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Petitioner: PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION LTD. VS Respondent: Messrs KHAIRPUR SUGAR MILLS LIMITED and another
Court Name: Sindh High Court Judge(s): Munib Akhtar Title:PAKISTAN INDUSTRIAL CREDIT AND INVESTMENT CORPORATION LTD. vs Messrs
KHAIRPUR SUGAR MILLS LIMITED and another Case No.:Suit No,B-213 of 2000 and C.M.As. Nos. 8049, 8050 of 2009 C.M.As. Nos. 8049, 8050 of 2009 M.As. Nos. 8049, 8050 of 2009 Date of Judgment:2012-03-14 Reported As: 2012 CLD 1192, 2012 P.C.T.L.R. 789, PLD 2012 Sindh 324, 2012 CLD 1136 Result: Application dismissed Judgment ORDER ' MUNIB AKHTAR, J.---By means of C.M.A. 8050 of 2009 ("main application"), the defendant No,1 seeks modification and variation of the decree dated 2-10-2001 whereby the present suit ' was decreed by way of a compromise between the parties. The suit had been instituted by the plaintiff, then a non-banking financial institution (NBFI), under the Banking Companies (Recovery of Loans, Advances. Credits and Finances) Act, 1997 ("1997 Act") to recover an amount of Rs,355.371 million from the defendant No,1 (due as on 30-9-2000). Proceedings against the defendant No,2 (Bankers' Equity Ltd., another NBFI) were pro forma, and that defendant is not relevant for present purposes. The second application, C.M.A. 8049 of 2009 seeks condonation of the delay, if any, in the filing of the main application. It may be noted that the main application was filed with reference to sections 151 and 152, C.P.C. Read with Order XXI, Rule 2 thereof, but learned counsel for the defendant pressed his case entirely on the basis of section 152. (It is also to be noted that the plaintiff has subsequently been merged with or into NIB Bank Ltd.) 2. Briefly stated, the defendant's case on the main application is as follows. Learned counsel contended that the compromise decree was obtained by the plaintiff as a result of misrepresentations, which was not known to the defendant at the time that the compromise was arrived at between the parties. The result of these misrepresentations was that the plaintiff was able to obtain the defendant's consent to a decree that was for an amount considerably greater than what would otherwise have been the case. It was many years later, in 2008, that the defendant had the matter examined by a team of chartered accountants, and the true facts came
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to light. The defendant had in the meanwhile, been diligently paying the installments in terms of the compromise decree. However, the position that emerged was that the defendant was making overpayments to the plaintiff. The defendant corresponded with the plaintiff in this regard, but the latter took the position that the matter was covered by the compromise decree. Having no other alternative, the defendant filed the present applications in the suit. It may be noted that after these applications were filed; an order dated 23-12-2009 was made in terms of which the defendant was required to continue making payments as per the compromise decree, but without prejudice to its case under the main application. The plaintiff gave an undertaking that if it was eventually found that the defendant had made overpayments, it would refund the balance amount. 3. Learned counsel for the defendant submitted that after the suit had been filed as above on or about 7-11-2000, the defendant filed its leave to defend application. Thereafter, the matter got referred to the committee for the revival of sick industrial units ("the committee") that had been set up around that time under the auspices of the State Bank. As a result, there was a compromise between the parties, and an application, being C.M.A. 7937 of 2001, was filed under Order XXIII, Rule 3, C.P.C. The terms of the compromise agreement were contained in the application. It was on this application that an order was made on 25-10-2001 (in terms as prayed) whereby the suit was decreed by consent. Learned counsel submitted that the compromise application, and hence the compromise decree, recorded that the liability of the defendant towards the plaintiff stood admitted by the former as being Rs,369.123 million as on 31-12-2000, which was the cut off date. Out of this amount, the defendant was liable to pay a sum of Rs,285 million in 20 six-monthly installments commencing from 1-3-2002. Thus, if the defendant paid the installments as per the agreement, it would obtain a remission in liability of Rs,84.123 million (i,e,, the admitted liability of Rs,369.123 million minus the amount paid of Rs,285 million). Learned counsel submitted that the defendant started making payments as per the compromise decree. However, in 2008, it instructed a firm of chartered accountants to examine the entire matter. The chartered accountants made a report dated 3-5-2008, and they concluded that if the defendant's liability had been correctly computed, especially in light of the State Bank circulars regarding elimination of interest, the amount actually payable by the defendant as on 31-12-2000 would have been Rs,257.861 million. As is at once apparent, this amount is considerably less than the liability of Rs,369.123 million admitted in the compromise application. Thus, the defendant would end up making a huge overpayment to the plaintiff in consequence of the agreed amount containing several components that could not lawfully be claimed by the plaintiff or were illegal on account of the binding State Bank circulars. The defendant immediately wrote to the plaintiff in this regard, but was rebuffed, and finally the latter, by means of its letter dated 15-4-2009, took the categorical stand that the parties were bound by the compromise decree, which had to be acted upon by the defendant under all circumstances.. This eventually led, as noted above, to the filing of the present applications on or about 21-8-2009. 4. Learned counsel accepted, quite correctly, that the general rule was that a compromise decree could only be modified or varied by consent. However, he contended that there Were certain exceptions to this, one of which was stated by the Privy Council as long ago as 1923. In Jamnabhai v. Fazalbhoy Heptoola and others AIR 1923 PC 184, the Privy Council observed that if "serious and substantial injustice" would be caused, then the consent order could be varied. Learned counsel also placed reliance on certain decisions under section 12(2), C.P.C. In support of his case, being Allah Wasaya and others v. Irshad Ahmad and others 1992 SCMR 2184, Dadabhoy Cement Industries Ltd. v. National Development Finance Corporation PLD 2002 SC 500 (and the eponymous decision of the Court below, which was this Court, and whose judgment is reported at 2002 CLC 166 (DB)), Mobile Eye Service of Pakistan v. Director Social Welfare and another PLD 1992 Karachi 183(DB) and Zafar Ahmad and others v. Government of Pakistan and others 1994 MLD 1612 (LHC;
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SB). He also referred to Cotton Export Corporation of Pakistan (Pvt.) Ltd. v. Awami Cotton Ginners and others PLD 1995 Karachi 282(SB), this being a case involving Order XXIII, Rule 1, C.P.C. He submitted that it was well settled that a compromise decree could be set aside if it had been obtained on account of fraud, misrepresentation or any other ground on which a contract could be set aside. 5. Learned counsel contended that the plaintiff had a dominant position in and throughout the entire transaction. At all material stages, it was the record, and in particular the statement of accounts, filed and presented by the plaintiff that was relied upon. He submitted that a compromise decree could be set aside on the same grounds that a contract could be avoided but of course, it was incumbent for the party seeking relief to bring its case within the parameters of the ground(s) being taken (e.g., fraud, misrepresentation, mistake, etc.). He submitted that if such a case was properly made out, then not merely could the compromise decree be set aside in its entirety, but (much more importantly, since this was of the essence of the defendant's case) the court could also in appropriate circumstances modify the decree, by setting it aside in part and allowing it to stand to the extent that it was lawful. In pal-Ocular, he submitted that the court could vary or modify the amount payable under a compromise decree if it found that a portion thereof could be (or could have been) avoided by the party obligated to make payment on any ground on which the contract could be avoided. 6. Learned counsel referred to the prayer clause of the main application, and submitted that the only relief sought was a modification of the compromise decree by way of a reduction in the amount payable by the defendant. This prayer was made because certain components of the amount payable under the compromise were illegal and could not have been lawfully claimed by the plaintiff. He contended that the court had ample powers under section 152, C.P.C. To modify the compromise decree in this manner, and relied on Manzoor Hussain and others v. Malik Karam Khan and others 1991 SCMR 2451 and' Sher Muhammad and others v. Khuda Bur and another PLD 1961 Lahore 579 (SB). The ground on which, according to learned counsel the present compromise agreement (and hence the compromise decree) could be avoided was misrepresentation, i,e,, in terms of section 18 of the Contract Act. Learned counsel based his case on clauses (2) and (3) thereof (and particularly the latter), and referred to Civil Aviation Authority v. Aer Rainta International (Pvt.) Ltd. 2003 YLR .1523 (SHC; SB). Learned counsel also relied strongly on the decision of the Lahore High Court in the Zafar Ahmad case (supra). 7. ' To establish his case that there had been misrepresentation by the plaintiff learned counsel referred-to the letters dated 25-8-2000 and 25-10-2000 that had been written by the defendant to the plaintiff seeking the detailed breakup of the amount being claimed by the latter and other particulars regarding the account. However, no such details were provided. Learned counsel submitted that this amounted to misrepresentation on the part of the plaintiff. Learned counsel- emphasized that the defendant had no means to properly ascertain the legality of the plaintiff s demand and had been forced simply to accept what was placed before it by the latter. The defendant believed what the plaintiff represented regarding the state of the account in good faith to be true. In this manner, the plaintiff had gained an advantage over the defendant by misleading it and including unlawful amounts in its claim. He submitted that the defendant was informed that only if it accepted what the plaintiff had said would it (the defendant) be able to avail the benefit of the revival scheme referred to above. It was only later that, in 2008, the true position emerged. Learned counsel submitted that certain components of the compromised amount were clearly unlawful and illegal on account of being violative of binding State Bank circulars (in particular in relation to the charging of interest) and section 74 of the Contract Act (the penal interest being an unlawful penalty).
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8. Learned counsel also referred, to the correspondence addressed by the defendant to the plaintiff subsequent to the exercise carried out on its behalf by the chartered accountants by which it discovered, the true position. He referred to the letters dated 15-1-2009, 6-5-2009, 5-6-2009 and 16-6-2009. He submitted that the only reply ever received from the plaintiff was that the parties were bound by the terms of the compromise decree. Learned counsel emphasized that at all material times, the defendant did not know, nor did it have any means of knowing, the correct position and the true facts, whereas the plaintiff all, along had full knowledge of the same. He referred to section 19 of the Contract Act, and in particular relied on the second paragraph thereof. (Learned counsel also submitted in relation to this section that the exception thereto had been declared contrary to the Injunctions of Islam by the Supreme Court in Wafaq-e-Pakistan v. Awamunnas 1988 SCMR 2041.) Learned counsel submitted that the defendant had a strong case for appropriate modification of the compromise decree and prayed accordingly. 9. Learned counsel for the plaintiff strongly opposed the main application. He referred firstly to the loan agreement (dated 4-2-1992) in terms of which the facility sued upon had been provided to the defendant. He submitted that the recitals to the loan agreement expressly stated that the Federal Government had obtained a line of credit from the World Bank (and/or its associate entity, IDA) in foreign currencies for financing various projects in Pakistan. This amount had been relent by the Government to the plaintiff, who had used part of the amount so made available to finance the sugar mill project of the defendant. Learned counsel submitted that the loan given to the defendant was repayable in 20 installments and the loan agreement provided, in clause (5), that interest at the stipulated rate would be chargeable from the defendant. There was also an express provision (clause 11) regarding penal interest in case the defendant failed to pay any installment when due. 10. Learned counsel submitted that the defendant went into default, which led to the first restructuring of the loan on or about 22-12-1997. The restructuring was subsequently modified twice, but the defendant again defaulted, and that led to the filing of the suit. The amount claimed was, as noted above, Rs,355.371 million. Learned counsel emphasized that the full particulars and details of the claim were provided in the statement of account annexed to the plaint and there was, at all, material times, full and complete disclosure by the plaintiff. The defendant therefore could have no conceivable grievance in this regard. The amount had at all times, including as stated in the plaint, been claimed strictly in accordance with the loan agreement. 11. Learned counsel further submitted that the State Bank's BCD Circular No,13 of 20-6-1984 ("BCD 13"), which is the cornerstone of the present system of interest free banking, contained certain exceptions, and referred to paragraph 2 thereof. This provided that nothing in the circular was to apply "to on-lending of foreign loans which will continue to be governed by the terms of the loans". He referred to section 29 of the Financial Institutions (Recovery of Finances) Ordinance, 2001 ("2001 Ordinance"), whereby the 1997 Act was repealed. Subsection (2) expressly stated that the 1997 Act would continue to apply to interest bearing loans. With reference to the charging of penal interest, learned counsel submitted that section 74 had no application to the facts and circumstances of the present case. 12. Learned counsel contended that no question arose of the plaintiff having dominated or obtained an unfair advantage over the defendant. He submitted that both were sophisticated parties, which had freely and willingly entered into the relevant transactions, i,e,, the loan agreement and the compromise agreement. Referring to the statement of claim (totaling Rs,355.371 million) he submitted that even if the amounts of penal interest (Rs,33.206 million) and capitalized interest (Rs,25.196 million) were excluded, the amount payable by the defendant would still come to Rs,296.9 million. (This was of course, without prejudice to the plaintiff's case that penal interest and capitalization were perfectly lawful in the present case.) Yet, the compromise decree
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only required the defendant to pay an amount of Rs,285 million. This amount was thus even less than the original principal plus interest, and no interest was being charged from the defendant for the entire period during which payments were being made on the compromise decree. He submitted that the compromise decree was eminently fair and indeed tilted in favour of the defendant which could therefore have no possible grievance. Learned counsel denied that the defendant was ever under any sort of threat or coercion from the plaintiff. He submitted that the defendant had defaulted, and instead of suing for the amount due, the plaintiff had restructured the loan as noted above. Despite such restructuring the defendant persisted in its default, and it was only then that the instant suit was filed. 13. Learned counsel also referred to the relevant minutes of meeting of the committee for revival of sick units held on 25-11-2000 at which the defendant's case was decided, as well as the correspondence leading up to the compromise. In particular, he referred to the defendant's letter of 6-2-2001 and the plaintiffs letters of 22-3-2001 and 11-6-2001 to contend that the compromise was arrived at as a result of proper negotiations between the parties. He referred in particular to the plaintiffs letter dated 1-6-2001, whereby it had agreed to a modification sought by the defendant in the terms of the compromise. He submitted that this showed that the plaintiff had acted throughout in a responsible, flexible and accommodating manner. Thus, there could be no possible grievance on the defendant'$ part. 14. Learned counsel submitted, with reference to sections 18 and 19 of the Contract Act that the defendant had failed to make out any case of misrepresentation. He contended that the second paragraph of section 19 did not apply to the present case. He submitted that the material facts were all along available with the defendant and any assertion to the contrary was incorrect. He referred to the exercise carried out by the chartered accountants on the defendant's behalf and submitted that its case in this regard was contradictory. The defendant could not have provided any information or material to the chartered accountants that it did not itself have. If therefore the defendant did not, as alleged by it, have access to the relevant material and record, then there could not have been anything made available to the chartered accountants for them to carry out the exercise and' reach the conclusion that they did. 15. With regard to section 152, C.P.C., learned counsel submitted that the proviso to section 27 of the 2001 Ordinance enabled a court exercising jurisdiction thereunder to correct any typographical error or mistake in a decree. This was in pari materia section 152, C.P.C. However, the equivalent provision in the 1997 Act (which was section 27 thereof) had nothing similar to the proviso, and hence there was no such power available under the latter statute. Since the present matter continued to be governed by the 1997 Act, the relief sought through the main application could not be granted. Even as regards section 152, learned counsel submitted that its scope was much more limited than as contended for the defendant. He therefore contended that no ease' at all had been made out for interference with the compromise decree and the main application merited dismissal. 16. Exercising his right of reply, learned counsel for the defendant submitted that the exception in paragraph 2 of BCD 13 only applied if the loan was in foreign currency ,and repayable in such terms. However, in the present case, the loan agreement was in Rupee, terms. Hence, the exception did not apply. As regards the penal interest, learned counsel reiterated that it was in the nature of a penalty and hence its charge was unlawful by reason of section 74 of the Contract Act. He also referred to the dictionary meaning of "on-lending" to contend that it applied only when the actual sum lent was lent further to a third party. This admittedly was not the case at hand. He reiterated that there was complete inequality of bargaining power between the plaintiff and the defendant and it was for this reason that the former was able to claim the penal interest and the capitalized interest even in terms of the compromise decree.
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17. I have heard learned counsel as above, examined the record with their assistance and considered the case law relied upon by them. The nature of a compromise decree is of course well known. It is the compromise agreement to which the Judge's order has been superadded. It is also well settled that even though the judicial imprimatur has been affixed to the compromise agreement, the ensuing decree can be set aside on the same grounds as are available to impugn an ordinary contract, such as being void (or voidable, as the case may be) on the grounds of mistake, fraud, misrepresentation, coercion, etc. However, it is important to .Keep in mind that the compromise agreement remains distinct and separate from the compromise decree. This is unlike the situation in an 'ordinary' decree, i,e,, one that results from a judicial adjudication of a dispute on its merits. There, the agreement (or more precisely, the matters directly and substantially in issue arising out of or relating to the agreement, whether actually or constructively) as it were merge into the decree and are embodied in it. In World Automobiles and others v. Muslim Commercial Bank Ltd. And others 2009 CLD 1276, a decision relied upon by learned counsel for the defendant, the - question before a learned Division Bench of this Court was whether the terms of a compromise decree could be amended or varied outside the court by the .Parties. One view was that the compromise decree could not be challenged or varied at all (see at paras 31-33 of the decision). The other view was that decree could be varied by consent or agreement of the parties (see at paras 34-35). After reviewing the authorities, the learned Division Bench held as follows:-- "36. Having carefully considered the law on the variation/amendment of compromise decrees outside of the Court by the parties we find the latter mentioned two authorities to be more persuasive. To us there seems to be no logical reason why two parties by consent, out of Court, cannot vary/amend their own Court sanctioned agreements. This is moreso, if the variation/amendment does not materially affect the substance of the earlier Court sanctioned agreement (as in this case) which simply be consent purported to substitute one form of security with another which ' was also sufficient to repay the debt. 37. Accordingly we find that Court sanctioned compromise decrees, as opposed to decrees, passed on merit by a Court of competent jurisdiction, can be varied/amended by the parties by consent outside of the Court but same may need seal of the Court. The failure to have such agreed variations/amendments endorsed by the Court may be fatal to the parties, or one party, seeking to rely on them. 18. The preferred approach in order to avoid later disputes/uncertainty regarding the variations/ amendments agreed to between the parties, or to guard against one party backing out of the agreement (as in this case) would, of course, be for these variations/amendments again to be endorsed by the Court which passed the original consent order." (Emphasis supplied) In my respectful view, it is clear from the foregoing observations that notwithstanding its embodiment in the compromise decree, the compromise agreement continues to retain its own existence. Otherwise, no question could at all arise of its variation or modification, and certainly not "outside the Court". It therefore follows that when considering the question whether, and if so to what extent, a compromised matter can be set aside or modified, it must be carefully ascertained whether the challenge is to the decree or the agreement. The compromise agreement is made by the parties, and the compromise decree by the court. If the agreement is successfully impugned, then the decree will almost always fail. But it may be possible -to attack the decree without impugning the agreement. A challenge to the one is therefore not necessarily a challenge to the other. Furthermore, the grounds on which the agreement on the one hand and the decree on the other can be attacked may overlap but are nonetheless distinct. It may be that as a matter of form, the challenge is (and may have to be) directed towards the decree. However. It is the substance of the challenge that must be carefully ascertained, and hence the distinction between the decree and the agreement must be kept in mind. Thus, if a compromised matter is challenged on the ground
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of (say) misrepresentation, it is important to be clear whether the attack is directed against the agreement or the decree. The reason is that the compromise agreement, being simply a contract, can only be impugned on the ground of misrepresentation if the matter comes within the ambit of the Contract Act, i,e,, sections 18 and 19. The compromise decree on the other hand, may be set aside under section 12(2), C.P.C. Now, one of the grounds available under the latter provision is that the decree was obtained by misrepresentation. However, it is clear that as used in .Section 12(2), the term "misrepresentation" has a meaning and connotation broader…
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