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Onus is on the borrower
12/06/2007 The Star By BHAG SINGH
When steps are taken to auction off a borrower’s property, he should
participate in the foreclosure process to ensure that the best price is
obtained.
A PERSON who has charged his land to borrow money from a bank may be under
the impression that because the bank has decided to auction off the
property, he can ignore the proceedings as the auction will result in the
debt being settled.
This is not always the case because if the proceeds obtained following the
auction are less then the loan sum outstanding, the bank will, except in
rare cases, proceed to recover the balance outstanding by seizing the
borrower’s other assets or making him a bankrupt.
A person who has defaulted in the repayment of a loan should not ignore the
foreclosure proceedings in the belief that the auctioning of the property
will release him from all obligations.
In some cases the land belongs to the borrower himself. In other cases, the
land may belong to someone else. The person charging the land, whether the
borrower or a third party, is referred to as the chargor.
When the borrower defaults, the lender who is called the chargee, is
entitled to foreclose the charge.
This means taking the permitted steps provided for in the National Land Code
to have the land auctioned off, pay itself the money owed and hand over the
difference, if any, to the land owner, whether he is the borrower or a third
party.
This involves serving a statutory notice, applying to court for an order for
sale, fixing the reserve price followed by an auction.
The chargor may feel aggrieved that the land was sold off at a lower price.
The consequence of this could be that either the sale price is not enough to
settle the debt or that a bigger surplus could have been expected.
On other occasions, the land price may have appreciated around or shortly
after the auction was conducted.
This could leave the chargor feeling that if only the lender had held on a
little longer, the benefit to the borrower could have been greater by reason
of the bigger surplus.
However, the chargee is not obliged to wait for a suitable time.
It is always in the interest of the chargor to be involved and to take the
necessary action to protect his interests.
Asia Commercial Finance (M) Bhd & Anor v Development & Realtor Sdn Bhd
illustrates how an oversight in responding in the appropriate manner was
prejudicial to complaining later.
On March 16, 1989, in the presence of the chargor and its counsel, an
auction date was fixed.
On July 3, 1989, the court fixed the reserve price at RM140,000 but the
chargor and his counsel were absent. The valuation report was dated May 3,
1988, and reflected the open market value on that date.
The challenge raised by the chargor to the auction was that the market value
of the said land was RM310,010 based on a valuation, not seriously disputed,
to reflect the market value around the date of the auction.
However, the situation was complicated by the auction being held on July 12,
1989, and the land was sold for RM140,600.
Was the auction valid?
Based on the events that had taken place, this had to be decided by weighing
the injustice to the chargor where reliance was placed on a report prepared
16 months before the auction date.
On the other hand, there was a successful bidder at a duly scheduled auction
who was not at all involved in the proceedings leading up to the auction.
In deciding this the court considered the issue of the need for the exercise
of a proper standard of care by a chargee to the chargor and adopted the
view of Kay J in Kennedy v De Trafford where it was said: “ ... a mortgagee
is, strictly speaking, not a trustee of the power of sale. It is a power
given to him for his own benefit, to enable him the better to realise his
debt.
“If he exercises it bona fide for the purpose, without corruption or
collusion with the purchaser, the court will not interfere even though the
sale be very disadvantageous, unless indeed the price is so low as in itself
to be evidence of fraud.”
In the case of Cuckmere Brick Co Ltd v Mutual Finance Ltd, Salmon LJ based
the obligation of the mortgagee, not on a standard of behaviour imposed by
equity but on a legal duty based on the tort of negligence and expressed as
follows:
“Given that the power of sale is for the benefit of the mortgagee and that
he is entitled to choose the moment to sell which suits him, it would be
strange indeed if he were under no legal obligation to take reasonable care
to obtain what I call the true market value at the date of the sale”.
Thus the mere fact that the land is sold off at below the market value does
not give the chargor an automatic right to have the sale set aside.
As was said by Mills J in Khoo Cheong Puay v Oversea Chinese Banking
Corporation & Ors, “to set aside a sale on the ground of gross undervalue,
such undervalue must, at the date of the contract of sale, be sufficiently
gross to be itself conclusive and decisive evidence of fraud”.
In this case, the unsuccessful attempt to set aside the auction was partly
contributed by the chargor not being present when the reserve price was
fixed. Nor did the chargor apply to stop the auction which resulted in an
innocent third party acquiring rights to the property.
In such a case, the borrower can also help himself by looking for a buyer
who is able to offer something better then the reserve price and deal
directly with the bank before the auction. This will serve the interest of
both parties and save costs in most cases. |
