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Petitioner: UNITED BANK LTD., KARACHI VS Respondent: Messrs GRAVURE PACKAGING (PVT.) LTD. and JUDGMENT
Court Name: Sindh High Court Judge(s): Anwar Mansoor Khan Title:UNITED BANK LTD., KARACHI vs Messrs GRAVURE PACKAGING (PVT.) LTD. and
JUDGMENT
Reported As: 2001 YLR 1549 Result: Order accordingly Judgment JUDGMENT ' The present suit has been tiled 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 9-7-1987 a sum of Rs,6 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 (1B-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 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 re-payable in lump sum. The prompt payment bonus of Rs,0.258 million was also provided in the said agreement. The re-payment 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 9-7-1987 for Rs,7.200 million. In addition to the above, the defendants Nos.2 to 5 secured the said amount by guaranteeing repayment thereof under a letter of guarantee, dated 9-7-1987 filed as Annexure-D to the plaint and referred to in the affidavit in evidence as Exh. P/4. In addition to the above, according to the plaintiff the defendant 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
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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/Exh.P/8 along with the affidavit in evidence. The said mortgage is also registered with the Registrar of Joint Stock Companies by a Certificate of Mortgage, dated 22-9-1988 Annexure-I/Exh.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 Annexures R and S (Exh.P/18 and Exh.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 re-payable 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 along with the plaint as Annexure-T (Exh.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.D.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/Exh.13/22. The said amount under the second agreement 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-I (Exhs.P/24 to 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 Exh.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.C.F. Facilities (forced) after adding 'together the three various N.I.F.F. Facilities into one single N.I.C.F. Facility became Rs,13,953,846 which, was admitted by entering into another agreement Annexure-Z 8/Exh.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 1-1-1995 till realization 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 Qanun-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 Nos.2 to 5 as, according to the said defendants, the same are not actual signatures of the defendants. The name is not decided and cannot be accepted in view of Article 17(2) of the Qanun-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 as, according to them, the same has been admitted in Exh. 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:---
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'(a)N.I.C.F. Account {{TABLE}} Outstand- Mark- ing up of Balance 365 Amount days 0.0. On 210 30-6-1987 days Mark-up Total outLess of cushion standing adjust- period of before rement adjust-payment ment UPTO 30-6-1994 Rs, Rs, Rs, Rs, Rs, 4006142 878161 505243 5389546 4083524 Net Balance After Adjustment(s) Rs,1306022 01) N.I.D.F. Account 1234325 139726 80390 1454441 135000 Net balance outstanding after Rs,1319441 adjustments/re-payments (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 {{TABLE}} 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. In fact, 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 Nos/ 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 to how Mark-up on mark-up could be charged in xiew 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 in fact 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, in fact 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 v. Qayyum Spinning Limited and others 2001 MLD 1351 it was held that Mark-up on Mark-up 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. In fact in the case of Dr. Aslam Khaki v. Syed Muhammad 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. Haft Textile Mills Ltd. Suit No,B-153 of 2000. 8. Mr. Aziz stated that, with regard to S.B.P. Circulars Nos.13 and 32, dated 20th June, 1984 and 26-11- 1984 respectively. He stated that two Circulars are among many which S.B.P. Has been issuing from time to time and the two Circulars in actual fact have to be examined. The First Circular No,13
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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 U.B.L. v. 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 S.B.P. Circular No,BID(Gen) 2470/601-Q4-90 of 17-6-1990 which was addressed to all Banks with regard to the treatment to be given to re-scheduled 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 re-payment 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 mark-up as is evident from line 5 of the Circular itself. He said that on the date of Circular i,e, 17-6-1990 five years, had elapsed from the date on whieh the system of mark-up had been introduced. Guidelines, according to him were issued by H.B.L. To its various officers in order to deal with re-scheduling, restructuring and writing off which was contained in the aforesaid Circular of S.B.P., dated 17-6-1990. He said that the guidelines issued by S.B.P. Were attached. Circular No,4 of 17-2-2000 was also issued by S.B.P. 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 C.I.B., it was made incumbent that such loans/advances should be shown to S.B.P. As "re-scheduled/restructured" instead of 'defaults'. In other words when Banks finalise re-scheduling/restructuring arrangements with the borrowers customers, S.B.P. Does not treat the borrowers/customers as having committed defaults. In actual fact in some cases if rescheduling/re-structuring 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 8-1-1999 was passed by a Division Bench of this Court in Special High Court Appeal No,1871 of 1998 (Messrs Hardware Manufacturing Corporation (Pvt.) Ltd. And 5 others v. U.B.L.). 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 8-1-1999, 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 1502 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
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contract substituting the old contract and which was in the nature of novation of a contract within the meaning of suction 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 SC 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 t( scind 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 the point of actual disbursement it was argued by Mr. Aziz stating that there need not be any actual disbursements when a Bank allows re-scheduling or re-structuring of an existing debt. Therefore, in re-scheduling, the liability to pay to the Bank is amended or recast giving further time for re-payment 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 owned 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 here 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 SC 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 30-6-2001 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 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 of 1999 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 interests/mark-up as cost of production which interest/mark- up is allowable expenditure in income tax returns. 14. Mr. Aziz said that therefore rescheduling, re-structuring and entering into fresh agreement to renew the facility by adding mark-up 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 Qayyum Spinning case and argued that
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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 re-purchase as a notional transaction, and that; because it was considered as a notional pansaction where, the mark up was not serviced, rescheduling was allowed by addition of markup on the un-serviced mark-up. Such rescheduling/re-structuring 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 transactions 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 transaction 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 Instruments 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 mark-up 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 conditionality's attaching to Bai Moajjal as the permissibility of such a transaction is dependent on fulfilment 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, re-structuring 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 mark-up was added to arrive at a notional re- purchase 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 'Ribs' or mark-up on mark-up. He stated that no doubt, 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
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trade of a commodity. He stated 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 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, where after 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…
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