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Petitioner: KASB BANK LIMITED VS Respondent: Messrs TRANS LIMA PRIVATE LIMITEDHonorable Justice Zia PerwezQutubuddin Saim with Jam Asif Mehmood for of Ahmed and Qazi,M. Salim Thepdawala
2007 C L D 1407
2007 C L D 1407
[Karachi]
Before Zia Perwez, J
KASB BANK LIMITED---Plaintiff
Versus
Messrs TRANS LIMA PRIVATE LIMITED and 4others---Defendants
C.M.As. Nos. 476 and 477 of 2006 in Suit No.B-33 of 2005, decided on 27th July, 2007.
(a) Lease---
---- "Financial lease" and "operating lease"---Distinction illustrated.
Distinction between 'Financial Lease' as opposed to 'Operating Lease' can be summarized as follows:--
Financial Lease
Operating Lease
Financial lease is a long term lease on fixed assets, the same may not be cancelled by either party.
Operating Lease is a non-pay out lease which may be cancelled by the lessee prior to its expiration.
In financial lease the leasing company buys the equipment and leases it to the lessee.
The sum of all the lease payments by the lessee does not necessarily fully provide for the recovery of the assets cost.
It is a full payout lease involving obligatory payment by the lessee to the lessor that exceeds the purchase price of the leased property and financial cost.
In operating lease sphere of operation is limited which generally cover those goods which could be, needed by different users.
Financial Lease is a lease that transfers substantially all the risks and rewards incident to ownership of an asset. Lessor is only a financier and is not interested in the assets.
In Operating Lease, the lessor will have the continuing interest in the leased equipment and thereby undertakes to bear the maintenance etc. Lessor retains the usual risks and rewards that come from the ownership of the assets.
The Financial.Lease is not cancellable by the lessee prior to its expiration date:
The Operating Lease is cancellable by the lessee prior to its expiration.
The Financial Lease provides for maintenance services at the cost of lessee.
The lessor provides service, maintenance and insurance.
The asset is fully amortized over the life of the lease.
Under such lease the equipment cost is not fully amortized over the leased tenure.
The lessee has the use of the asset for 75% or more of the estimated economic life of the leased property.
Such lease is usually for a short period i.e. less than 75% of the estimated life of the assets, which period may not be adequate to recover to the full extent the investment in the asset.
The present value al the beginning of the, lease term of the minimum amounts payable under the lease (exclusive of amounts payable for insurance, maintenance and similar normal outgoings) is at least equal to 90% of the cost of the leased assets net of investment grants.
The lessor makes payment for the cost of the asset and remains the owner of such equipment and. permits the use of equipment to the lessee for a specified period of tune against the rentals.
During the period of lease, the lessee must fulfil the obligations irrespective of the fact. whether the asset remains in use or becomes obsolete.
In case of default committed by the lessee in payment of lease money the lessor has recourse to the leased asset as the owner.
The operating lease is anon-pay-out lease in which the lessor's obligations may include services attached to the leased property such as maintenance, repair and technical advice. A good example of an operating lease is a lease for telephone service wherein the Telephone Department renders all such services for the leased telephone equipment against fixed uniform rentals from the users. Furthermore, the Operating. Lease generally cover those goods which could be needed by different users which includes goods that are not peculiar to one kind of industry i.e. the things that many different kinds of lessees can use, like air conditioners, which could be used in offices, hospitals, laboratories and cars etc. Thus the equipments/machineries, like the buses cannot be included in the category far Operating Lease.
Normally the rentals or charges for any machinery is maximum for a new machine and may decrease over the period of its use.
Lease Financing and Hire Purchase 4th Edn. by Dr. J.C. Verma ref.
(b) Lease---
----Financial Lease---Rentals or charges' for any machinery is maximum for a new machine and may decrease over the period of its use.
(c) Financial Institutions (Recovery of Finances) Ordinance (XLVI of 2001)---
----Ss. 9, 10 & 15---Suit for recovery of financial lease money of buses leased to defendants---Default by lessee---Remedies available to the lessor---Record showed, that defendants defaulted to pay several instalments as per lease agreement and failed to get the insurance polices of the leased vehicles renewed on expiry of the insurance policies---Such being obligations on the part of defendants and by their acts and omissions, plaintiff/Bank became entitled to act in pursuance of the terms agreed to between the parties and effect recovery of the amount in pursuance of the provisions of Financial institutions (Recovery of Finances) Ordinance, 2001---Principles.
Hadley v. Baxendale (1854), 9 Ex. 341; 156 E.R. 145; Victoria Laundry (Windsor) Ltd. v. Newman-Industry Ltd. (1949) 2 KB 528; (1949) 1 All.ER 997; Humphrey Motors Ltd. v. Ells, (1935) SCR 249; Financings Ltd. v. Baldock, (1963) 1 All.ER 443; Buchanan v. Byrnes (1906), 3 CLR 704; Hughes v. N.Ls. (Pvt.) Ltd. (1966) WAR 100; Pigott Construction Co. v. W.J. Crowe Ltd. (1961), 27 DLR (2d) 258; Alkok v. Grymek, (1968) SCR 452; Hongkong Fir Shipping Co. v. Kawasaki Kisen Kaisha Ltd., (1962) 2 Q.B. 26; Cehave N.V. v. Bremer Handelsgesellschaft m.b.H., the `Hansa Nord'; (1976) Q.B.44; Johnson v. Agnew, (1980) AC 367; (1979) 1 All. ER 883; Moschi v. Lep Air Services Ltd., (1973) AC 331; (1972) 2 All.ER 393; Red Deer College v. Michaels, (1976) 2 SCR 324 and Keneric Tractor Sales Ltd. v. Langille, (1987) 2 SCR 440 ref.
(d) Lease---
----Financial lease---Default by lessee---Damages---Remedies available to the lessor.
The modern view is that when one party repudiates the contract and the other party accepts the repudiation, the contract is at this point terminated or brought to an end. The contract is not, however, rescinded in the true legal sense, i. e. in the sense of being void ab initio by some vitiating element. The parties are discharged of their prospective obligations under the contract as from the date of termination but the prospective obligations embodied in the contract are relevant to the assessment of damages. Such is the law for contracts generally and it is this law which should apply equally to breaches of chattel lease.
Hadley v. Baxendale (1854), 9 Ex. 341, 156 E.R. 145; Victoria Laundry (Windsor) Ltd. v. Newman Industry Ltd. (1949) 2 KB 528; (1949) 1 All. ER 997; Humphrey Motors Ltd. v. Ells, (1935) SCR 249; Financings Ltd. v. Baldock, (1963) 1 All. ER 443; Buchanan v. Byrnes (1906), 3 CLR 704; Hughes v. N.Ls. (Pvt.) Ltd. (1966) WAR 100; Pigott Construction Co. v. W.J. Crowe Ltd. (1961), 27 DLR (2d) 258; Alkok v. Grymek, (1968) SCR 452; Hongkong Fir Shipping Co. v. Kawasaki Kisen Kaisha Ltd., (1962) 2 Q.B. 26; Cehave N.V. v. Brerner Handelsgesellschaft m.b.H., the 'Hansa Nord'; (1976) Q.B.44; Johnson v. Agnew, (1980) AC 367; (1979) 1 All. ER 884; Moschi v. Lep Air Services Ltd., (1973) AC 331; (1972) 2 All. ER 393; Red Deer College v. Michaels, (1976) 2 SCR 324 and Keneric Tractor Sales Ltd. v. Langille (1987) 2 SCR 440 ref.
(e) Lease--
----Operating lease---Default in payment or discontinuation of lease by lessee---Remedies available to the lessor.
Where an operating lease is extended under a written contract extending over a fixed tenure the .remedy available to the lessor in case of default in payment or discontinuation of the lease by the lessee would be to lease out the property elsewhere and to recover the amount of difference, if any, from the lessee for the .un-expired period of lease under written contract in addition to the higher lease charges for the period that the property remained with the lessee.
(f) Lease---
----Financial lease---Main business of lessor not hiring of machinery but that of providing finance for purchase of chattels or machinery to be Leased---Default by lessee-~-Remedies available to the lessor.
Cases involving financial lease, where the main business of the lessor is not that of hiring of machinery but it is that of providing finance for purchase of chattels or machinery to be leased out on lease suitable to the particular needs and requirements of the specific lessee. Default in such cases of financial lease can be distinguished from that in case of an operating lease. However as in such cases the lessor indulges only to the extent of financing which is his main vocation, the ordinary course to be followed to minimize the losses would be to dispose of the chattel or machinery. The amount of sale proceeds be adjusted towards the unpaid instalments due for the entire tenure of the lease under contract. The' balance outstanding, if any, may be recovered from the lessee to secure the agreed amount of return and the finance, as already stipulated under the terms of the agreement between the parties.
(g) Financial Institutions (Recovery of .Finances) Ordinance (XLVI of 2001)--
----S. 10---Suit for recovery of advanced amount by Bank---Application for leave to defend suit by defendants---Validity---All he figures had been settled and worked out by the parties in their agreement in specific detail at the time of agreement which also provided for agreed loss in case of default and from such amount of agreed losses the defendants were entitled to adjustments out of auction proceeds of items, hence no ground for grant of leave to defend the suit was made out.
Qutubuddin Saim with Jam Asif Mehmood for of Ahmed and Qazi for Plaintiff.
M. Salim Thepdawala for Defendant Nos. 1, 2 and 4.
Mirza Adil Baig and M. Beg for Defendant No.3.
ORDER
ZIA PERWEZ, J.---Plaintiff, a financial institution, has instituted this suit against the defendants, its customers, for recovery of Rs.122,714,226 under section 9 of Financial Institutions (Recovery of Finances) Ordinance, 2001.
2. Defendants Nos. 1, 2 and 4 seek permission for leave to defend the suit under provisions of section 10 of Financial Institutions (Recovery of Finances) Ordinance, 2001 (C.M.A. No.477 of 2006). Defendant No.3, has also moved similar application (C.M.A. 476 of 2006). These applications are being disposed of by this order. Defendant No.5 did not come forward to defend the suit, though served.
3. Defendant No.1, a private limited company, availed finance of Rs.102,500,000 by way of lease of 25 air-conditioned buses along with fabrication. The lease transaction was sanctioned vide letter of the plaintiffs dated 17-5-2004 followed by agreement between the parties dated 22-5-2004 and subsequent documents executed and provided by the defendants to the plaintiffs i.e. continuing Guarantee dated 22-5-2004, letter of continuity dated 22-5-2004, Demand Promissory Note dated 22-5-2004, Trust Receipt dated 22-5-2004. Acceptance Receipt of Vehicles, Undertaking for insurance, undertaking for indemnity for leased vehicles dated 30-3-2004 and Registration Books dated 30-9-2004 and Registration Certificates dated 12-1-2005 of the respective vehicles. The .plaintiff extended lease finance. facility to the defendants repayable in 60 instalments in which 1st six instalments 'for Rs.769,224 each and next 54 instalments of Rs.2,218,706 each.
4. The defendants paid initial instalments of Rs.2,000,382 up to 25-2-2005 towards their financial obligation to the plaintiffs but defaulted in payment of subsequent instalments due. The insurance policies covering the leased vehicles also expired and defendants failed to renew the same as per terms of agreement. Despite repeated letters to settled their outstanding liabilities and even after service of legal notice, the defendants failed to discharge their financial obligations hence the plaintiff filed the present suit.
5. Defendants Nos. 1, 2 and 4 in their application (C.M.A. No.477 of 2006) admitted the availing of facility and subsequent default in payment of instalments due to losses. They claimed to have applied to the plaintiff-Bank for rescheduling vide letter of defendant No. 1 dated 1-3-2005 but no reply was received. The defendant No.1 in such circumstances entered into an agreement with M/s Mass Transit (Pvt) Ltd. dated 2-6-2005 whereby the shares of defendant No. 1 company with its liabilities were transferred in the name of M/s. Mass Transit including liability to be paid to the plaintiff and consequently the buses were also to be handed over to M/s. Mass Transit. However, on 2-6-2005 the plaintiff-Bank took physical possession of the buses and filed the present suit. M/s. Mass transit had also applied to Security Exchange Commission to transfer the shares in its name and has requested the plaintiff-Bank for transfer of the liability against the defendant No.1. The defendants have also disputed the validity of various articles of Lease Agreement dated 22-5-2004 being violative of the principles of natural justice, the Law of Contract and General Clauses Act, for which defendant No. 1, after execution of the same, asked for modification, which was not considered by the plaintiff-Bank. The defendants have stated that the plaintiff is not entitled to claim additional rent in view of promissory note dated 22-5-2004. It is submitted that the promissory note is not valid due to under stamping while the letter of guarantee was executed to the extent of the mortgage property and thus the plaintiff cannot invoke the personal guarantee in presence of secured guarantee. The defendants have denied of having ,received notice dated 26-10-2005. Subsequently, the plaintiff-Bank auctioned of the buses under section 15 of the Ordinance, 2001 without any notice to the defendants is illegal and arbitrary. The plaintiff-Bank has failed to show present market value of the leased buses and the fact that whether sale of the same shall discharge the liability of loan financing. The defendants have admitted the amount of finance and the amount' paid but has disputed the amount of Rs.122,714,226 as shown in clause 15(c) of the plaint. The defendants have said that they are ready to settle the matter amicably but the plaintiff-Bank is not ready for the same. The defendants pleaded that substantial question of law and facts are involved and the matter requires evidence.
6. Defendants No.3 in his application has narrated the same facts as stated by defendants Nos. 1, 2 and 4 in their application. In addition, he stated that vide letter dated 12-3-2004 the plaintiff communicated the offer, which was valid for 15 days, to the defendant No. l but there is nothing on record to show that the offer was ever accepted. It is further stated that defendant No.3 resigned from defendant No. 1 company in March and hence he has no concern with the dispute which started from April, 2005, as reflected in the correspondence. No notice has been served upon defendant No.3 anti there is nothing due and outstanding against him. Defendant No.3 also claims to have instituted Suit bearing No.1488 of 2005 against the plaintiff and defendants Nos.1 and 2 for declaration, injunction and damages/compensation which is pending adjudication before this Court.
7. Plaintiff also filed replication in reply to the application filed by defendants Nos.1, 2 and 4 and defendant No.3 in which it has controverted the averments stated by the defendants in their applications.
8. I have heard the arguments advanced by the learned counsel appearing for the parties, and with their assistance have perused the material available on record.
9. Plaintiffs disclosed the details in support of the claim as per statement set forth in paragraph No.15 of the plaint, however, as auction proceeds were realized subsequent to the institution of this suit, parties were allowed to file their respective statements in pursuance of sections 9(3) and 10(4) of the Financial Institutions (Recovery of Finances) Ordinance, 2001 vide order dated 12-6-2007 and taken on record on 21-6-2007.
10. Mr. M. Salim Thepdawala, learned. Advocate for defendants Nos.1, 2 and 4, has contended that the defendants having entered into a lease are not liable to make payment of any amount to the plaintiff beyond the period for which they retain the possession of the leased buses. After entering upon the possession of the leased buses, the plaintiffs are not entitled to recover any amount as agreed between the parties except for the period the buses remained in possession of the defendants.
11. To elaborate his contentions learned counsel referred to the salient features of a financial lease and an operating lease. After distinguishing the two types of leases, as discussed in detail herein below, learned counsel proceeded to argue that the defendants have already made payment of a substantial portion of .the amount due to them, as such, the suit filed by the plaintiffs is misconceived and the claim is exaggerated. That the item/description "agreed loss value", as set forth at Serial No.12 of the schedule annexed to the agreement executed between the parties, is illegal in view of the fact that the lease stood terminated when the plaintiffs entered into possession of the buses and thus the description as mentioned at Serial No.12 of the schedule has become extraneous and redundant hence it is illegal and unenforceable. That the buses were obtained on lease by the defendants in pursuance of their agreement under Urban Transport Scheme with the City District Government Karachi. That in pursuance of the terms of the agreement, the City District Government Karachi was liable for making payment of interest/subsidy to the extent of 9% mark-up for air-conditioned buses and 6% for non-air-conditioned buses. Plaintiffs failed to join the contributory of the defendants i.e. City District Government Karachi as a party to the suit, as such, the soil is not maintainable. That the defendants also entered into the agreement whereby M/s. Mass Transit (Pvt.) Ltd. who negotiated and then expressed their consent to take over all the liabilities with respect to the said buses but plaintiffs failed to extend due cooperation and thus defendants are not liable for payment of the amount. To substantiate his arguments he has referred to the contents of plaint and Annexures thereto in addition to the documents filed along with the application. In support of his contention learned counsel also filed written arguments and placed reliance on Allied Bank of Pakistan. Limited v. Mrs. Fahmida (2004 CLD 110), Abdul Razzaq v. A.D.B.P. (2002 CLD 1707), Habib Bank Limited v. Schorr Textiles Limited (2001 YLR 1244), Yussra Textile Corporation v. PICK Commercial Bank Limited (2003 CLD 905) [Lahore], Orix Leasing Pakistan Limited v. New Malik Foundry and Engineering Works (2003 CLD 1779) and so also has referred to Banking Tribunals Ordinance (LVIII of 1984) and Bharats Lease Financing and Hire Purchase 4th Edition, by Dr. J.C. Verma and Lease Financing and Hire Purchase 4th Edition by Vinod Kothari.
12. Mr. Mirza Adil Beg, learned counsel for defendant No.3, while adopting the above arguments of Mr. M. Salim Thepdawala, further contended that the defendant No.3 has resigned as Director of defendant No.1 on 7-4-2005 and thus is not liable and has no obligation to make any payment.
13. While opposing the application Mr. Qutubuddin Saim, learned counsel for the plaintiffs, has placed reliance on the terms of the agreement between the parties and has pointed out the essential characteristics of the financial lease as opposed to the operative lease. He denied the contentions of learned counsel for the defendants that the City District Government Karachi was a necessary party on the ground that the agreement, on the basis of which the plaintiff. .financed the lease, was only between the parties to the present snit and the City District Government Karachi was not a signatory to the said agreement. That the plaintiffs performed their part of the contract strictly in accordance with the law in discharge of their obligations. He also referred to the specific documents executed by the defendants i.e. Continuing Guarantee, Letter of Continuity. Promissory Note, Trust Receipt, Acceptance Receipt of vehicles, undertaking in addition to 64 post dated cheques issued in favour of plaintiffs. It was not the letter and spirit of the contract covered by the lease agreement between .the parties to discontinue the agreement or to treat the transaction as an operating lease and it was strictly a finance lease. That the rights of the plaintiffs in case of default in making payment of the amount of lease on the due dates has specified in agree ment invoking the mechanism provided by the agreement itself which was executed by free-will and consent of .the parties. He also placed reliance on the replication filed by the plaintiff.
14. Before proceeding further to appreciate the arguments advanced by the learned counsel, distinction between financial lease as opposed to operating lease may be examined as follows:--
Financial Lease
Operating Lease
Financial lease is a long term lease on fixed assets, the same may not be cancelled by either party.
Operating Lease is a non-pay-out lease which may be cancelled by the lessee prior to its expiration.
In Financial Lease the leasing company buys the equipment. and ceases it to the lessee.
The sum of all the lease payments by the lessee does not necessarily fully provide for 'the recovery of the assets cost.
It is a full payout lease involving obligatory payment by the lessee to the lessor that exceeds that purchase price of the leased property and financial cost.
In operating lease sphere of operation is limited which generally cover those goods which could be needed by different users.
Financial Lease is a lease that transfers substantially all the risks and rewards incident to ownership of an asset. Lessor is only a financer and is not interested in the assets.
In Operating Lease, the lessor will have the continuing interest in the leased equipment and thereby undertakes to bear the maintenance etc. Lessor retains the nsnal risks and rewards that come from the ownership of the assets.
The Financial Lease is not cancellable by the, lessee prior to its expiration date.
The Operating Lease is cancellable by the lessee prior to its expiration.
The Financial Lease provides for maintenance services at the cost of lessee.
The lessor provides services, maintenance and insurance.
The asset is fully amortized over the life of the lease.
Under such lease the equipment cost is not fully amortized over the leased tenure.
The lessee has the use of the asset far 75% or more of the estimated economic life of the leased property.
Such lease is usually for a short period i.e. less than 75% of the estimated life of the asset, which period may not be adequate to recover to the full extent the investment in the asset.
The present value at the beginning of the lease term of the minimum amounts payable under the lease (exclusive of amounts payable for insurance, maintenance and similar normal outgoings) is at least equal to 90% of the cost of the leased assets net of investment grants.
The lessor makes payment for the cost of the asset and remains the owner of such equipment and permits the use of equipment to the lessee for a specified period of time against the rentals.
During the period of lease, the lessee must fulfil the lease obligations irrespective of the fact whether the asset remains in use or becomes obsolete.
In case of default committed by the lessee in payment of lease money the lessor has recourse to the leased asset as the owner.
15. From the above, it is clear that the operating lease is a non-pay-out lease in which the lessor's obligations may include services attached to the leased, property such as maintenance, repair and technical advice. A good example of an operating lease is a lease for telephone service wherein the Telephone Department renders all such services for the leased telephone equipment against fixed uniform rentals from the users. Furthermore, the operating lease generally covers those goods which could be needed by different users which includes goods that are not peculiar to one kind of industry i.e. the things that many different kinds of lessees can use, like air conditioners, which could be used in offices, hospitals, laboratories and cars, etc. 'Thus the equipments/machineries, like the buses which are the subject-matter of this suit, cannot be included in the category for operating lease. Furthermore, the terms and conditions of the agreement, which is an admitted document and has been executed with the consent of the parties, clearly stipulates the conditions of a financial lease. Reference is made to the book Lease Financing and Hire Purchase. (4th Edition) authored by Dr. J.C.…
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