Financial Times

Parate execution - how it works

By Rajika Chelvaratnam
Parate execution is a procedure special to banks, which allows the resale of property mortgaged to the bank. The mortgage is organised without going through court proceedings and the institution itself is given the power to hold an auction for the sale of the property by the appointed auctioneer.

The procedure is relatively quick and it also gives the customer an opportunity to come before the bank during the interim period and settle the amounts due. Therefore the procedure is beneficial for the bank as well as the customer as it removes the hassle of going through court procedure for the bank and gives the customer an opportunity to save his property.

Parate execution originated with state mortgage banks, then was adopted by the Bank of Ceylon and People's Bank and has now been taken up by private commercial banks. The Recovery of Loans by Banks (Special provisions) Act No.4 of 1990, empowers all commercial banks while the Bank of Ceylon and the People's Bank have their own Acts. This method ensures a loan recovery rate of 90 percent, according to commercial banking sources.

Procedure
The resolution is adopted by the institution itself. Under parate execution the bank first demands the payment of money due, then a parate notice is sent to the defaulting customer, then a resolution is adopted before the board of that particular bank. Such resolution has to be gazetted and advertised in a public newspaper in all three languages.

Subsequently, if there still has been no repayment an auction is fixed which again has to be gazetted and advertised in all three languages. "Reasonable publication must be made before the auction itself so that the benefit will be there for the customer and there won't be unjust enrichment for the institution with the sale of the property," the chief manager of a commercial bank said in an interview.

Since this procedure is adopted purely by the bank the customer or any interested party can go to courts and get a stay order (stopping the sale). This is expected to be done inter parte, that is where the customer and the bank are both present in court, but is very often done ex parte, that is when only the customer goes to court without giving notice to the bank when it is not enlightened of the circumstances of lending.

Customer Benefit
Interim letters are sent to the customer before parate proceedings are commenced. The letters intimate to the customer that the next step is about to be taken and to settle the remaining amount owed to the bank. The bank also gives terms of repayment and a specific time period within which the amount must be settled. "We advise them to somehow find the money and settle and some find the money and settle and avoid further costs," said the chief manager.

Single mortgage
There has been a question as to whether it is possible to auction a particular land or property when such property is the only property of the customer. Under parate execution the criteria of the ownership or the circumstances pertaining to the ownership is absolutely not considered. The only thing that has to be established under parate procedure is whether there has been a lending which has been secured by this property and the mortgage bond has been validly executed.

The chief manager added that, "very often when this is the case we do give due consideration and we try hard to avoid it being sold by auction. But we pressurise the borrower to repay which is quite successful."

Third party
There have been instances where the party benefiting from the mortgage does so by securing the property of a third party, the sale of which the third party attempts to contest in courts. "We have been successful in getting court orders that involves third parties," said the manager. Such a mortgage could be pursued so long as the bank can establish its bona fides. This means that the bank has to prove that they have not mortgaged the property of the third party without the knowledge of that party or have attempted to mislead the owner in any way.

If the third party has been aware that he or she is securing their property for the customer's facility they take upon themselves the responsibility that they are aware of the consequences. In such circumstances the court has allowed the sale. The chief manager added that their bank has been successful in vacating the stay orders obtained by third parties in court to date.

Condominium
There have been instances where the whole condominium property is mortgaged and the units are later sold separately, which could later lead to injustice if the property were to be subject to parate execution.

"There could have been instances we have taken a mortgage on the land to put up a building. In which case, we have to ensure that at the time of exercising this, we are sufficiently alert to the people who are buying it. We generally have a tie-up with the purchasers," said the chief manager. In such instances the bank could enter into a tri parte agreement, where the purchasers of the condominium property could also pay the instalments of the mortgage in order to avoid injustice. "We are supposed to monitor but there could be exceptions."

Resale
There is a provision under the Act, in instances of resale, which makes it possible for the bank to get back the property to the original owner, if the owner can find a buyer.

Then a payment has to be made and the bank cancels the mortgage and a resale endorsement is given, which gives rights back to the original owner and the bank takes upon itself to waive the rights it has acquired.

There is also provision in the Act for resale endorsements, where the bank sells the property for a higher cost than the outstanding value, and the excess is given to the customer. "But most often we recover only the outstanding. We don't make a gain out of the resale."

Practical problems
Banks do experience problems when judges are not enlightened of the procedure and issue ex parte orders staying the auctions without giving the bank's position a hearing. "In Colombo I would say about 75 percent of the judges are alert to this and don't issue ex parte enjoining orders (which prevents the bank from auctioning the property), but most outstation courts issue orders without a hearing from the bank."
Another problem is when a property is secured it may have been overvalued at the time of lending in which case there is a problem of having to resell and get the outstanding. If there is a loss the bank has to bear it.

"I would say that banks have succeeded very much under parate proceedings and a very large quantum of recovery has got paid," the chief manager said. "In all our recovery practices we have got all our enjoining orders vacated after inquiry."

New computer system at Customs reduces delays

The computerization of the Customs clearance system would minimize delays in the operation of the entire system, said Sarath Jayatilleke, Director General, Sri Lanka Customs at a recent seminar on "Road to Fast Cargo Clearance" arranged by the Sri Lanka Apparel Exporters' Association (SLAEA).

He said the Customs was ready to afford fullest cooperation to the apparel trade in granting clearance inward and outward and the initiatives taken by the Department so far would help achieve these objectives together with the revenue objectives.

The first step was taken in 1994 by computerizing import export documentation but it could not completely take out the manual human intervention in the process. They have now decided to embark on a complete computerization of the Customs Data called "Electronic Data Interchange" (EDI) which would wipe out most of the documentation, easing the clearance.

He said that other initiatives were being taken to implement the recent implementation of GAT Valuation Scheme.

Jayatillake acknowledged that there could be situations where the new system of value could be of some detriment to the industries in Sri Lanka because of its inherent feature of the valuation system and the authority that the Customs had in implementing the law.

Ranjan Casiechetty, Chairman, Apparel Exporters' of Sri Lanka, said the apparel industry in Sri Lanka has been providing employment for around 350,000 and either directly and indirectly, around one million were involved in the apparel trade. Apparels exports have netted in around $ 2.4 billion and accounted for 52 percent of the country's exports.

He said that worldwide they were going through a crucial stage as globally competition has become more and more important and speedy delivery was very vital. (QP)

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