to overcome the difficulties faced when serving the summonses and other documents on the defendants.9 It also requires registering a Lis pendens10 in the Registry of Lands where all transactions relating to immovable property are registered under the provisions of the Prevention of Frauds Ordinance.11 In doing so, a duty is cast upon the attorney at law of the mortgagee to make a search in the Land Registry and to inform the persons who have rights over the property by way of a notice. This will ensure the third parties, who have rights over the mortgaged property such as secondary mortgages to come forward and to present their respective claims before court. The Act also provides for the protection of the rights of such parties by adding them as parties to the action.

* for the power of plaintiff to join as a party to the action, a claimant who claims adverse to the rights of the mortgagor.13

Detailed and specific provisions are made in respect of the sales under a hypothecary decree. It also deals with the matters that may come up when the property liable to be sold in execution of a decree and with the issues that may arise until the delivery of possession, removing all persons who are in possession.15 Any person who has a claim over the balance proceeds too is entitled to establish such claims and the court is required to make orders accordingly.16

The other important aspect in the Mortgage Act is the taking away of the rights granted under the Civil Procedure Code17 to a person who is entitled to set aside an ex-parte decree entered upon default by making an application to the same court where the decree was entered.18 In the case of Australanka Exporters (Pvt) Ltd. Vs. Indian Bank,19 it was held by Raja Fernando J. that the only remedy available in law is to make an appeal in terms of Sec. 88(2) of the Civil Procedure Code when a judgment is entered in terms of Sec. 59 of the Mortgage Act. It shall not be deemed to be a judgment entered upon default even when the decree is entered upon default in a mortgage action.

Special provisions are also made when the mortgaged land is directed to be sold either by the Fiscal of court or by a person other than him. These provisions are to be operative over riding the provisions of the Civil Procedure Code.20

Mortgages of movables are dealt with separately in the Act. The rights of the approved credit agencies are protected with special attention. The necessary provisions in this regard are made in part V and VI of the Act.

Thus, it could be described that the drafters of the Mortgage Act has taken into consideration issues such as

Therefore it is not incorrect to say that the provisions in this Act are made in a balanced manner protecting the rights of the mortgagor and the mortgagee and also the third parties who have rights over the mortgaged property.

With the introduction of the open economy into the Sri Lankan economic policy, there had been a considerable increase of investments by both local and foreign investors in the country. As a result, the volume of business also was increased and the people were depending on loans and advances for their commercial activities. In that context the investors had to depend on financial facilities from lenders and invariably the lenders were very much keen on recovering their loans and advances without delay. As a result the business community urged the authorities to introduce laws enabling them to recover the monies due to them in time.

The introduction of the Debt Recovery (Special Provisions) Act No.02 of 1990 is one of the results of this agitation by the lending institutions, especially by the banking community. This is evident by Section 2 of the Act where the purview of this Act is limited to the lending institutions covered in Section 30 to the Act.

Introduction of this particular Act has been a turning point in the legal system of Sri Lanka. Until this law came into operation, the lenders were to file actions in terms of the provisions of the Civil Procedure Code as in the other civil cases and they were required to prove their cases on a balance of probability. The major concern over this procedure had been the inevitable delay in taking some steps stipulated in the Civil Procedure Code. With the introduction of this Act a remarkable change in the procedure was introduced and an Order Nisi is issued at the very outset. The defendant is required to disclose the defence by way of an affidavit before the plaintiff commences his case. This is the major deviation from the usual way in determining civil cases introduced by the Act No.2 of 1990.

As stated hereinbefore, only the "institutions" that are mentioned in Section 30 to the Act are entitled to invoke the jurisdiction, under the provisions of this Act. It is also necessary that the debt that is to be recovered, including the interest, should exceed Rs.150, 000/=.21

When a plaint is filed in terms of the provisions of this Act, it is necessary to file an affidavit to the effect that the sum claimed is lawfully due to the institution from the defendant. The contents of which is considered as evidence in court and the court is obliged to act upon the contents of the affidavit. The original instrument, agreement or document sued upon or relied on by the institution should also be filed with copies enabling court to send copies to the respondents with the summons.22

The court being satisfied with the contents in the affidavit and also being satisfied that the requisite stamp fees have been paid, Decree Nisi in the specified form is issued.23 The day appointed for the defendants to appear in court should be inserted in the Decree Nisi itself. The date should be decided having regard to the distance from the defendant's residence to the court where the action is filed.24 The Decree Nisi could be served on the defendant by registered post or even through the process server attached to court on the defendant, by delivering the summons to the address given by the defendant to the lending institution.25 The proof of service of the Decree Nisi must be in accordance with the requirements stated in Section 5 of the Act.

The most important fact introduced by the Act is that the defendant is not entitled to appear and participate in court, unless he obtains leave to appear and show cause against the Decree Nisi within the stipulated period of time.

(2) upon the defendant furnishing such security to the court that may appear reasonable and sufficient for satisfying the sum mentioned in the Decree Nisi, in the event of it being made absolute

(3) upon the court being satisfied with the contents of the affidavit filed, that they disclose a defence which is prima facie sustainable and on such terms as to security, framing and recording of issues, or otherwise as the court thinks fit.26

The application by the defendant to obtain leave to appear and show cause should be supported by an affidavit which should deal specifically with the plaintiff's claim and state what the defence to the claim is and what facts are relied upon to support it.27 This position is well settled now and it was held in the cases of Peoples Bank vs. Lanka Queen Intl (Pvt) Ltd28and W.K.M.D.Perera vs. Peoples Bank29 that it is mandatory for the defendant to file an application to obtain leave to appear and show cause and such application must be supported by an affidavit which should deal specifically with the plaintiffs claim and state clearly and concisely what the defence to the claim is and what facts are relied upon to support it. If the defendant either fails to appear and show cause or if having appeared his application to show cause is refused, the court shall make the Decree Nisi absolute.

In the case of National Development Bank vs. Chrys Tea (Pvt) Ltd. and another,30 it was further held that the court has no discretion to order security which is not sufficient to satisfy the sum mentioned in the Decree Nisi.

The procedure stipulated in the Debt Recovery Act had been discussed in full in the case of Ramanayake Vs. Sampath Bank Ltd. and others.31 In this case the matters such as 'debt', 'triable issue', 'leave to appear and defend', 'an issue or question which ought to be tried', 'lending institution', 'failure to file answer and objections' and "Decree Absolute" have been discussed exhaustively. In this case it was further held that the dispute should have arisen from a transaction in the course of banking, lending, financing or other allied business activity but does not include a promise or agreement which is not in writing in an action filed under this Act. It was further held that the accompanying affidavit to the plaint must contain that the sum claimed is justly due from the defendant and the affirmant should be a Director or a Principal Officer of the lending institution or an Attorney-at-law duly authorized to bring and conduct the action and he should be a person having personal knowledge of the facts of the cause of action. In this same judgment it was also held that the purpose of Sec.6 is to prevent frivolous or untenable defences and dilatory tactics.

When court grants leave to appear and show cause against the decree Nisi, in terms of Section 6(2), the rest of the matters are governed by Sections 384, 385, 386, 387, 390 and 391 of the Civil Procedure Code. These provisions in the Civil Procedure Code empower the defendant to commence his case after obtaining leave from court to appear and defend. In terms of these provisions it is the duty of the defendant to commence his case and to establish his defence. Thereafter the order, making the Order Nisi absolute or dissolved should be made in a judicious way by court. If the order is to make the Order Nisi absolute, it will be considered as a writ of execution and it will be implemented immediately.

It is interesting to note that the orders made in terms of the provisions of this Act are not appeal-able. This was highlighted in the case of Bandara Vs. The People's Bank.32 In this case it was held that this is an Act which created special jurisdiction and it has a procedure whereby no right of appeal has been bestowed on a party aggrieved by a Decree Absolute. However the order made for non-appearance, in answer to the summons, can be inquired into by the same court within a reasonable time after the Decree Absolute was entered, if the defendant proves that he was prevented from appearing after the Decree Nisi was served on him by reason of accident or misfortune or that such Decree Nisi was not served on him at all.33

In conclusion it must be mentioned that when enacting this law, the Legislature has taken into consideration the practical difficulties encountered in courts by the litigants. The remedial measures that were introduced seem to be really effective. The lenders who are now making use of the provisions of this Act have overcome many difficulties that they faced then, to a considerable extent.

It is also necessary to mention that a separate District Court is set up to entertain only the actions filed under this Act in Colombo which is the principal commercial city in Sri Lanka where the majority of cases in the country are filed. The number of the cases that are filed in this court also is considerably increasing. Certainly, it is an indication to show that the general public has accepted the system envisaged by enacting this Act.

As mentioned above, the lending institutions are now in a position to recover their dues in a better and speedy manner than it was before the introduction of the Debt Recovery (Special Provisions) Act No: 02 of 1990. With the introduction of the Recovery of Loans by Banks (Special Provisions) Act No: 04 of 1990, this situation was further relaxed in respect of some banks, namely the Bank of Ceylon, The Peoples Bank, the banks established under the provisions of the Regional Rural Development Bank Act No: 15 of 1985, National Savings Bank, Development Finance Credit Corporation and a commercial bank holding a license under the Banks Act No: 30 of 1988

In terms of the provisions made in this Act the respective Boards of the aforesaid banks are entitled to pass a Board Resolution in writing authorizing any person to sell by public auction any property mortgaged to the bank as security for any loan in respect of which default has been made in order to recover the whole of the unpaid portion of such loan, and the interest due there upon to the date of the sale, together with the moneys and costs recoverable.34 Therefore the aforesaid banks do not need to resort to litigation whenever they are to recover the dues mentioned in Section 4 of the Act. This procedure of recovering dues from the debtors is commonly known as "parate execution" and it is not a strange system as far as our legal system is concerned. It had been recognised even by the Roman law principles.

Specific procedure is laid down in the Act it self when the Banks are to act upon the provisions of this act. This procedure is stipulated in detail in Sections: 05 to 15 of the Act. The basis of this procedure is to inform the borrower of the resolution adopted by the Board of the Bank and thereafter to hold the auction in public, in the proper manner. A certificate of sale is issued in terms of Section: 15 to the Act when the auction is completed. The person who purchases the property at the auction could file a petition in the District Court of the area where the land is situated to obtain the possession of the land.

The provisions of this Act have been made use of by the banks frequently and they were able to either recover the dues by selling the mortgaged property or were able to obtain title to such property.

There had been many occasions where the rights of third parties were affected by selling the mortgaged property under the provisions of this Act. There were some instances where complete outsiders were having title over the property. They had to come to courts challenging the resolution in order to protect their rights. Sometimes the banks themselves did not follow the procedure stipulated in the Act. For an example they had not sent the notices to the relevant parties or had not affixed the notices on the land as required by law. Therefore there were many instances where the rights of the individuals specially the parties other than the parties to the contract were affected badly when implementing the provisions of the Act.

However with the pronouncement of the recent decision by the Supreme Court in Sri Lanka the mortgaged properties belonging to the guarantors are not liable to be sold under the provisions of this Act. This decision was made in the case of Chelliah Ramachandran and others vs. Hatton National Bank35 by the Apex Court in the Island and it has now become the law of the land.

In this decision, His Lordship the Chief Justice Sarath N. Silva has referred to three basic rights of ownership or dominion namely, the right to posses, the right to use and enjoy and the right to alienate property, recognized in the Roman Dutch Law that prevails in this country. He also has referred to the procedure mentioned in the Act and stated that no notice of the auction is required to be sent to the guarantors although the property belonging to the guarantors themselves are to be auctioned. In conclusion His Lordship has held that the properties that are mortgaged belonging to the guarantors cannot be auctioned in terms of the provisions of the Act. Therefore only the properties that belong to the principal borrower is liable to be dealt with under the provisions of the Recovery of Loans by Banks Act.

It is also necessary to mention that Her Ladyship Justice Shiranee Bandaranayake, who adorned the same bench with four other judges including the Chief Justice, has written a dissenting judgement and held that even the properties belonging to the guarantors can be subjected to the provisions of this Act. Her Ladyship Justice Bandaranayake, in deciding the issue has tried to determine the intention of the Legislature in enacting this piece of legislation. However the majority decision will prevail and therefore the property belonging to the guarantors are not liable to be sold now by way of an auction under the provisions of the Act.

The banks are not happy with this decision and they now seem to have imposed restrictions in releasing funds for loans. Without obtaining the properties belonging to the principal borrowers as security they are now reluctant to grant loans. Therefore it is suggested that the provisions contained in the Recovery of Loans by Banks Act be revised to fall in line with the decision of the Supreme Court ensuring the rights of the guarantors to a mortgage bond.

The State Banks such as The Bank of Ceylon, Peoples Bank, State Mortgage Bank and Development Finance Credit Corporation have been established by separate Acts of Parliament. The functions of these banks are being carried out in accordance with the provisions of the respective Acts. These Acts also contain provisions similar to the provisions contained in the Recovery of Loans by Banks (Special Provisions) Act No: 04 of 1990 when they are to recover its dues. Thus the aforesaid state banks resort to parate execution in terms of the provisions contained in the respective statutes when they are to recover dues without making use of the provisions in the Recovery of Loans by Banks Act.

The law applicable here too are similar to the position explained hereinbefore under the provisions of the Recovery of Loans by Banks Act. Thus, the properties secured belonging to the guarantors cannot be auctioned by way of parate execution even by the state controlled Banks. Only the property secured belonging to the principal borrowers are liable to be auctioned by the Banks now under the prevailing law.

In conclusion it is necessary to note that the prevailing laws are some what adequate in recovering dues by the lending institutions. However the delay that occurs in courts is inevitable. It must be noted that the delay in these cases occur mostly when it comes to the appeal stage. Generally the decisions in the original courts are made within a reasonable time. Therefore it is advisable to increase the number of appellate courts in the country with sittings in the provinces. Moreover the delays at the procedural stages could be avoided if proper case management and supervision is introduced whilst in-service-training for judges are strengthened.