SC Upholds Validity of Mortgage Clauses for Future Advances

The Supreme Court recently held that mortgage bonds containing clauses securing future advances are valid and enforceable but limited to the capped amounts specified in the bonds. The Court emphasized that such clauses, often referred to as “all-monies” or “continuing security” clauses, ensure that properties mortgaged under these agreements can secure present, future, and contingent liabilities, subject to the agreed limits.

The dispute arose when the Plaintiff company, which had obtained a restructured loan of Rs. 10,000,000 in 2016, challenged the Defendant bank’s attempt to enforce mortgage bonds executed in 2015. These bonds secured previous loans and included provisions for securing future advances. However, the liabilities under these bonds were capped at Rs. 5,500,000 and Rs. 8,200,000, respectively. The Plaintiff sought an interim injunction to restrain the bank from proceeding with parate execution under the bonds, arguing that the 2016 loan was not explicitly covered. The Commercial High Court granted the interim injunction, prompting the bank to appeal to the Supreme Court.

“…Thus, the mortgage bonds executed in 2015 would secure not only moneys owing upon the security but also money due upon future advances that become payable on demand. En passant, I would pinpoint Section 64 (1) of the Mortgage Act that renders a mortgage given to secure future advance valid and effective….” 

“…There was a clear mutual intention at the time of executing the individual mortgage bonds that the total debt (whole debt) enforceable by the bank by virtue of the mortgage bonds would be capped at Rs. 5,500,000/- and Rs. 8,200,000/- respectively, even though the liabilities of the Plaintiff – Respondent owed to the bank may be higher. Clause (e) of bond No. 2711, as cited above, exemplifies this intention, stating that ‘……such final balance not to exceed in whole the sum of Rupees Eight Million Two Hundred Thousand Only (Rs. 8,200,000/-) and interest thereon……….”. In the context of guarantees which contained whole debt clauses but with a cap on total liability, English case law illustrate the intention of parties not to cover certain types of liabilities – see Investec Bank (UK) Ltd v Zulman3 and Barclays Bank v Caldwell….”

“….I must emphasize the importance of mortgage bonds that guarantee the repayment of all monies currently or at any time owed to the bank in respect of advances and accommodations granted to the borrower (mortgagor), provided that the liability of the mortgaged property is capped at a specified amount. This critical feature cannot be overlooked. The upshot of all this is that a board resolution of a bank seeking to enforce a liability exceeding the capped limit specified in the mortgage bond would render such enforcement actionable, as the excess liability beyond the cap has to be enforced by other appropriate means of recovery….”  – Justice A.H.M.D. Nawaz

The Supreme Court set aside the Commercial High Court’s interim injunction, finding that the 2015 mortgage bonds, by virtue of their “all-monies” clauses, encompassed the restructured loan of 2016. The Court noted that the bonds explicitly allowed for future liabilities while capping enforceable amounts at Rs. 5,500,000 and Rs. 8,200,000, respectively. However, it stressed that the enforceability of the bonds must remain within these capped limits.

While overturning the interim order, the Supreme Court directed the Commercial High Court to proceed with the trial of the case expeditiously. It clarified that this judgment applies only to the interim injunction and does not preclude further examination of the issues at trial.

Case No: SC / APPEAL / 181/ 2018 [ Decided on 27.11.24]

BEFORE : Jayantha Jayasuriya, PC, CJ, A.H.M.D. Nawaz, J, Janak De Silva, J