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Official Citation: 2014 PLD 283
Court / Jurisdiction: Supreme Court of Pakistan
Year of Decision: 2013
Decision Date: 2013-12-31
Parties: NATIONAL BANK OF PAKISTAN and 117 others vs SAF TEXTILE MILLS LTD. and JUDGMENT
This judicial decision was delivered by the Supreme Court of Pakistan on 2013-12-31. The matter involves proceedings between NATIONAL BANK OF PAKISTAN and 117 others and SAF TEXTILE MILLS LTD. and JUDGMENT, officially reported as 2014 PLD 283. The court reviewed applicable Pakistani statutes, procedural requirements, and governing case-law authorities. The full text below contains the complete facts, arguments, and legal reasoning rendered by the honorable bench.
Case cited as PLD 2014 Supreme Court 283
Court Name: Supreme Court of Pakistan Judge(s): Iftikhar Muhammad Chaudhry, Gulzar Ahmed, Sh. Azmat Saeed Title:NATIONAL BANK OF PAKISTAN and 117 others vs SAF TEXTILE MILLS LTD. and
JUDGMENT
Reported As: PLD 2014 Supreme Court 283 Result: Appeals dismissed Judgment JUDGMENT ' SH. AZMAT SAEED, J.---Through this judgment, it is proposed to dispose of above-mentioned Civil. Appeals, involving common questions of law i,e, the constitutionality or otherwise_ of section 15 of the Financial Institutions (Recovery of Finances) Ordinance, 2001 (hereinafter referred to as "the Ordinance of 2001"). 2. A Constitutional Petition was filed before the learned High Court of Balochistan to call into question the vires and the constitutionality of section 15 of the Ordinance of 2001, inter alia, on the ground that it offended against the Articles 4 and 175 of the Constitution of the Islamic Republic of Pakistan, 1973. The Constitutional Petition was dismissed vide judgment dated 16-6-2005 announced on 27-7-2005, reported as Sh. Abdul Sattar Lasi v. Federation of Pakistan through Secretary, Ministry of Law, Justice and Parliamentary Affairs, Islamabad and 6 others (2006 CLD 18), whereby section 15 of the Ordinance of 2001 was held to be ultra vires to the Constitution. 3. Various Constitutional Petitions were also filed before the learned Lahore High Court to call into question the vires of section 15 of the Ordinance of 2001. The said Writ Petitions were heard by the learned Full Bench of the said Court and vide judgment dated 23-12-2008, section 15 of the Ordinance of 2001 was held to be unconstitutional, being violative of Articles 2-A, 3, 4, 9, 23, 24, 25 and 175 of the Constitution and found suffering from a variety of legal infirmities detailed in the said judgment.
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4. The aforesaid two judgments were variously challenged before this Court through Civil Petitions for Leave to Appeal which were allowed and leave was granted. The Civil Appeal No,99 of 2009 was directed against the judgment of the learned High Court of Balochistan dated 16-6-2005 announced on 27-7-2005. While the remaining Civil Appeals filed by the different Financial Institutions are directed against the judgment of the learned Lahore High Court, dated 23-12-2008. The Civil Appeal No,99 of 2009 was withdrawn on 23-4-2013, as the parties had entered into a settlement outside the Court. 5. Mr. Muhammad Akram Sheikh, learned Sr. Advocate Supreme Court appearing on behalf of the Financial Institutions in Civil Appeals Nos.146, 204 to 254, 289 to 302 and 1147 of 2009, contended that a clear procedure is set out in section 15(4) of the Ordinance of 2001. It gives the mode of advertising a sale, and the contents of the notice of sale. He added that section 15(11) of the Ordinance of 2001 provides for resolution of all disputes relating to the sale. Any person aggrieved regarding the procedure or manner in which the public auction is conducted may approach the Banking. Court, which will examine and decide the objection of the customer/mortgagor on the touchstone of the procedure given in the Code of Civil Procedure, 1908 as provided in section 7(2) of the Ordinance of 2001. 6. It was further contended that there is no established principle of law that for sale of the property through auction there must be a reserve price, as a fundamental legal requirement. Even under the Order XXI Rule 66 Code of Civil Procedure, 1908, there is no requirement that there must always be a reserve price. 7. It was also submitted that the Financial Institution has to follow the whole process of public auction transparently by issuing three statutory notices and therefore giving the mortgagor right to redeem the mortgage and upon failure to publish public auction notices in the newspapers, then conduct a public auction and receive bids etc. Only after this, the Financial Institution will become entitled, if it so desires, to match the highest bid received in open auction. It is also not correct to say that while executing the Sale Deed, a Financial Institution becomes the 'registering authority'. The registering authority would always remain the Registrar of the Documents under the Registration Act, 1908. Even otherwise, the power of sale is not unbridled. The sale has to be conducted in a transparent manner as given in section 15 of the Ordinance of 2001 and proper accounts have to be submitted to the Court under section 15(1) of the Ordinance of 2001. If the Financial Institution seeks to conduct a sham auction without making best efforts to obtain the highest price of the property being sold, the mortgagor has always the right to object to it in the Banking Court under section 15(11) of the Ordinance of 2001. 8. It was also contended that after creation of mortgage, all that remains in the hand of the mortgagor, is only the 'equity of redemption' and, the right to receive whatever remains surplus to the claim of the mortgagee after sale of the property. Under section 15, the mortgagee is entitled to sell the property only after giving the mortgagor ample notices and opportunities to get the property redeemed. 9. It was added that the completion of formalities by a Financial Institution to sell the mortgaged properties in case of .Default is not a judicial or quasi-judicial process of adjudication of claims. It is merely a power that the legislature in its wisdom found fit to give to the Financial Institutions to enable them to convert the security into cash by strictly following a stringent set of formalities for selling the said property through public auction. Exercise or non-exercise of section 15 of the Ordinance of 2001 powers by the Financial Institution does not in any way affect or impair either the Financial Institution or the customer's right to claim through Banking Court any money from the other party that they may be entitled to. The said section 15 applies only to the sale of the mortgaged properties by the mortgagees for recovery of outstanding mortgage money. The Financial Institutions would have to account for the proceeds of the sale. In case the Financial
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Institution still needs to file a recovery suit, the amount already recovered under section 15 would go towards reducing its claim. Section 15(13) of the Ordinance of 2001 itself clarifies this position as follows:-- "The rights and remedies under this section are in addition to, and not in lieu of, any other rights or remedies. a financial institution may have under this Ordinance." ' The question of inequality does not arise as the concept of providing any right exclusively to a certain class of persons through a statutory provision is not new to legislative enactments and have also been held to be valid by the superior Courts in Pakistan and abroad. The very name of the Ordinance of 2001 [i,e, Financial Institutions (Recovery of Finances) Ordinance, 2001] makes the intention of the legislature in promulgation of this Ordinance abundantly clear. Even a mortgagee (i,e, a Financial Institution) cannot recover any money/amount under section 15 over and above the Mortgage Money and for recovery of the same, it shall have to file a separate suit under section 9 of the said Ordinance. ' Further, under subsection (12) of section 15 of the Ordinance of 2001, the mortgagor can approach the Banking Court and obtain an injunction restraining the sale or proposed sale of mortgaged property on the ground that 'all moneys secured by mortgage have been paid'. 10. The learned Sr. Advocate Supreme Court further added that the law of limitation only provides for a timeframe for seeking access to the Courts after a person acquires a cause of action. It is an established principle of law that limitation does not destroy the right but only bars a remedy that requires intervention of the Court. Even otherwise, there has hardly been a case in which section 15 of the Ordinance of 2001 has been invoked, after the period of limitation for enforcement of a mortgage had expired. The limitation period for enforcement of a debt is only 3 years, while for enforcement of a mortgage it is 12 years from accrual of the cause of action. 11. It was also urged that it is incorrect that a bank can recover any money that would not constitute the "Mortgage. Money". If any attempt is made to bring the property to sale for recovery of any amount not secured by the mortgage or which cannot, otherwise, be claimed, the mortgagor can challenge the same under subsection (12) of section 15 of the Ordinance of 2001. A Financial Institution would also be accountable for any unjustified recovery since under subsection (10) it must render proper accounts and under subsection (9) only rightful dues under the mortgage are available for distribution between the mortgagees, and the surplus amount has to be paid to the mortgagor. The mortgagor could also file a suit under section 9 for recovery of an amount that it may be entailed to claim. 12. It seems that the legislature was extraordinarily careful in safeguarding the interest of the innocent mortgagors from any mala fide actions of the mortgagees which have elaboratively been provided in section 15 of the Ordinance of 2001 from advertisement of an auction to the sale and scrutiny thereof. 13. It was also contended that the impugned judgment shows that this Court overlooked the background in which section 15 of the Ordinance of 2001 was promulgated, an omission that is contrary to this Court's approach as clearly stated in the cases of Syed Zafar Ali Shah and others v. General Pervez Musharraf, Chief Executive of Pakistan and others (PLD 2000 SC 869) and Khan Asfandyar Wali and others v. Federation of Pakistan through Cabinet Division, Islamabad and others (PLD 2001 SC 607). In the latter case, this Court upheld section 5(r) of the National Accountability Ordinance, 1999, which aimed at converting default of a purely commercial contract into an offence, and that too with retrospective effect, thus, upholding the legislature's attempt of making a person liable to face prosecution and imprisonment for a mere default of loan despite the fact that such contract and such default might have occurred at a time when such default was not an offence, all this only to protect Financial Institutions from defaulters and to enable them to recover their money. Furthermore, the learned Judges declined to give any weight to judicial
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reasoning contained in certain Indian judgments that had upheld section 69 of the Transfer of Property Act, 1882 [(hereinafter referred to as "the Act of 1882") (that authorizes private sale of mortgaged property)] on the basis that there was some difference between section 69 as it stands in the Indian statute books and its shape in the Pakistani legislation. The Pakistani version specifically empowers private sales by scheduled banks [section 69(1)(b)] while there is no such power in the Indian statute. Also in the Pakistani law, it only visualizes that in case the Federation/Government choose to notify any conditions for exercise of the powers the same would also be applicable. ' The judgment, as it was urged, does not describe as to how the Federal Legislature exceeded its law in making powers by giving Financial Institutions, through section 15 of the Ordinance of 2001, another mode of liquidating and converting into cash, the asset (in this case, immovable property) that the customer may have given as security for his/its payment obligations towards the Financial Institution. 14. The learned Judges, it is contended, in the impugned judgment, have purported to exercise the judicial power of "Reading Down of a statutory provision. It is submitted that the principle of "Reading Down" a provision of law could not be used to totally strike down a statutory provision in which the legislative intent was set out with absolute clarity. That under the settled principles of 'Judicial Review', while considering the vires of any statute or provision of law within the touchstone of the Constitution, it is incumbent on the Constitutional Court to objectively consider all the prevailing circumstances/background that necessitated such statute or provision of law, while declaring section 15 of the Ordinance of 2001 to be an invalid piece of legislation. The learned Judges failed to appreciate that there is a presumption in favour of the validity of a statute and courts of law have to presume that the particular law is intra vires and not ultra vires. 15. Mr. Salman Akram Raja, learned Advocate Supreme Court, appearing on behalf of the Appellants/Bank in Civil Appeals Nos.505 to 534, and 392-L to 408-L of 2009, contended that section 15 of the Ordinance of 2001 is an enabling provision that allows a Financial Institution to exercise rights given to it voluntarily by a borrower through the creation of a mortgage as security for financial facility. Provisions similar to section 15 of the Ordinance of 2001 exist in many jurisdictions of the world and have helped balance the relationship between Financial Institutions and the borrowers, which otherwise on account of inherent delays in litigation in these jurisdictions, had titled disproportionately in favour of the borrower. Section 15 of the Ordinance of 2001 does not involve denial of the borrower's rights in terms of Article 10A of the Constitution. It only recognizes the lender's right to recover in terms of a voluntarily created mortgage. It does not interfere with the determination of liability which is a judicial function for which the borrower may approach the Banking Court. An exercise of entitlement by the lender in terms of section 15 simply shifts the onus to seek a judicial determination on the borrower, provided the borrower wishes to dispute the lending Financial Institution's claim that default has occurred. The word 'default' used in section 15(2) does not envisage a judicially determined default. The use of the word 'default' in section 15 is similar to the use of the word 'default' in section 9, which enables a party whether a lender or a borrower to approach a Banking Court in the event upon coming to the conclusion that default has occurred. In the event of the Banking Court being approached for the determination of the rights and liabilities of the parties, all rights flowing out of Article 10A of the Constitution would be available to the parties, including the borrower. 16. He added that the terms of section 15 of the Ordinance of 2001 are to be read into the relationship of mortgagor and mortgagee, just as the terms of sections 124 to 147 of the Contract Act, 1872 (hereinafter referred to as "the Act of 1872") are to be read into contract of indemnity between a guarantor/surety, beneficiary and the principal debtor. These voluntarily given rights include the right to sell mortgaged property through a highly transparent process that involves
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multiple notices to the borrower and all others with an interest in the property being sold through a public auction. After the public auction is complete account of the sale proceeds is to be filed by the Financial Institution before the Banking Court. At all times, before and after the auction sale, the borrower has the unrestricted right to approach the Banking Court for redressal of any grievance [sections 15(11) and 15(12)]. The borrower can also demonstrate either that no mortgage was created or that the debt has been discharged. A sale not made strictly in accordance with the provisions of section 15 may be set aside by the Court. Such grievance can include objections about the price or the manner of the sale. This power is inherent in the power made available by section 15(11) of the Ordinance of 2001 to determine all disputes relating to the sale of mortgaged property. 17. It was further contended that section 15 of the Ordinance of 2001 has essentially re-affirmed and built upon the existing section 69 of the Act of 1882. Similarly, the right to sell pledged goods without judicial determination is recognized by section 176 of the Act of 1872 and by the lex mercatoria as well as the codified law all over the world. In the modern world, the sale of pledged company shares can result in the deprivation of control and effective ownership of valuable immoveable property that may include the industrial as well as the commercial and residential assets of the company concerned. It was submitted that, as a matter of constitutional principle, no distinction can be made between section 176 of the Act of 1872, section 69 of the Act of 1882 and section 15 of the Ordinance of 2001. 18. The learned counsel further contended that the judgment of this Court in the case of Messrs Elahi Cotton Mills Ltd. And others v. Federation of Pakistan through Secretary M/o Finance, Islamabad and 6 others (PLD 1997 SC 582), while upholding the constitutionality of recovery of income tax prior to assessm ent on presumptive basis, has already held that the question of the constitutionality has to be examined keeping in view the particular realities and mischief sought to be addressed by a given provision of law. The section 15 of the Ordinance of 2001 has to be examined in the context of the wide spread menace of loan default and long protracted recovery proceedings prevalent in Pakistan. 19. It was further urged that the statutory provisions permitting foreclosure and sale of mortgaged property without the intervention of any Court (non-judicial foreclosure) existed in the Commercial Codes of several States of the United States of America. Some of those Commercial Codes, such as those of the State of New York, are considered and upheld against constitutional challenge based on the due process clause of the American Constitution (Fourteenth Amendment) in the following judgments:- (i) Flagg v. Brooks (1978 Supreme Court, 436 US 149). (ii) Apao v. Bank of New York (1997 97 ARM, US Court of Appeal, Ninth Circuit). (iii) Coffey Enterprises Reality and Development Company, Inc. v. Holmes et al. (Supreme Court of Georgia, 233 Ga, 937; 213 S.E. 2d 882). The UK Law of Property Act, 1925 entitles the mortgagee to sell mortgaged property or to appoint a receiver over the mortgaged property without the intervention of a Court. ' Section 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 of India empowers a secured creditor to enforce any security interest on account of default in repayment without the intervention of a Court or Tribunal. Furthermore, section 17 of the said Act only provides for an ex post appeal against actions taken under section 13. The vires of the aforesaid provisions were examined by the Supreme Court of India in the case of Mardia Chemicals Ltd. And others v. Union of India and others [(2004) 4 Supreme Court Cases 311]. ' The State Financial Corporations Act, 1951 (hereinafter referred to as "the Act of 1951") enacted in India had, through section 29 thereof, vested in Financial Corporations set up in terms of the Act of 1951, the power to take over the management and possession of industrial concern as well as to
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sell property pledged, mortgaged, hypothecated or assigned to the financial corporations without the intervention of a Court. The aforesaid section 29 of the Act of 1951 has been examined and upheld by the Indian Courts in several well-considered judgments. Reference may in this regard was made to the following judgments:-- (i) S.K. Karimuddin and others v. Union of India and others (AIR 1933 Orissa 238) (ii) Alka Ceramics, Piplodi, Himatnagar v. Gujarat State Finance Corporation Ahmedabad and others (AIR 1990 Guj. 105) (iii) Messrs Surprise Hotel (Pvt.) Ltd., v. U.P. Financial Corporation and others (AIR 1998 Allahabad 24) (iv) Messrs R.K. Industries Plot No,SPL 35, Industrial State, Kallur v. A.P. State Finance Corporation and others (AIR 1991 Andra Pardesh 174) (v) Messrs Kharavela Industries (Pvt.) Ltd., v. Orissa Finance Corporation and others (AIR 1985 Orissa 153) 20. The Recovery of Loans by the Banks (Special Provisions) Act No,4 of 1990, enacted in Sri Lanka, empowers banks to sell through auction property mortgaged to the bank without intervention of a Court. Reference may in this regard be made to section 4 of the said Act. 21. It was submitted that it is common for a State to provide a term that is to be read as part and parcel of a particular category of regulated contracts, regardless of whether or not the contracting parties had actually included the said term in any given contract regulated by the statute. Section 15 of the Ordinance of 2001, in fact, states that the power of sale of mortgaged property without the intervention of a Court is to be read into all instruments creating or evidencing a mortgage over immovable property. Every borrower is free not to avail or maintain borrowing against the security of mortgaged property. Those who maintain borrowing against the security of mortgaged property do so voluntarily and with knowledge of the existence of section 15 of the Ordinance of 2001. 22. It was next contended that section 15 of the Ordinance of 2001 simply places the onus to show that no amount at all is payable on the borrower who has mortgaged immovable property in favour of a lending Financial Institution. This is consistent with the presumption of correctness placed by the Bankers' Books Evidence Act, 1891 on the statements of account maintained by the Financial Institutions. While the correctness of such statements of account is rebuttable, the onus to rebut the presumption created by law is placed on the borrower. 23. The learned counsel next contended that section 15 of the Ordinance of 2001 is not discriminatory nor in violation of Article 25 of the Constitution. Sections 9 and 15 of the Ordinance of 2001 are based on a reasonable classification and do not violate Article 25 of the Constitution. 24. It was also submitted that the exercise of power to sell in terms of section 15 of the Ordinance of 2001 does not involve the exercise of judicial powers neither is there any denial of access to justice as regards the borrower. The borrower is provided ample opportunity through the issuance of three notices to pay and a fourth notice of sale, to approach a Court of law in terms of sections 15(11) and 15(12) of the Ordinance of 2001. Consequently, section 15 cannot be said to be inconsistent with the requirements of Articles 4 and 175 of the Constitution. That section 25(1) of the Agricultural Development Bank Ordinance, 1961 (hereinafter referred to as "the ADBP Ordinance") and section 40 of the Industrial Development Bank of Pakistan Ordinance, 1961 (hereinafter referred to as the "IDBP Ordinance") are para materia to section 15 of the Ordinance of 2001. Both the afore-noted Sections have withstood the test of time and have been given effect by the superior Courts of Pakistan. The impugned judgment of the learned Lahore High Court has, in Paragraph 20. Thereof, wrongly placed reliance on the judgments of this Court, reported as Agricultural Development Bank of Pakistan v. Sanaullah Khan and others (PLD 1988 SC 67) and Agricultural Development Bank of Pakistan and another v. Abid Akhtar and others (2003 SCM R 1547) in order to draw a distinction between section 25(1) of the ADBP Ordinance and section 15 of the Ordinance of 2001. It has already been held by a five member Bench of this Court in the case of Ocean Industries Limited and Raza
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Kazim v. Industrial Development Bank (PLD 1966 SC 738) that the power to sell mortgaged property without the intervention of a Court is a method of recovery distinct from recovery of the amount due as arrears of land revenue. 25. Both the learned counsel, in support of their respective contentions, laid great emphasis on the judgment of the learned High Court of Balochistan in Sh. Abdul Sattar Lasi's case (supra), the reasoning adopted and judgments relied therein. 26. The other counsel appearing on behalf of the Appellants/ Financial Institutions adopted the arguments of Mr. Muhammad Akram Sheikh, learned Sr. Advocate Supreme Court and Mr. Selman Akram Raja, learned Advocate Supreme Court. 27. The learned counsel appearing on behalf of the private respondents controverted the contentions raised on behalf of the appellants and defended the impugned judgment of the learned Lahore High Court, dated 23-12-2008 by contending that section 15 of the Ordinance of 2001 offends against the Constitution. It was their case that the said provision confers judicial power upon a Financial Institution in derogation of the provisions of Article 175 of the Constitution. And the said provision is not only discriminatory per se but is also capable of being used in a discriminatory manner, as it envisages a parallel system for the Recovery of Claims of the Financial Institutions against their customers in as…
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