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Suit 493-98 (UBL v[1]. Gravure Packaging & ots.)

IN THE HIGH COURT OF SINDH, KARACHI

 

 

 

Suit No.493/1998.

 

 

 

 

 

 

 

J U D G M E N T

 

 

 

 

 

 

 

Date of hearing: 16.05.2001.

 

 

 

 

 

Plaintiff: United Bank Ltd. through Mr. Azizur Rehman, Advocate.

 

Defendants: M/s. Gravure Packaging, Jehangir, Mrs. Noor Jehan,

 

Abdul Kalim Baazka and Rafya through M/s. Saalim Salam Ansari

 

and Abid Sherazi, Advocates.

 

 

 

 

 

ANWAR MANSOOR KHAN, J.- The present suit has been filed by the plaintiff against the defendants for recovery of Rs.33.081 millions as due on 30-12-1994.  The said suit was filed under the Banking Tribunals Ordinance, 1984.  The facts are, that the defendant No.1 was sanctioned by the Plaintiffs’ I.I. Chundrigar Road Branch on 09-07-1987 a sum of Rs.6.0 million as cash finance on mark-up basis wherefore, the defendant No.1 executed an agreement for financing for short-medium-long term on mark-up basis (IB-6) whereby, it was agreed that the customer namely the defendant would sell to the bank the raw materials/finished goods/machinery etc. for a total sum of Rs.6.0 million.  In pursuance to the said agreement, the various goods were bought and the consideration for purchase was paid to the defendant No.1.  The second portion of the said agreement provided for purchase by the customer of the same goods at a marked-up price known as the “purchase price ” being Rs.7.2 million calculated by the bank and agreed by the defendant No.1.  The said amount was repayable in lump sum.  The prompt payment bonus of Rs.0.258 million was also provided in the said agreement.  The repayment of the debt thus credited on account of purchase by the defendant No.1 from the bank for payment in instalments/lump sum that a subsequent future date was secured by a demand promissory note dated 09-07-1987 for Rs.7.200 million.  In addition to the above, the defendants No.2 to 5 secured the said amount by guaranteeing repayment thereof under a letter of guarantee dated 09-07-1987 filed as Annexure-D to the plaint and referred to in the affidavit in evidence as Ex---P/4.  In addition to the above, according to the plaintiff, the defendants had requested the plaintiffs’ branch by an application an agreement to open L/Cs which were opened.  The payment under the Bill of Exchange were to be made by the plaintiff amounting to Rs.3.7 million being deferred payment L/C under U.S. aid, Rs.1.8 million finance against imported merchandise and Rs.1.5 million in N.I.D.F. plus mark-up thereon.  The said amount included the amount of Rs.7.2 million secured by mortgage of the property of the defendant No.1 and confirmed by the defendant No.1 by a memorandum of deposit of title deed as Annexure-H/Ex---P/8 alongwith the affidavit in evidence.  The said mortgage is also registered with the Registrar of Joint Stock Companies by a Certificate of Mortgage dated 22-09-1988 Annexure-I/Ex---P/9.

 

 

 

2.                     The said account was transferred from the I.I. Chundrigar Road Branch to the Corporate Branch of the Plaintiff Company where fresh agreements were entered into which have been filed with the plaint as Annexure-R and S (Ex---P/18 and Ex---P/19).  Under the said agreement the same amount namely Rs.7.20 million was mentioned as re-purchase price with a prompt payment bonus of Rs.0.258 million.  In the second agreement, however, it seems that the said Bills of Exchange were purchased by the bank for Rs.1.5 million and sold to the defendant No.1 for Rs.2 million repayable on or before 31-12-1990.  Another amount being N.I.C.F. was admitted by the defendant by a letter of admission wherein the liability to the extent of Rs.9,893,834.86 was admitted.  The balance confirmation has been filed alongwith the plaint as Annexure-T (Ex---P/20).  The said N.I.C.F. facility was, in 1991.  It is stated that further documents were executed whereby, the said N.I.C.F. facility was increased to Rs.12.453 million being the purchase price on a sale price of Rs.9.893 million with a prompt payment bonus of Rs.0.935 million.  Such agreement is filed as Annexure-V/Ex---P/22.  The said amount under the second agreement of N.I.C.F. facility was guaranteed by a letter of guarantee by the said defendants No.2 to 5 Annexures-X, Y, Z and Z-1 (Ex---P/24 to Ex---P/27).  It is the case that in 1993 the said N.I.C.F. facility was again renewed whereby the amount of Rs.12.223 million which was the purchase price in Ex---P/22 became the sale price and the purchase price was enhanced to Rs.16.074 million with a prompt payment bonus of Rs.1.406 million.  The other three being the N.I.D.F. facilities (forced) after adding together the three various N.I.D.F. facilities into one single N.I.D.F. facility became Rs.13,953,846 which, was admitted by entering into another agreement Annexure-Z-8/Ex---P/34 which was signed by the defendants.  This confirmation only was in regards to the total amount and no additional mark-up or purchase price was mentioned in the said agreement.  On account of the various finances given, the plaintiffs have, therefore, claimed a decree against the defendants in the sum of Rs.39.747 million jointly and/or severally as also a mortgage decree with liquidated damages and future mark-up from 01-01-1995 till realisation as also costs of the suit.

 

 

 

3.                     The written statement has been filed by the defendants in which preliminary objections as to the maintainability of the suit were taken on the ground that in fact the suit is for rendition of account and not a suit for recovery and that the claim of liquidated damages is unlawful.  It was further stated that the agreements are not witnessed and are violative of Article  17(2) of the Qanoon-e-Shahadat Order, 1984 and that the person filing the plaint had no authority to verify the same.  The suit has been filed as a mortgage suit.  The objection has been taken that the mortgage per the Islamic financing and the law prevalent could only be that by possession and, therefore, the memorandum of deposit of title deed and mortgage are invalid and cannot be looked into.  The objection is also taken that the amount includes exaggerated amount of mark-up and the same cannot be allowed.  The execution of the guarantees has also been disputed by the defendants No.2 to 5 as, according to the said defendants, the same are not actual signatures of the defendants.  The same is not decided and cannot be accepted in view of Article 17(2) of the Qanoon-e-Shahadat Order, 1984.  In addition to the denial of guarantee, the defendants have also denied the payments claimed by the plaintiff on account of L/Cs and according to the defendants, the same had been paid off.  However, the plaintiffs have admitted the factum of the payment to the extent of Rs.6,848,855.00 as, according to them, the same has been admitted in Ex---D/11.  The defendants have filed a statement of account which according to them is under the formula given by the State Bank of Pakistan which is as follows:-

 

 

 

“(A) N.I.C.F. ACCOUNT

 

 

 

OUTSTANDING     MARK-UP               MARK-UP                               TOTAL                                   LESS

 

BALANCE               OF                           OF CUSHION                          OUTSTAND-                          ADJUST-

 

AMOUNT/O.D        365 DAY                 PERIOD OF                             ING BEFORE                           MENT

 

ON 30-06-87           210 DAYS                               ADJUSTMNT                          REPAYMENT

 

                                                                                                                                                                UPTO 30-6-94

 

Rs.                           Rs.                           Rs.                                           Rs.                                           Rs.

 

 

 

4006142/-                                878161/-                  505243/-                                  5389546/                                 4083524/-

 

 

 

NET BALANCE AFTER ADJUSTMENT(S)                                                                                           Rs.1306022/-

 

 

 

 

 

(B) N.I.D.F. ACCOUNT

 

 

 

1234325/-                                139726/-                  80390/-                                    1454441/-                                                135000/-

 

 

 

NET BALANCE/OUTSTANDING AFTER

 

ADJUSTMENTS/REPAYMENTS                                                                                            Rs.1319441/-

 

 

 

(C)           U.S. AID L/c Account’s OUTSTANDING                Rs.5768798/-

 

 

 

(D)           O.S. P.A.D. L/c Account’s OUTSTANDING Rs. 580000/-

 

 

 

GRAND OUTSTANDING/BALANCE                                                                                     Rs.8974261/-“

 

 

 

 

 

4.                     The defendants have vehemently contested the addition of mark up on mark up and subsequent agreements, stating that the same is unlawful  and cannot be allowed. Infact what has been claimed is that the subsequent agreements are void, not having been acted upon.  The plaintiffs have also claimed damages on account of breach of agreement.

 

 

 

5.                     The following issues were framed:

 

 

 

1.                   Whether the plaintiff bank has charged mark up on mark up ?  If so, what is its effect?

 

 

 

2.                   Whether the suit is bad for non joinder of necessary party?

 

 

 

3.                   Whether defendants No.2 to 5 are liable as guarantors and if so to what extent?

 

 

 

4.                   Whether the defendants are liable to pay the suit amount?

 

 

 

5.                   What should the decree be?

 

 

 

 

 

6.                     Before all the issues could be argued, I had asked Mr. Aziz as to how Markup on markup could be charged in view of the clear circular of the State Bank of Pakistan. I had also asked Mr. Aziz, as to under what law can he take refuge on the agreements, against which no disbursements had, admittedly been made, and were only for roll over of an existing debt. I had also pointed out, that the agreements do not otherwise disclose that there existed a debt earlier and that the agreements are infact for the purchase by the bank and sale to the borrower. Mr. Aziz was very candid and said that in the event that this court were to apply the principle of the said the State Bank’s Circulars, infact it would be the bank who would have to pay back the amount to the Defendant. It was pointed out that in an order, in the case of  Habib Bank Limited versus Qayyum Spinning Limited & others  SBLR 2001 Karachi 186 it was held that Mark up on Markup could not be charged. It was also held that all agreements which were not acted upon by actual disbursement, and which were meant for the purposes of roll over of an existing debt were void and could not be considered. Infact in the case of Dr. Aslam Khaki vs Syed Mohammad Hashim PLD 2000 SC 225 such has also been held.

 

 

 

7.                     Mr. Aziz stated that notwithstanding the said decisions, he would wish to reiterate his contentions that he had made in the case of Qayyum Spinning and in the unreported case, being Habib Bank Ltd. V Hafiz Textile Mills Ltd.  Suit No. B-153 of 2000.

 

 

 

8.                     Mr. Aziz stated that, with regard to SBP Circular Nos.13 and 32 dated 20·June 1984 and 26·11·1 984 respectively. He stated that the two Circulars are among many which SBP has been issuing from time to time and the two Circulars in actual fact have to be examined. The first Circular No. 13 according to him will not be attracted where renewal of loan is made subsequently, since "renewal" amounts are merely extension and continuation of the earlier agreement between the parties. Circular No.32 merely pertains to different items of Bank charges and therefore cannot be made basis for striking down the contract between the parties. In other words Circular No.32 does not have the effect that it over rides Circular No.13. In the case of UBL Vs. Central Cotton Mills Ltd. reported as 2001 MLD 78 (S.B.) deals with the said two Circulars. The learned Single Judge of the High Court of Sindh Karachi came to the conclusion that Circular No.13 is not overridden by Circular No.32. He said that in SBP Circular No. BID(Gen)2470/601 ·Q4·90 of 17·06·1990 which was addressed to all Banks with regard to the treatment to be given to rescheduled loans and capitalisation of mark up/interest and the guidelines were given. In Clause 2.1 of the said Circular, the "restructured" loan has been defined as one whose terms and conditions have been modified principally because of deterioration in the borrowers financial condition, in order to provide reduction in interest rate or principal or a capitalisation of interest accrued. Clause 2.2 refers to a "rescheduled" loan and defines it as one in which effective interest rate terms remain unchanged from original terms but principal repayment terms have been extended because of project delays and such loan has been defined as not a restructured loan. According to him, clause 7.1 provided for capitalised mark up/interest on loans and defined the words as ‘uncollected interest’ which is added to ‘unpaid principal’ in accordance with contractual loan agreement.

 

 

 

9.                     It is his case that in the said Circular and the guidelines attached to the same, the word “interest” has really been utilized to mean interest and/or markup as is evident from line 5 of the Circular itself. He said that on the date of Circular i.e. 17·06·1990 five years had elapsed from the date on which the system of markup had been introduced. Guidelines, according to him were issued by HBL to its various officers in order to deal with rescheduling, restructuring and writing off which was contained in the aforesaid Circular of SBP dated 17·06·1990. He said that the guidelines issued by SBP were attached. Circular No.4 of 17·02·2000 was also issued by SBP under the heading "Rescheduling/restructuring of non·performing loans". The Banks as per Para (i) were required to continue to provide for rescheduled/restructured loans/advances for a period of one year (excluding grace period). Also while reporting to CIB, it was made incumbent that such loans/advances should be shown to SBP as “rescheduled/restructured” instead of; ‘defaults’. In other words when Banks finalise rescheduling/restructuring arrangements with the borrowers/customers, SBP does not treat the borrowers/customers as having committed defaults. In actual fact in some cases if rescheduling/restructuring is not carried out, it would create lot more problems for borrowers/customers who actually stand to gain from the new agreements. Additionally he stated that an unreported judgment dated 08·01·1999 was passed by a Division Bench of this Court in Spl. HCA No. 187198 (M/s. Hardware manufacturing Corporation (Pvt) Ltd. and 5 others vs. UBL). It was held that by executing a Finance Agreement, the Appellants' liability, the original contract/agreement stood extinguished and the earlier agreement was substituted by a later Finance Agreement/contract. A reference was made in this connection by the Division Bench to two reported cases i.e. PLD 1962 Karachi 334 and AIR 1943 P.C. 147. He said that the said Order of the Division Bench is binding on this court, and therefore, what is decided has to be acted, and no judgment otherwise can be passed.

 

 

 

10.                    Mr. Aziz argued the position of Novation of Contract and stated that in the unreported judgment of the Division Bench of the High Court of Sindh dated 08·01·1999, the decision which was reached was in line with a number of cases which had mentioned, being 1994 CLC 2272 (Karachi) D.B. and 2000 CLC 1602(Karachi) S.B.  He said that it was held by the Division Bench of the High Court of Sindh Karachi that, where a fresh agreement was entered into and the Defendant acknowledged that a certain sum was due from him which formed consideration under the new agreement, the liability of the Defendant under the original contract was completely extinguished and there was a fresh contract substituting the old contract and which was in the nature of novation of a contract within the meaning of Section 52 of the Contract Act, 1872. The Division Bench has placed reliance for purposes of interpretation of Section 62 of the Contract Act on PLD 1964 S.C. 337. Likewise he said that in the second reported the conclusion of the learned single Judge was that Section 62 of the Contract Act clearly provides that if parties to a Contract agree to substitute a new contract for the old one or to rescind or alter it, the original contract between the parties need not be performed and that, there is nothing in the Contract Act or in any other law which prohibits the parties from altering terms of the original contract or executing a new contract to substitute the old one. It was further held that the subsequent agreement amounted to novation of the old contract, the consideration of which was the agreement of the Bank to extend time for payment of the outstanding liabilities of Defendant No.1.

 

 

 

11.        On of the point of actual disbursement it was argued by Mr. Aziz stating that there need not be any actual disbursements when a Bank allows rescheduling or restructuring of an existing debt. Therefore in rescheduling, the liability to pay to the Bank is amended or recast giving further time for repayment to the Bank. He said that, in this connection the definition of the word "debt" would also be relevant and for the meaning of the word, he has relied on PLD 1983 Karachi 176 (D.B.) where it was held that a debt in the hand of a debtor does not belong to him but it belongs to the person to whom it is payable. A debt is something that is owed by one person to another. It is an obligation and liability to pay or return something. He states that similarly in the above referred case reported in 2000 CLC 1502 (Karachi) S.B., the learned Single Judge utilized the words “outstanding liabilities of Defendant No.1” which was treated as consideration for the new contract. Thus the outstanding liabilities constituted the debt payable to the Bank. Since the acknowledgement of liability contained in the fresh agreement is available, fresh disbursements obviously was not required, as otherwise there would be duplication, and the Bank will be out of pocket by actually disbursing the outstanding amount again to its borrower/customer.

 

 

 

12.        Mr Aziz said that the judgment reported in PLD 2000 S.C. 225 is actually the one passed by Shariat Appellate Bench of the Supreme Court consisting of 5 Judges. The Supreme Court has given directions and in any case until 30·06·2001 the present laws will continue to be valid. Therefore the contents of the judgment have not come into force so far. A large number of steps have to be taken by the Federal Government and other agencies including Banks for different phases of transformation which is still to be effected. He had also referred during the arguments to the various Articles of the Constitution of Pakistan, inter alia Article 203·H(1)  which provides that all pending proceedings in any Court or Tribunal shall continue and the points in issue therein shall be decided in accordance with the law for the time being in force. He referred to a judgment of a learned Single Judge of the High Court of Sindh, Karachi, in Suit 1700/99 where it was held that the said judgment of the Shariat Appellate Bench of the Supreme Court and injunctions of Islam cannot be pressed into service to avoid payment of outstanding liabilities since verse 2:280 does not create a right in favour of a debtor for payment of what is acknowledged as due.

 

 

 

13.        Mr. Aziz said that Industrialists and Traders make lot of money by borrowing from Banks, etc. and the money really comes from even small depositors who put their money into the hands of the Banks. The interest or mark up paid by these Industrialists and Traders is included in their accounts and they get benefit of increased prices for their produced/manufactured items and they are allowed to reap benefits by showing interest/mark up as costs of production which interest/mark up is allowable expenditure in income tax returns.

 

 

 

14.        Mr. Aziz said that therefore rescheduling, restructuring and entering into fresh agreement to renew the facility by adding markup is valid. It shall only be effective after the judgment of the Shariat Appellate Bench of the Supreme Court becomes applicable. Mr. Aziz adopted the arguments made by Mr Ejaz advocate in the Qayuum Spinning case and argued that notwithstanding the fact that the said judgment is not applicable, it is necessary to dilate upon the history as to how and what was the actual perspective that the bankers had understood in respect of the said system. He has referred to the judgment in the case of Dr. M. Aslam Khaki (supra). He stated that the said judgment also notices the manner in which the system was to work and referred to a note that has been mentioned in the judgment of Mr. Junejo.  He has stated that the State Bank of Pakistan considered that the entire transaction of purchase and repurchase as a notional transaction, and that, because it was considered as a notional transaction where, the mark up was not serviced, rescheduling was allowed by addition of markup on the un-serviced markup. Such rescheduling / restructuring was the only way that the banks could save their money, and earn thereon. He stated therefore, renewal by way of entering into a fresh agreement was considered appropriate. He stated that the circulars namely BCD Circular No.13 and BCD Circular No.32 did not give any idea how the transaction were to take place and it was therefore a belief that such transactions could be entered into or done. He said that it was common knowledge that notional sale and such like transactions were valid transaction. He stated that disbursement for purchase in such notional transaction was not necessary and that the amount of debt on a particular date could be deemed to be proper and appropriate disbursement. Mr. Aziz stated that if a view is taken by this court that subsequent agreements are invalid agreements it will cause an irreparable injury and harm to the banks whereby, the banks may in fact collapse. In the judgment of Dr. M. Aslam Khaki (supra) a discussion on the concept of Negotiable Instrument Act, 1881 has been referred to. Sections 79 and 80 of the said Act have also been cited. Reference has been made to a booklet on markup system by Mr. Justice Moulana Muhammad Taqi Usmani in which a detailed discussion has been held as to the mark up system as is in vogue and has been in practice in the banks. It has been pointed out that the practice adopted under the garb of mark up is authoritative of the conditionalities attaching to Bai Moajjal as the permissibility of such a transaction is dependent on fulfillment of the various conditions as enshrined in the Quaranic injunctions in the order of the court.  It has been stated by Mr. Aziz that in BCD Circulars Nos.13 and 32, the concept of Bai Moajjal or Murabaha, has not been stated and what was categorically said in the notifications of the State Bank of Pakistan, was that mark up could be charged on a transaction, but mark up on mark up could not be charged, in that there was nothing to stop the banks from entering into such fresh agreements for renewal, restructuring or rescheduling. His emphasis lay on the fact that, upon mark up having been charged under the agreement the same became a debt and such debt became due and payable within the stipulated period. He said that in the books of accounts such was a credit payable by the debtor, therefore, the debtor was in fact using the money of the creditor, namely the bank. According to him, subsequent agreements were nothing but agreements for sale and purchase where, the commodity being sold was notional and that in fact, the debt payable under the first agreement became the notional sale of notional goods at a purchase price of such goods, and markup was added to arrive at a notional repurchase price and so forth. He said that it has now been explained as to how the bank should finance and what is the meaning of ‘Riba’ or mark up on mark up. He stated that no doubt, now under the new definition that has been given by the case of Dr. M. Aslam Khaki, subsequent agreements would be deemed to be invalid agreements on the account of the fact that the Supreme Court has held that purchase if any, has to be actual purchase and not a notional transaction. Mr. Aziz Advocate further submitted that the question of increase on money was also not understood by the banks, in fact State Bank of Pakistan had also not understood the concept of money which has now been stated in the said judgment of the Supreme Court. He stated that it could not have been even thought of or understood that money could not earn money by way of additional mark up on a debt.  According to him, it is this judgment which has cleared the concept of money and that in doing so it is stated that the money is not a ‘commodity’ and therefore cannot be traded like a trade of a commodity. He stated that it has been held, therefore, that only commodities could be traded which were in accordance with the principle that “Allah has allowed trade and prohibited Riba”.  According to him, therefore, in view of the above the Honourable Shariat Appellate Bench of the Supreme Court had given a regulatory timetable whereby, a date of implementation has been given. He stated that under the measures to be taken for the purposes of creating an infrastructure and a legal framework a summary has been given in the order passed by the court. It was stated that the solution to the economic revival has to be taken into account and that the Federal government shall cause a board to be created for arranging exchange of information of financial institutions about feasibility of project etc. and all technical assistance with regard to the anomalies emerging in the practical operation of financial institutions or difficulty arising out of the operation of financial practice etc. and that all this was to be done by the 30th June, 2001, whereafter  the laws and provisions of laws to the extent that those declared to be repugnant of injunctions of Islam shall cease to have effect from 30th June, 2001.

 

           

 

The question is whether the amount of purchase price (which has been    stated to be the debt of the customer) can be increased? And if so in what circumstances?

 

 

 

The answer to this question depends on the meaning ascribed to the word “increase” and accordingly the increases in the amount of purchase price are classified as follows:

 

 

 

(a)                Increase which are not permissible

 

 

 

(A)              Mark-up on any overdue installment, where the finance facility is payable in installments and the amounts and due dates of installments are specified in the Agreement.

 

 

 

(B)              Mark-up on overdue amounts in cases of lump sum payment agreements.

 

 

 

(b)               Increases which are permissible

 

 

 

(A)              Where the amount of mark-up is to be booked by the Banks on accrual basis in each quarter on the basis of outstanding balance and such outstanding balance also includes the mark-up for the previous quarters.

 

 

 

In these cases, the banks can be allowed to charge mark-up on the outstanding balance (inclusive of previous mark-up debits) as the bank under its general lien and right to set-off is allowed to apply the credit balance of the Customer to offset the liabilities of the Customer. Accordingly any mark-up recovered by the Bank by debiting the account of the Customer should be recognized as a withdrawal by the Customer.

 

 

 

(B)              At the time of fresh sanction [renewal] of the working capital facilities, some times the amount of the facility is enhanced. The amount of the fresh finance facility is used to adjust the outstanding liabilities of the Customer in respect of he previous facility. Naturally the outstanding amount of the facility also includes mark-up. It is sometimes argued that the amount of the second facility amounts to mark-up on mark-up or capitalization of mark-up or roll-over.

 

 

 

Fresh finance facility is granted to the Customer by the Bank. The amount of the facility can be utilized by the Customer for any purpose and the mere fact that the Customer used such amount to pay back its liabilities which included some amount of mark-up would not make the amount of the fresh facility mark-up on mark-up.

 

 

 

The proposition would be further clarified with the converse argument i.e. the Customer could have paid the outstanding liabilities from its own resources or by obtaining a finance facilities of equal amount from a separate institution. In such a case the argument of the later facility being mark-up on mark-up, capitalization of mark-up or roll-over cannot be sustained.

 

 

 

In such cases the enhanced amount of the facility or the such amount of the facility as has been used to settle earlier liabilities on account of mark-up cannot be termed as increase in the purchase price and is therefore permissible.

 

 

 

(C)              It also needs to be clarified that the grant of a fresh finance facility of a similar nature particularly in cases of working capital facilities is not restructuring or rescheduling of the liabilities. Accordingly, any increase in amount of the later facility is not increase the marked-up price of the earlier facility.

 

 

 

(D)              A number of times, the overdue facilities (mostly long term) are restructured or rescheduled. Again restructuring and rescheduling of the over due facilities is structured in the following manner:

 

 

 

 

 

·         by way of grant of fresh facilities

 

·         by way of a new schedule of payment

 

 

 

 

 

15.                    Mr. Aziz ur Rehman advocate further argued that under the Banking Companies Ordinance, 1962 the word loans, advances and credit have been defined to include finances as defined in the Banking Tribunals Ordinance, 1984.  The Ordinance in section 2(e) defines a finance to mean:-

 

 

 

“(e) ‘finance’ includes an accommodation or facility under a system which is not based on interest but provided on the basis of participation in profit and loss, mark-up or mark-down in price, hire-purchase, lease, rent-sharing, licensing, charge of fee of any kind, purchase and sale of any property, including, commodities, patents, designs, trade marks and copyrights, bills of exchange, promissory notes or other instruments with or without buy-back arrangement by a seller, participation term certificate, musharika certificate, modarba certificate, term finance certificate or any other mode other than an accommodation or facility based on interest and also includes guarantees, indemnities and any other obligation, whether fund based or non-fund based, and any accommodation or facility the real beneficiary whereof is a person other than the person to whom or in whose name it was provided; and” (Underlining is mine.)

 

 

 

Mr. Azizur Rehman states that finance includes ”accommodation or facility”.  According to him an accommodation in terms of the Webster’s dictionary means:-

 

 

 

“accommodation ...1. Act of accommodating, or state of being accommodated; specif.: a Act of fitting or adapting, or state of being fitted or adapted; adaptation; adjustment; -- often followed by to. “The organization of the body with accommodation to its functions.”  Sir M. Hale. b Adaptation of conduct in order to comply or conform; obligingness. c Provision of what is needful or desirable for convenience; specif., the giving of pecuniary aid.”

 

 

 

According to him, the mark-up or interest that is accrued on a loan or finance is capitalised and once it is capitalised it becomes a part of the loan and cannot be separated or distinguished.  Mr. Azizur Rehman refers to the meaning of the word capitalise as contained in Webster’s New International Dictionary of the English Language, Second Edition, 1937  which is as under:-

 

 

 

“Capitalise ...1. To convert into capital, or to use as capital; hence, to make use of for the sake of profit; to turn to one’s immediate advantage.”

 

           

 

Mr. Azizur Rehman has also  referred to the case of HASHWANI HOTELS LIMITED. v. FEDERATION OF PAKISTAN and others (PLD 1997 S.C. 315) in which it has been held:-

 

 

 

“...One view can be that each amount of disbursement will constitute an accommodation or loan agreement, the other view can be that he disbursements of the various amounts made by the banks were in performance of the above three loan agreements already executed.  If we were to prefer the above first view, it will affect the vested right of the banks to recover interest at the rate of 14% under the loans agreement and, therefore, the construction which does not affect the vested right of a party is to be preferred.”

 

 

 

It has further been held:-

 

 

 

“A perusal of the above quoted definition indicates that it includes loan of money and, therefore, it can be held that the word “accommodation” used in the above Circular of 15.02.1981 refers to loan agreement...”

 

 

 

Thus, according to Mr. Azizur Rehman, the agreement entered into between the plaintiff and the defendant is one of accommodation where the loans have been restructured and upon restructuring of loan the banks have accommodated the defendant and, therefore, it is obligatory upon the defendant to pay back the entire amount agreed upon.  According to Mr. Azizur Rehman the word obligation has been defined in the Oxford dictionary to mean:-

 

 

 

“Obligation ...1. The act of obligating, or binding , oneself to a course of action; a putting under a promise, vow, or oath, as in initiation into an organization (see OBLIGATE, v.,5)

 

2. The agreement, promise, contract, oath, or the like, by which one is obligated or bound.

 

3. That which a person is bound to do or forbear; any duty imposed by law, promise, or contract, by the relations of society, or by courtesy, kindness, etc.

 

4. That which obligates or constrains; the binding power of a promise, contract, oath or vow, or of law; as, the obligation of conscience, of affection, or of ideals.

 

5. State of being bound ‘legally or morally’.  “Bound in filial obligation.

 

6. State of being indebted for an act of favor or kindness; also the act itself; as, to place others under obligations.

 

7. Obs. a Binding tie. b Liability. c Civility.

 

8. Law. A bond with a condition annexed, and a penalty or non-fulfilment.  In a larger sense, it is a formal and binding agreement or acknowledgement of a liability to pay a certain sum or do a certain thing.”

 

  

 

He states that as there was an accommodation it was the obligation of the defendant to have abided by the contract and promise made as, the obligation is in fact a state of being indebted for an act done by the plaintiff for him. 

 

 

 

16.                    Mr. Azizur Rehman further states that under section 25 of the Banking Companies Ordinance, 1962, the State Bank has exceeded its authority to issue such directions.  According to him under section 25 of the said Ordinance, the State Bank of Pakistan could have issued such a direction as legislation in respect of Islamic modes of financing could only be done by legislation.  He refers to section 21 of the Enforcement of Shariat Act, 1991 and states that under the said provision all laws are to be enacted exclusively by Majlis-e-Shoora (Parliament) and the Provincial Assembly as the case may be and no law shall be deemed to have been made unless it is made in the manner laid down in the Constitution.  Mr. Azizur Rehman states that this is a deeming provision and in view of the definition given of the word “deem” in the case of SIRAJUDDIN v. SARDAR KHAN (1993 SCMR 745) a fiction of law has been created and that any law that is promulgated or devised through a mode other than by an Act of the Parliament or the Provincial Assembly shall be void and not liable to be acted upon.  According to him, therefore, the State Bank Circulars are invalid and void thus incapable of being acted upon.

 

 

 

17.                    Mr. Aziz thus concluded the arguments saying that in holding that the banks have unlawfully rescheduled/restructured/renewed by entering into fresh agreement adding markup, the banks shall collapse.

 

 

 

18.                    The Defendants  have argued and have filed their Written Arguments in which, they have reiterated the contents of the Written Statement. It is stated that the plaintiff has claimed that (1) NICF (2) NIDF (3) PAD Finance Facilities were allowed / granted to defendant Company. The Defendants have summarized the claim as follows :-

 

 

 

                                                                        In Million

 

                        1).        NICF                           

 

 

 

                        a).        Principal 9.857  }          This liability is claimed

 

                        b).        Mark-up1.874               }          on the basis of Finance

 

                        c).        Misc:Charges 0.088 }    Agreement  i.e. 09th May

 

                                    Total:   11.819   }          1993.Annexure:Z-5 and

 

                                                                        Z-34 of the Suit i.e. A/C

 

                                                                        No:01-670-2164-6

 

 

 

                        2).        NIDF I

 

 

 

                                    a).        Principal Amount

 

                                                            13.837  }          Claimed on the basis of

 

                                                                        }          Agreement dated 13-05-1993

 

                                    b).        Mark-up  3.691             }          Annexure Z-8 & Bank  

 

                                    c).        Misc.Charges    }          Statement A/C No:

 

                                                and Exp.0.141   }          741-0256-8 Annexure:

 

                                                                        }          Z-35.

 

                                    Total:    17.668

 

 

 

           

 

                        3).        NIDF. II

 

 

 

                                    Principal           0.116    }          Annexure: Z-35

 

                                                                        }          Account No: 741-0237-2

 

 

 

                        4).        PAD                           

 

                                   

 

                                    a)Amount Disbursed 0.581}       Annexure:         Z-36

 

                                    b).Mark-up       0.158    }          Account No: 775-0035-9

 

                                                Total     0.739    }          Annexure:

 

 

 

 

 

19.                    The Defendants claim that, the plaintiff claimed these outstanding liability on the basis of above documents and prayed for the recovery of the finance by Sale of mortgaged property, by defendant No:1,  with Mark up, relying upon the Judgment of Honourable Lahore High Court reported as 2001 CLC 158 (Lahore) Muhammad Ramzan Versus  Citibank N.A.

 

                       

 

20.                    It is stated that, the claim could only have been granted in light of Finance Agreements, Annexure: ‘V’ to the plaint, dated 01-01-1991 (NICF Accounts) where the purchase price is shown at Rs. 9.893 (M) and Buy-back at Rs. 12.453(M) and the (Agreement dated 09-05-1993 Annexure: Z-5 where purchase price is Rs.12.453 & buy back price Rs. 16.074 (m).  It is submitted that the amount was never disbursed to defendant No:1 under the said agreement.  It is further stated, that the plaint also does not disclose this fact.

 

 

 

21.                    It was further stated that, in the NIDF A/c i.e. Agreement dated 13.05.1993 Annexure:Z-8, no disbursement is shown, but only execution of agreement is mentioned. The Plaintiff witness has not said at any place in his evidence that there was  any actual disbursement. In fact, he has admitted that “—Nothing was disbursed in cash to the Defendant No. 1 excepting the amount of Rs.7.500 million. No explanation has been advanced for the other agreements and the claim.

 

 

 

22.                    The assertion of the Defendants is that they had in their Written Statement, denied the quantum of amount as claimed by Bank. The defendant’s witness in his evidence Exb: No:6, has submitted the explanation regarding the Loan facility. It is stated by Mr. Abid, that, in the cross examination, the plaintiff admitted that “the date of execution of Ex: “C” is earlier than the date of purchase of stamp on which letter has been written”. It is also argued that the defendant has received the copy of debit note from the Plaintiff bank which is for Rs.59,83,045, in excess and never deleted after.

 

 

 

23.                    It was argued that the plaintiff was entitled to recover Rs. 1.2 million, being the difference of selling and buy back price but Defendant has charged the mark-up amounting to Rs.1,930,451/- on NICF & Rs.354,638/- on U.S. Aid L.C totaling to Rs.2,285,089/- on the following dates  Annexure: Z-34 (Ex 6/24).

 

 

 

 

 

                        DATE                                                  AMOUNT

 

 

 

                        01-04-1989                    ….                   Rs.       5,97,840/-  }

 

                        03-05-1989                    ….                   Rs.       2,15,297/-  }

 

            A.        31-07-1989                    ….                   Rs.       0,74,215/-  }NICF

 

                        15-08-1989                    ….                   Rs.       4,62,653/-  }

 

                        30-12-1989                    ….                   Rs.       5,80,446/-  }

 

 

 

            Amount debited by the bank to this NICF A/c. on the following dates.

 

 

 

                        07-03-1989                                :           Rs.       45,895/-}          

 

                        29-05-1989                                :           Rs.       46,362/-}  Ex: 6/24

 

26-06-1989                                :           Rs.       82,969/-} R/w Annex:

 

B.         07-09-1989                                :           Rs.       45,985/-}   Z-34

 

                        29-11-1989                                :           Rs.       48,362/-}

 

                        26-12-1989                                :           Rs.       82,696/-}                                                                                                                       _____________

 

                                                            Total of A+B    Rs.       22,85,089/-

 

                       

 

24.                    It is stated that since the buy back agreements contained the amount of prompt payment bonus, and that the bonus was nothing but penalty, the same could not be claimed. The plaintiff bank, therefore ought to have given the relief  for Rs. 0.258 being the payment Bonus  as per Clause-3 of Annex: R to the Suit, but instead of allowing the relief, (I) excess mark up amounting to Rs.7,30,451/-  plus Rs. 2,58,000/- (being payment, Bonus) , making total of Rs.9,88,451/- has been charged from defendant, by debiting it to Account for the period  01-01-1989 to 31-12-1989. It was due to the excessive charge and compounding mark up, that the Plaintiff claimed that there was a default in the huge amount that is being claimed. The entire amount is thus liable to be deleted.

 

 

 

25.                    It was further argued that the second Agreement i.e. Annexure” R, no fresh agreement was executed for the year 1990 i.e. 01-01-1990 to 31-12-1990 and A/c remained in operation upto 28-11-1990 when last cheque bearing No:00297915 was withdrawn for Rs. 2,50,000/- and thereafter A/c was never allowed to operate, the cheques issued by Defendant were also dishonored no loan facility or withdrawals allowed after that date. 

 

 

 

 

 

26.                                It was argued that during the period  01-01-1990 to 31-12-1990, the plaintiff bank charged a mark up, amounting to Rs. 16,63,308/- on the following dates:

 

 

 

 

 

                        01-04-1990                                :           Rs.       86,979/-

 

                        09-06-1990                                :           Rs.       46,971/-

 

                        30-06-1990                                :           Rs.    6,55,841/-

 

                        01-11-1990                                :           Rs.       85,561/-

 

                        30-12-1990                                :           Rs.    7,87,956/-

 

 

 

                                                                        Total     Rs.  16,63,308/-

 

 

 

                       

 

27.                    It was alleged that, on the contrary the amount deposited by the defendant during this period i.e. 01-01-1989 to 31-12-1990 is Rs. 1,90,09,483/- against the withdrawal of Rs.1,81,79,791, net positive deposits balance was Rs.8,29,692/-.  This, was stated to be the period, when the plaintiff bank started to debit the amount unauthorisedly without issuing any debit voucher to defendant.

 

 

 

 

 

28.                    As to the NICF agreement dated 01-01-1991, it was shown that no transaction was ever allowed by the plaintiff  bank to be made and no disbursement were been made nor shown. Annexure:Z-34 which is the Bank Statement filed by the plaintiff  in  Opening Balance is  shown at Rs. 98,93,834/- and thereafter, for the entire period debits were created by the bank, however no physical or actual disbursements have been shown. It was further argued that even during the period from 01-01-1989 to 31-12-1990 the plaintiff bank continued to charge excessive mark up which was also compounded. This was done despite the fact that the marked up price was agreed to in the agreement.  For the  period 01-01-1991 to 30-06-1991 the Plaintiffs charged Mark up unauthorisedly in the Account. The details of such are contained in Ex.6/24 to 6/26 showing the unauthorized entries in NICF A/c. These unauthorised amount were again charged by Bank in its NIDF & PAD accounts thereby raising the liability from 65,66,401/- to the suit amount in three years compounding the mark up and also debited account with no explanation no debit voucher is issued by bank to defendant company. The defendant approached the plaintiff bank vide Ex: 6/29 to 6/42 and asked the plaintiff bank to explain/ reconcile the amount debited by them in the Account  but the plaintiff bank failed to reconcile the same. Vide Ex 6/29 the defendant demanded the bifurcation of mark up and Principal amount but there was no response as to such request. Vide Ex: 6/30 the defendant complained to the plaintiff that they were charging excessive mark, but again there was no reply. Vide  Ex: 6/31, the defendant pointed out the discrepancy in the account and submitted the calculation to the Bank by calculating the mark up, but again of no avail. Vide letter dated 24th  November, 1993  Ex: 6/32 the defendant informed, that the re-scheduling intended to be made is incorrect, and denied to accept the liability. Vide letter 08th February,1994 Ex: 6/33 the defendant requested the plaintiff regarding the reconciliation of the amount vide letters dated 16th  February,1994 , 28th July,1994 the defendant again requested and shown their view regarding the quantum of excessive liability continuously shown by the bank.

 

29.                    It is argued that, finally on 4th July,1994, the defendant again submitted the complete working of  NIDF  and NICF  A/c  to the plaintiff bank. In this Statement the defendant worked out the calculation of mark up on Daily Product Basis . But the plaintiff bank once again failed to delete or reconcile the entries unauthorizedly / illegally debited to the account. Thereafter the defendant vide their letters Ex: 6/38 to 6/43 reminded the plaintiff bank for the settlement of the Account but to no avail. The plaintiff’s claim  execution of the agreements only. On the contrary no disbursements were made as per the agreements discussed above, hence the Agreements were without consideration and void.  Reliance has been placed on the case of UBL V/s. Chaudhary Ghulam Hussain  reported as 1999 PTCLR 162 (Lahore) wherein it was held that: “Agreement without consideration would be treated as Void: 

 

 

 

“9.       The appellant bank, has also placed reliance on two financing agreements:

 

 

 

(i)                 agreement dated 2.7.1986 (page 461) executed by the parties whereunder respondents Nos.1 and 2 were to be allowed financial facility of Rs.80,80,434/-  for a period ending on 30.6.1987 and in terms thereof respondents Nos.1 and 2 were required to pay back Rs.9,697 Millions.

 

 

 

(ii)               Agreement dated 22.9.1987 (page 465) according to which respondents Nos.1 and 2 were to avail of facility of Rs.98,35,660/-.  This facility was to come to an end on 21.9.1998 and in terms thereof  respondents Nos.1 and 2 were required to pay the buy back price of Rs.11,803 Millions on or before 21.9.1988.

 

 

 

            It is claimed that though respondents Nos.1 and 2 had availed of the above-noted two financial facilities as well, but they have defaulted to clear their dues, arising thereunder.

 

 

 

10.       From the perusal of the record, it transpires that there is no sanction advice available for creation of these financial facilities.  Significantly, the statement of account filed by the appellant does not show any disbursement, whatsoever, under these two agreements which have to be treated as void, being without consideration.  The supporting material of these agreements i.e. D.P.C. Notes etc. (pages 483, 485, 487 and 489) also suffer from the same fatal defect and cannot be looked into for holding that respondents Nos.1 and 2 had incurred any financial liability thereunder.  We hold accordingly.”(Emphasis is mine).