Banking Law Case: Pratutlal Shrestha vs. Rastriya Banijya Bank, Kathmandu NKP (2063), No.5, P. 601.
Case: Writ of Mandamus
Plaintiff/Applicant: Pratut Lal Shrestha
Defendant/Respondent: Board of Directors, Rastriya Banijya Bank of kathmandu and others
Decision Number: 7700
This case concerns whether a person who mortgaged his property as third-party security for a company’s loan could limit his liability to a specific sum discussed informally, or remained liable for the company’s full outstanding debt as stated in the mortgage deed.
Facts of the Case:
Pratut Lal Shrestha’s elder brother, Atul Lal Shrestha, was a director of Nara International. The company had taken a loan of NPR 9 crore from Rastriya Banijya Bank and had mortgaged its own land and building as security.
Later, the company needed additional credit. Atul Lal asked Pratut Lal to provide his own house and land, Kitta No. 209 in Kathmandu, as additional security. The property was valued, and based on its value, the bank allowed additional credit of up to NPR 27 lakh. Believing that his liability would be limited to this amount and its interest, Pratut Lal executed a mortgage deed in favour of the bank.
Later, Pratut Lal wanted to sell the mortgaged property and repay the amount. He asked the bank to inform him of the outstanding amount and provide the interest and penalty-interest concessions given to other borrowers so that he could clear the loan.
The bank refused to release his property. It stated that under the mortgage deed, the company’s property would remain security until the company’s full loan and interest were recovered, and that Pratut Lal’s liability was not limited to NPR 27 lakh.
Pratut Lal therefore filed a petition seeking to stop the bank from auctioning or otherwise taking control of his property and to direct the bank to accept NPR 27 lakh plus interest and release his mortgaged property.
Legal Issues:
- Whether the third-party mortgagor’s liability was limited to NPR 27 lakh or governed by the mortgage deed.
- Whether the bank could auction Shrestha’s property under Section 47(a) of the Commercial Bank Act, 2031 and Section 57 of the Banks and Financial Institutions Ordinance, 2061.
- Whether the case could be filed directly before the Supreme Court when an alternative remedy was available under the Contract Act.
Different Courts’ Decision:
Supreme Court:
The Supreme Court examined the mortgage deed and found that Shrestha had agreed to use his property to secure Nara International’s loan. The deed did not limit his liability to NPR 27 lakh. Instead, it allowed the bank to recover the company’s outstanding loan from his mortgaged property if the company failed to repay.
The Court held that the NPR 27 lakh additional credit limit did not limit Shrestha’s liability. His liability was determined by the terms of the mortgage deed.
The Court also held that the bank could auction the mortgaged property to recover the loan under the applicable banking laws.
Finally, the Court found that the dispute was mainly about the interpretation of the mortgage agreement. Since Shrestha had an alternative legal remedy under the Contract Act, he could not directly seek relief through the Supreme Court’s extraordinary writ jurisdiction.
Therefore, the writ petition was dismissed.
Principle Established:
- A third-party mortgagor’s liability is determined by the terms of the mortgage deed, not by any informal understanding about a lower amount.
- A person who guarantees another’s loan is liable if the borrower fails to repay, according to the terms of the agreement.
- A bank can auction mortgaged property, including property given by a third-party guarantor, to recover an unpaid loan.
- The Supreme Court’s writ jurisdiction is generally not used for contractual disputes when another proper legal remedy is available.
