Contract Law Case: Keshavkisi vs. International Leasing and Finance Company Limited et.al, NKP 2058 B.S, V.3/4.
Case: Certiorari with Mandamus
Petitioners: Keshav Kisi and others
Respondents: International Leasing & Finance Company Ltd. and others
Decision No: 6986
This case is related with security, valuation of mortgaged property, Certiorari with Mandamus
Facts of the Case:
Nagendra Khadka, proprietor of Anjana Dana Udyog, borrowed Rs. 30 lakhs from International Leasing & Finance Company Ltd. under a written loan agreement. As security for the loan, properties belonging to the petitioners were mortgaged to the finance company. At the time of taking the security, the company had valued the properties at a total of Rs. 41,95,450/- The borrower failed to repay the loan according to the agreement. The finance company therefore initiated proceedings to auction the mortgaged properties and published notices. According to the company, nobody participated in the auction. On 2055/04/10 BS, The company prepared a new valuation of the property at only Rs. 21,49,187/- and itself accepted the property at that price. The property was subsequently transferred and registered in the company’s name on 2055/04/17 BS. Petitioners argued that the company had reduced the property’s value to almost half of its earlier valuation without giving them notice or participation, and then purchased the property itself at that reduced value. They therefore challenged the valuation, auction, and transfer as unlawful and contrary to natural justice.
Plaintiff’s claim:
Petitioners claimed that the company had originally valued the mortgaged properties at Rs. 41,95,450/-, but later without properly informing or involving them, reduced the valuation of the same property to only Rs. 21,49,187/- They argued that the company itself then accepted the property at this reduced value and did not properly follow the required auction procedure. Petitioners were not given an effective opportunity to participate in or challenge the substantially reduced valuation. Therefore, they contended that the company’s action violated the principle of natural justice and that the valuation, auction, and subsequent transfer of the property into the company’s name should be quashed. They further argued that, under Section 48(2) of the Finance Company Act, 2042, the company should have sought additional security from the borrower before proceeding against the existing mortgaged property.
Defendants arguments:
The finance company argued that Nagendra Khadka had borrowed Rs. 30 lakhs and had failed to repay the loan according to the agreement. The company stated that it had published notices regarding repayment and auction of the mortgaged property and had also informed the petitioners through correspondence and public notices. According to the company, no one participated in the auction, and therefore, after the unsuccessful auction, the company itself accepted the property at the value determined through the valuation process. The company maintained that all these actions were carried out under the Finance Company Act, 2042. It further argued that, since the property had already been transferred and registered in the company’s name, petitioners had no proper standing to challenge the matter through a writ petition. Finally, the company argued that an alternative ordinary legal remedy was available to petitioners for challenging the auction and transfer, and therefore they should not invoke the extraordinary writ jurisdiction of the Supreme Court.
Legal Issues:
- Whether the self-auction or purchase and transfer of mortgaged property by a finance company, after substantially reducing its valuation without giving the property owners proper participation or notice, is lawful and consistent with natural justice?
- Whether the existence of an alternative remedy prevents the Supreme Court from exercising its writ jurisdiction when the impugned process itself appears to violate natural justice?
Decisions of Courts:
Supreme Court Division Bench:
Justice Govind Bahadur Shrestha: Justice Govind Bahadur Shrestha believed that the finance company had not followed a fair and proper procedure. The property was first valued at Rs. 41,95,450 /- but later its value was suddenly reduced to Rs. 21,49,187/- petitioners were not properly involved or informed about this major reduction. There was also not enough evidence to show that the auction had been conducted properly. Since the company itself accepted the property at the much lower value, the judge found the process unfair and against natural justice. Therefore, he ordered that the reduced valuation, the company’s acceptance of the property, and its subsequent registration in the company’s name should all be quashed.
Justice Gyanendra Bahadur Shrestha: Justice Gyanendra Bahadur Shrestha took a different view. He felt that petitioners had an ordinary legal remedy available to challenge the auction and sale of the mortgaged property. In his opinion, they should first use that remedy instead of approaching the Supreme Court through its extraordinary writ jurisdiction.Therefore, he believed that the writ petition should be dismissed. Because the two judges disagreed, the case was sent to a Full Bench for the final decision.
Supreme Court Full Bench: The Full Bench agreed with Justice Govind Bahadur Shrestha. Court found that the finance company had followed an unfair procedure. The property had been drastically undervalued, petitioners were not properly informed or involved in the reduction, and the company itself took the property at the reduced value. Court therefore concluded that the process was unfair and contrary to natural justice. It quashed the reduced valuation, the company’s acceptance of the property, and the later transfer and registration of the property in the company’s name.
Established Principles:
- Valuation of secured property must not be arbitrary: Where a creditor previously valued mortgaged property at a particular amount, a later substantial reduction in valuation requires a legally proper and transparent process. In this case, the property had originally been valued at Rs. 41,95,450/-, but was later valued at only Rs. 21,49,187/- Supreme Court considered this substantial reduction highly significant.
- A creditor cannot take unfair advantage of its own position: The finance company was both the party conducting the enforcement process and the party that ultimately acquired the property. Therefore, the process had to be particularly fair and transparent. The Court found the company’s conduct procedurally defective because it substantially reduced the valuation and then itself accepted the property at that reduced price.
- Administrative or statutory power must be exercised fairly: Even when a company has statutory authority to enforce security, that authority cannot be exercised arbitrarily or contrary to principles of natural justice.
