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Petitioner: Chaudhri MUHAMMAD QASIM and 7 others VS Respondent: PRIME COMMERCIAL BANK JUDGMENT
Court Name: Lahore High Court Judge(s): Jawwad S. Khawaja, Mian Saqib Nisar Title:Chaudhri MUHAMMAD QASIM and 7 others vs PRIME COMMERCIAL BANK
JUDGMENT
Reported As: 2004 CLD 1181 Result: Appeal allowed Judgment JUDGMENT ' JAWWAD S. KHAWAJA, J.---This appeal impugns the judgment and decree dated 5-5-2000 passed by a learned Judge in Chambers in a suit filed by Prime Commercial Bank Ltd., (plaintiff/ respondent No,1) against Chaudhri Cables (Pvt.) Ltd. (respondent No,2), the eight appellants in this appeal and Shama Wire and Cable Industries (Pvt.) Ltd., (respondent No,3). Through the impugned judgment, an application filed by the appellants, seeking leave to defend the suit, was dismissed and as a consequence the suit of the plaintiff-Bank was decreed. 2. In order to appreciate the controversy between the parties it is necessary first of all to set out their respective contentions as averred in their pleadings. The case of the plaintiff-Bank as set out in the plaint, is that banking facilities were provided by it to Chaudhry Cables (Pvt.) Ltd., ("Chaudhri Cables") from time to time. More particularly it has been stated that initially, vide advising letter dated 3-9-1992 a finance facility of Rs.30,000,000 was sanctioned in favour of Chaudhri Cables. For this purpose an agreement for running finance dated 5-9-1992 was also executed between the plaintiff-Bank and Chaudhri Cables. Subsequently, the facility of Rs.30,000,000 was renewed and enhanced to Rs.260,000,000. For this purpose another agreement for running finance dated 22-5- 1993 was executed between the plaintiff-Bank and Chaudhri Cables. The advising letter and the two agreements for running finance, were filed with the plaint. 3. Paragraph 6 of the plaint gives the break down of the amount of Rs.171,813,523.45 claimed by the plaintiff-Bank in its suit. In view of its relevance to the decision of this appeal, it is reproduced below:-- "6. Out of the total Facility of Rs.260 million:---
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(i) A claim of Rs.29.367 million was honoured by the plaintiff on behalf of the defendant No,1 as of 8 March, 1997 in respect of the following Guarantees:--- (a) No, LSE/476/95 (b) No,LSE/477/95 Copies of the Pay Order showing payment to beneficiary alongwith the respective Guarantees, as mentioned above, are attached herewith as Annexures D.1, D.2 and D.3 respectively. (ii) A claim of Rs.26.463 million was honoured by the plaintiff on behalf of the defendant No,1 as of 5 June, 1997 in respect of the Guarantee No,LSE/478 of 1995. Copies of the Pay Order showing payment to beneficiary alongwith the said Guarantee are attached herewith as Annexure D.4. (iii) An amount of Rs.66.711 million was paid by the plaintiff as of 4 January, 1997 on account of acceptance under Letter of Credit No,LSE/ 721/96 established by the plaintiff. Copies of debit note and the said letter of credit are attached herewith as Annexure D.S. (iv) An amount of Rs.32.022 million as of 3 June, 1997 was paid by the plaintiff, being the custom duties, in respect of the above letter of credit. Copies of debit advices and pay orders are attached herewith as Annexure D.6; and (v) Miscellaneous expenses of Rs.1.593 million were incurred by the plaintiff on account of storage, insurance, muccadam bills, legal adviser's fee and excise duty etc. ' The plaintiff was able to recover Rs.5.060 million from the defendant No, 1. Hence, the total amount payable inclusive of mark-up by the defendants against the Facility comes to Rs.171,813,523.45 as on 20 October, 1999. 4. The facility referred to in the above quoted paragraph is the running finance facility of Rs.260,000,000 specified in the agreement dated 22-5-1993 referred to above. The claim of the plaintiff-Bank has categorically been based on the aforesaid running finance facility and not on any counter-guarantee or indemnity requiring Chaudhri Cables to indemnify the Bank in respect of payments made by it to the beneficiaries of the above referred guarantees and L/C. The significance of this fact has been discussed later in paragraphs 23 and 24 of this judgment. 5. The claim of the plaintiff-Bank against the present appellants is that they had executed guarantees in favour of the Bank to secure repayment of the above mentioned liabilities of Chaudhri Cables. Some of the appellants, as per averments in the plaint, had also mortgaged their immovable properties as collateral security for the aforesaid liabilities of Chaudhri Cables. 6. After service of summons on them, the appellants filed an application under section 10 of the Banking Companies (Recovery of Loans, Advances, Credits and Finances) Act, 1997 seeking leave to appear and defend the suit (the "PLA"). In the said application the two agreements for running finance dated 5-9-1992 and 22-5-1993 were not denied. It was, however, asserted that the statement of account appended with the plaint was not Consistent with the terms of the said agreements. ' In 'addition, it was expressly alleged that the guarantees and letter of credit referred to in paragraph 6 of the plaint were sanctioned by the plaintiff-Bank with the sole object of enabling Chaudhri Cables to fulfil its obligations under Contract No,1154-12 awarded to it by WAPDA for supply of ACSR Rabbit Conductor (the "WAPDA Contract") Paragraph 9 of the PLA being relevant in this contest, is reproduced as under:-- "9. That in fact the defendant-Company i.e. Chaudhri Cables (Pvt.) Ltd., was granted a Contract No,1154-12 from WAPDA for supply of 21,300 KM_ ACSR Rabbit Conductor valuing Rs.66,027,220.40 plus US $ 6,424,131.01. The plaintiff-Bank agreed to facilitate the defendant-Company i.e. Chaudhri Cables (Pvt.) Ltd., for the completion of aforesaid contract and the defendant-Company in, good faith got the letter of assignment of the proceeds of the contract vide WAPDA's letter N0.8598- 99/ DGM(P)/ D(PP) dated 20-3-1996 whereby it was confirmed that payment for supply under the contract shall be made to Messrs Chaudhri Cables (Pvt.) Ltd., Account No,00016400, with Messrs
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Prime Commercial Bank Ltd., the plaintiff. In spite of the above assignment, the plaintiff-Bank and more particularly its President Mr. Saeed I. Chaudhry played a fraud upon the defendant-Company and instead of delivering the imported raw material, withheld the same and never delivered to the defendant-Company or brought to its private customs bond so much so all the raw material about 1000 M/Tons of aluminum is still in the possession and custody of the plaintiff-Bank or might have been disposed of and the defendant-Company failed to complete its contract because of the misconduct of the plaintiff-Bank and the plaintiff-Bank ironically on the one hand withheld all the raw material with it and on the other hand has burdened the defendant-Company and has entered his claim in his account which are absolutely false, incorrect and baseless, hence cannot be relied upon. Since all the relevant documents are not presently available with the answering defendants arid the time to file the present application is expiring as such the relevant documents shall be submitted before this Honourable Court at a later stage. However, the plaintiff-Bank may be directed to produce all the relevant documents/record regarding the import of 1000 M/T aluminum and ultimate fate thereof." . ' In paragraph 11 of the PLA the appellants averred that the plaintiff-Bank had suppressed material facts and had asserted a false claim against the appellants. 8. From the contents of the plaint and of the PLA noted above the nature of the dispute between the parties is narrowed down. There is no reference in the plaint, to any WAPDA contract. In fact, the plaintiff-Bank has assiduously and, it appears, deliberately, avoided giving material particulars bf the guarantees (the "Guarantees") and the Letter of Credit ("L/C") mentioned in paragraph 6 of the plaint. Any references to the letter of Chaudhri Cables dated 5-11-1995 requesting the Guarantee and L/C facilities, the Bank's own letters advising the grant of the said facilities, the beneficiaries of the Guarantees and L/C and other details are missing from the plaint. The effect of these documents and brief- particulars thereof as required by Order 6, rule 9, C.P.C. Have also not been set out in the plaint. Before us it was argued by learned counsel for the Bank that the Guarantees and the L/C were independent documents representing separate and stand-alone obligations of the Bank towards the beneficiaries of the said instruments. 9. On the other hand the case of the appellants is that the Guarantees and the L/C, on which the plaintiff-Bank's claim is founded, were directly linked to the WAPDA Contract; that the sole purpose of the said Guarantees and L/C, to the knowledge of the Bank, was to enable Chaudhri Cables to fulfil its contractual obligations towards WAPDA and that the Bank had agreed to the terms of such facilities with Chaudhri Cables but had failed to abide by the same; thus preventing Chaudhri Cables from performing the WAPDA Contract. On this basis liability to pay the Bank's claim was denied. 10. It is in the context of the foregoing controversy appearing from the plaint and the PLA, that the reply to the PLA by the Bank is relevant. Certain new facts not originally pleaded, were set out in the reply while some averments in the plaint were' reiterated. The WAPDA Contract and the nexus between, it and the above referred facilities (as expressly alleged in paragraph 9 of the PLA) was completely glossed over. There is no denial in the Bank's reply, to the express averments relating to the WAPDA Contract in paragraph 9 of the PLA. In order to appreciate the Bank's position, the contents of paragraphs 8 and 9 of the reply to the PLA are reproduced as under:- "8 and 9. The contents of paras Nos.8 and 9 are denied being incorrect. As stated earlier the .Entries in the statement of accounts are according to the finance agreements and the law. Regarding the allegation that on 18 December, 1996 the liability was nil against the Agreement dated 5 September, 1992 and 22 May, 1993 respectively, it is submitted that the liabilities under these Agreements were running finance facilities which could fluctuate, being continuous in nature. Under such facility, the borrower (sic) withdraw and deposit the money as many time (sic) during the currency of the facility. Therefore, neither the statement of account is baseless and without
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substance nor it has been made with mala fide intentions and ulterior motives. It is categorically denied that the plaintiff has damaged in any respect the business of the defendant No,1.' It is denied that the continuance of the accounts as from 4 January, 1997 is unfounded and baseless. An amount of US$ 1,642,993,87 equivalent to Pak Rs.66,711,057,69 on account of acceptance under a Letter of Credit bearing No,LSE/ 721/96 dated 20 June, 1996 (the said L/C") established by the plaintiff on behalf of the defendant No,1 for the import of 998.204 M/Tons approximately of Aluminum ingots, was paid by the plaintiff. Copies of the said L/C and the 180 days Bill of Exchange alongwith payment instructions confirming the payment of Rs.66,711,057,69 are attached herewith as Annexures I and II respectively. Kindly also see the Statement of Accounts at page 164. On arrival of imported consignment at the Customs Port, Lahore, it was stored in the Customs Bonded Warehouse, Lahore, under pledge/control of the plaintiff so as to enable the defendant No,1 to arrange necessary funds for obtaining deliveries of the imported consignment against cash payment to the plaintiff within stipulated time. At the request of the defendant No,1 an ex-bond Bill of Entry dated 1 February, 1997 through customs agent Messrs Asif Associates (Private) Limited was filed. A copy of the same is attached herewith as Annexure III. The Customs official assessed the liability for payment follows:--- Sales Tax: Rs.12,538,835.00 Income Tax Rs. 4,109,919.00 Services Charges Rs. 1,393,193.00 Excise Duty Rs. 50.00 Total: Rs.18.041,997.00 ' Which was accordingly deposited by the plaintiff at the National Bank of Pakistan, Dry Port Branch, Lahore, on 6 February, 1997. A copy of Pay Order in this regard is attached herewith as Annexure IV. This payment of Rs.18,041,997 was made against specific written authorization of the Defendant No,1 vide its letter dated 4 February, 1997, a copy of which is attached herewith as Annexure V. ' Subsequently, the defendant No,1 abandoned the imported consignment as is evident from the letter dated 4 April, 1997 of the Deputy .Collector of Customs, Dry Port, Lahore, a copy of which is attached herewith as Annexure VI. Customs Authorities, on the basis of their said letter, proceeded to encash Indemnity Bond and post dated cheques aggregating to Rs.13,951,928 when the plaintiff was forced to deposit the said amount of Rs.13,951,928 on 3 June, 1997 to protect its interest and avoid the imported consignment from being auctioned. A copy of Pay Order in- this regard is attached herewith as Annexure VII. As such, the payment of funds to the foreign suppliers against the said L/ C and the payment of the amounts mentioned above coupled with other charges/expenses as mentioned in the Statement of Accounts resulted, in the continuance of the entries in the account of the defendant No,1 w.e.f. 4 January, 1997. ' After the sale of 998.M/Tons of Aluminum Ingots Rs.71,062,778.88 were received by the plaintiff (after deducting charges etc.,) which were adjusted as follows:-- Chaudhry Cables (Private) Ltd. Rs.36,355,747.97 Chaudhri Wire Rope Industries (Private) Limited.Rs.35,707,030.97 The detail of the adjustment of Rs.35,355,747.91 in the account of the defendant No. 1 is as follows:---Rs.71,062,778.88
Partial reduction in running Finance Rs.5,060,418.25 Payment of Mark-up subsisting at that time.Rs.30,295,329.66
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Rs.35,355,747.91 ' The above adjustments were appropriately intimated and notified to the defendant No,1 to which it never objected. Letters in this regard are attached herewith as Annexure VIII. Kindly also see the Statement of Accounts at pages 165, 184 and 185 respectively." 11. While the above portion of the reply to the PLA is instructive as to the position of the Bank, certain segments thereof need to be highlighted here. Firstly, it has been acknowledged by the Bank that the running finance facility allowed to Chaudhri Cables under the two finance agreements dated 5-9-1992 and 22-5-1993 was available to the said Company and had not been discontinued. To this extent the reply to the PLA is consistent with the contents of the plaint noted above. Secondly, the debits in the running finance account of Chaudhri Cables on and after 4-1-1997 have been justified by the Bank. These debits relate to the claim of the Bank itemized in paragraph 6 of the plaint. This too is in accordance with the stance of the Bank adopted in the plaint. There is, however, a serious inconsistency in the reply to the PLA which has neither been clarified therein, nor was it explained by learned counsel for the Bank during arguments. Our reference is to the contents of the reply to the PLA reproduced in the preceding paragraph. The amounts specified therein were admittedly paid from the running finance account of Chaudhri Cables which account, according to the Bank's own submissions noted above, was operational. Thirdly, we have noted that there is no allegation in the reply to the PLA or indeed in the plaint, that the Bank had at any material point in time, given notice to the Chaudhri Cables under Clause 10 of the running finance agreement so as to discontinue the running finance. The effect of the Bank's reply to the PLA as highlighted in this paragraph has been considered by us in a later part of this judgment. 12. It is not for us, while deciding this appeal, to embark on a full trial of the dispute between the parties. Since the PLA filed by the appellants, was dismissed by the learned Judge in Chambers, we have only to see if the dismissal of the PLA was justified or conversely, to decide if the appellants had raised a serious and bona fide dispute in respect of the claim asserted by the Bank. For reasons appearing below we have reached the conclusion that a serious and bona fide dispute has been disclosed by the appellants which entitles them to defend the suit filed by the Bank. 13. The principal defence of the appellants is set out in paragraph 9 of their PLA, which has been reproduced above. If the appellants are able to prove that there was an agreement between the plaintiff-Bank and Chaudhri Cables whereunder the Bank had agreed to provide the Guarantee and L/C facilities to enable Chaudhri Cables to perform the WAPDA Contract and if the appellants are also able to prove, as alleged, that the Bank committed a breach of such agreement thereby preventing performance of the WAPDA Contract by Chaudhri Cables, then, in our opinion the appellants would be able to successfully resist the suit of the Bank. 14. We have already observed that the contents of paragraph 9 of the PLA, to the extent the same relate to the WAPDA contract, have not been rebutted by the Bank in its reply to the PLA. This circumstance alone would have justified the grant to the appellants, of leave to defend the Bank's suit. We have, however, not confined ourselves to this omission on the part of the Bank. We have attempted to ascertain from the available record if there is any independent corroboration of the averments in paragraph 9 of the PLA. We have, prima facie, found that there is. 15. At the very outset our attention has been drawn by learned counsel for the appellants to a letter dated 5-11-1995 addressed by Chaudhri Cables to the plaintiff-Bank requesting it for financial facilities to enable Chaudhri Cables to perform the WAPDA Contract. In view of the importance of the said letter the same is reproduced as under: -- "We are grateful for the time given to us in which we have explained you the detail of our financial requirement against WAPDA Contract No,1154-12, the detail of the same is as under: (1) Contract No. 1154-12
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(2) Buyer WAPDA (3) Value Rs.284,447 Million (4) Delivery period Six months (5) Item ACSR Rabbit Conductor (6) Financing Agency IBRD/World Bank through direct disbursement (7) Financing Requirements (a) Performance Bond Rs.26 million (b) Advance Payment GuaranteeRs.28 million (c) Letter of Credit Rs.184.6 million (180 days usance)
(d) Total funded requirement to meet with the contract valueRs.50 million, of which Rs.30 million will be high point usage at any time. (8) Additional Security/CollateralTotal Contract proceeds will be assigned to the Bank. The raw material will remain in Bank's custody. We will request release of material against Trust Receipts, equal to requirements for 2 233 Ks production. Upon conversion into conductor Inspection Certificates of WAPDA will be provided to the Bank and proportionate release of raw material will be requested, until completion of the Contract. ' Upon completion the contract is estimated (as per details already provided) to generate net positive margin of over Rs.50 million which will be available to meet debt servicing requirement. We will also try that the steel (approximate Rs.24 million), is provided by the sister concern Chaudhri Wire Rope Industries (Pvt.) Limited. This amount will then also add to the aforesated margin of Rs.50. 16. It is important to note from the contents of the above letter that banking facilities were requested by Chaudhri Cables, expressly for the purpose of the WAPDA Contract. Subsequently, as per terms of security/collateral set out at serial No,8 of the above letter, Chaudhri Cables arranged the assignment of proceeds and the payment thereof directly from WAPDA into an account maintained by Chaudhri Cables with the plaintiff-Bank. This was done by means of a letter of assignment dated 20-3-1996 which was written by WAPDA to the plaintiff-Bank confirming that the amounts due to Chaudhri Cables under the WAPDA Contract, would be paid into the aforesaid account.
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17. Furthermore, it is significant that the plaintiff-Bank issued the Guarantees in favour of WAPDA as had been requested in the above referred letter of 5-11-1995. This was also confirmed by the plaintiff-Bank through a letter dated 8-1-1996 addressed by it to Chaudhri Cables. In this letter the L/ C for import of raw material was also agreed to be opened by the plaintiff-Bank_ The letter dated 8-1-1996 is reproduced as under:-- "This is with regard to the above contract for which we have already issued Performance Bond for ' Rs.26,410,000 and Advance Payment Guarantee for Rs.26,411,000 on your behalf. Insofar as the facility for the import of raw material for the execution of the above contract, please note that it is under process and shall be opened as per requirements of the contract subject to the Board of Directors approval." 18. From the aforesaid letter it does appear that the terms set out in Chaudhri Cable's letter of 5-11- 1995 had been accepted, firstly, through the issuance of the requested guarantees and also through confirmation that the facility for import of raw material will also be granted once approval of the Board of Directors is obtained. The L/ C for such import was, in fact, established subsequently and the aluminum ingots were imported thereagainst. 19. The contents of the two letters dated 5-11-1995 and 8-1-1996 and the grant of the requested facilities by the plaintiff-Bank, prima facie, indicate that the Bank had agreed to provide financing to Chaudhri Cables as requested, to enable it to perform its obligations towards WAPDA under the WAPDA Contract. It was, however, argued on behalf of the Bank that the Bank's letter dated 8-1- 1996 constituted only partial - acceptance of the terms set out in the letter dated 15-11-1995. The partial acceptance, according to the Bank's learned counsel, was represented by the Guarantees which had been requested by Chaudhri Cables and had been issued in favour of WAPDA. 20. In respect of the letter of credit, learned counsel for the plaintiff-Bank argued that the terms of the L/C application rather than the terms set out in the aforementioned letter of 5-11-1995, would prevail. This argument was advanced on the ground that the L/ C application was signed subsequently by Chaudhri Cables and, therefore, the terms recorded therein would override a prior understanding even if it is found that an arrangement in terms of the letter of 5-11-1995 had earlier been tacitly agreed to between the Bank and Chaudhri Cables. 21. We have considered the above argument and have also gone through the relevant provisions of the L/C application including Clauses 3, 4 and 9 thereof. These are discussed in a later part of this judgment. For the present it is noteworthy that the Bank has not produced on record any Board approval or sanction advice relating to the L/ C established by it although opportunity was provided to the Bank to do so. Considering the normal course of conduct in such matters and also bearing in mind the statement of the Bank in its letter of 8-1-1996 that the facility for import of raw material i.e. The L/C will be established after Board approval, we are, prima facie, justified in assuming that Board approval, was, in fact, granted and only thereafter the letter of credit was established. Since the Bank has not produced on record such Board approval and subsequent sanction advice, if any, we are not in a position to ascertain the terms on which approval was granted for the establishment of the L/C. During the course of a regular trial it will be open for the appellants to initiate discovery proceedings for production of relevant Board minutes and other record to prove the assertions set out in their application seeking leave to appear and defend. It will also be possible for the plaintiff-Bank to lead evidence, if any, to explain a material departure from normal banking practice if the Bank adopts the plea that the Board did not give separate approval before the L/C was established or that the L/C was established without any such Board approval or sanction advice. 22. We next come to the question of payment for the imported consignment and incidental charges by way of sales tax, customs duty and other expenses required for clearing the said consignment from customs. It is the case of the plaintiff-Bank, as set out in its reply to the PLA
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(reproduced above), that Chaudhri Cables had to "arrange necessary funds for obtaining deliveries of the imported consignment against cash payment to the plaintiff-Bank within the stipulated time". This contention appears to be inconsistent with other aspects of the case available on record. Firstly, we note that there is no allegation at all in the…
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