Al Wakeelo
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Petitioner: STATE BANK OF PAKISTAN VS Respondent: FRANKLIN CREDIT AND INVESTMENT COMPANY JUDGMENT
Court Name: Supreme Court of Pakistan Judge(s): Faqir Muhammad Khokhar, Sardar Muhammad Raza Khan Title:STATE BANK OF PAKISTAN vs FRANKLIN CREDIT AND INVESTMENT COMPANY
JUDGMENT
Reported As: 2009 CLD 1542 Result: Appeal allowed Judgment JUDGMENT ' FAQIR MUHAMMAD KHOKHAR, J.---This appeal under Article 185 of the Constitution of Islamic Republic of Pakistan, by leave of the Court, is directed against judgment dated 11-7-2002, passed by a learned Division Bench of the High Court of Sindh, Karachi, whereby Constitutional Petition No,D-1506 of 2000, of the respondents was allowed and the order dated 21-9-2000 of cancellation of the banking licence of the Indus Bank Limited, by the Governor, State Bank of Pakistan, was declared to be without lawful authority. 2. The Government of Pakistan, Finance Division, Islamabad, on the application of Mr. S.K. Sohail, Mr. Muhammad All Sohail and 5 others granted permission for establishment of a Commercial Bank by the name of Franklin Commercial Bank Limited, vide letter dated 26-8-1991, issued under subsection (2) of section 4 of the Banks (Nationalization Act No,XIX of 1974), Subsequently, another application was made seeking grant of a licence to carry on banking business in Pakistan in the name of Indus Bank Limited. Accordingly, the State Bank of Pakistan issued a licence dated 13-1- 1992, under subsection (1) of section 27 of the Banking Companies Ordinance, 1962. 3. The State Bank of Pakistan issued a show cause notice dated 18-5-2000, to the Indus Bank Limited containing certain charges, violations of law and instructions/directives of the State Bank. The Bank submitted its detailed reply to the same. Thereafter, the Governor of the State Bank, at the request of Mr. Khurshid Sohail, the then Chairman of the Board of Directors and President of the Bank, asked Mr. Khalid Siraj, Advisor State Bank and Messrs Taseer Hadi Khalid and Company, a firm of Chartered Accountants, to hold an inquiry. Into the charges contained in the show cause notice and reply of the Bank thereto. The Governor State Bank of Pakistan, after examining the show-
---
## Page 2
cause notice, the reply and the inquiry report together with other records, proceeded to cancel the licence of the Indus Bank Limited under subsection (4) of section 27 of the Banking Companies Ordinance, 1962, vide order dated 21-9-2000, by giving the following reasons in support thereof:- "6. Although not required under the law to give reasons for my satisfaction as stated above, I deem it appropriate to briefly set out the same, albeit without prejudice to the legal position. (a) Relevant conditions of the Licence read as under:-- (2) The appointment of the Chief Executive of the Bank shall be subject to the prior written approval of the State Bank of Pakistan. "4. The Bank shall comply with all relevant requirements of Banking Companies Ordinance, 1962, the State Bank of Pakistan Act, 1956, prudential regulations issued by the State Bank of Pakistan, from time to time, and any other directives/orders issued by the State Bank of Pakistan from time to time. (b) Indus Bank has breached the conditions of the Licence as would, inter alia, be evident from the following:-- (i) From the manual of delegation of authority submitted by Indus Bank, it is clear that all substantive powers rested with the Chairman, being Mr. Sohail. In spite of SBP requiring Indus Bank to review powers delegated to the Chairman, no concrete steps in this regard were taken. It is true that Mr. Sohail was designated as the Chairman and not as the Chief Executive, but it is he who was entrusted and exercised the powers of the Chief Executive. In this regard subsection (6) of section 2 of the Companies Ordinance, 1984, makes it clear that the Chief Executive means "an individual who, subject to the control and directions of the directors, is entrusted with the whole, or substantially the whole, of the powers of management of the affairs of the company, and includes a director or any other person occupying the position of a Chief Executive, by whatever name called.---Mr. Sohail, acted as the de facto Chief Executive, although his appointment as the Chief Executive was never approved by SBP. Further, from the correspondence exchanged, it is clear that Indus Bank's intention has been to defeat or frustrate the condition that the appointment of the Chief Executive "shall be subject to prior approval of the State Bank of Pakistan." (ii) Indus Bank management had failed to provide information, when required, for the purpose of inspection by SBP's Inspectors. It appears that a substantial portion of information was sent after the issuance of the Show Cause Notice but such information too has been incomplete. It is clear that Indus Bank management has not been complying with the requirements of SBP Inspection Team in providing information to the SBP Inspection Team in spite of being required to do so from time to time. (iii) From the report of the Accountants, it appears that till August 15, 1999, Indus Bank .Had failed to comply with the directive of SBP regarding obtaining a subordinated loan till its paid up capital was raised to the required level of Rs,500,000,000. It, however, appears that Indus Bank's paid up capital has subsequently been increased to the required level. (iv) Froth the papers, including the report of the Accountants, I am satisfied that placement of funds by Indus Bank with Franklin Credit and Investment Corporation under the portfolio management scheme, amounted to mismanagement of the affairs of Indus Bank and misuse of position by the concerned directors for their own benefit. (c) Indus Bank has been given sufficient opportunity by the State Bank to take necessary steps to comply with conditions of the Licence and directions of the State Bank, but has failed to do so. (d) Personal allegations of mala fides made against Mr. Rashid Akhtar Chughtai, Deputy Governor, by Indus Bank management have been found to be unwarranted and unjustified. It is a matter of regret that Indus Bank management made such allegations. (e) On facts and information available before me, I am clearly of the opinion that the affairs of Indus Bank are and also likely to be conducted in the manner detrimental to the interest of its
---
## Page 3
present and future depositors." 3. The very next day, the State Bank, moved, before the Peshawar High Court, company application No,8 of 2000, under section 49 of 1962 Ordinance, for winding up of the Indus Bank Limited. Simultaneously, another application was filed for appointment of a Provisional Manager for the purpose of taking control of the assets of the Indus Bank Limited, which was allowed, by way of an interim injunctive order. On the other hand, the respondents filed a Constitutional Petition No,D- 1506 of 2000, under Article 199 of the Constitution before the High Court of Sindh at Karachi, thereby calling in question the validity of order dated 21-9-2000 of cancellation of banking licence of the Indus Bank Limited. The Company Application No,8 of 2000 for winding up the Indus Bank Limited was allowed by the Peshawar High Court, by judgment dated 29-12001 reported as State Bank of Pakistan v. Indus Bank Limited through Chairman 2001 CLC 1833. Therefore, the Indus Bank filed Civil Appeal No,293 of 2001, under section 10 of the Companies Ordinance, 1984, before this Court' against the winding up order dated 29-1-2001 of the Peshawar High Court. The same was disposed of, by this Court, by judgment dated 27-3-2002, with the direction that the proceedings before the High Court of Sindh against cancellation of licence of the Bank be concluded within a period of one month. The Civil Review Petition No,65 of 2002 of the Indus Bank was also dismissed on 10-11-2006, on the statement of the learned counsel of the Indus Bank Ltd. A learned Division Bench of the High Court of Sindh at Karachi, by the impugned judgment dated 11-7-2002, allowed the constitutional petition and declared the order dated 21-9-2000 of cancellation of licence by the State Bank of Pakistan to be without lawful authority. 4. Mr. Khalid Anwa, Sr. Advocate Supreme Court, the learned counsel for the appellant State Bank of Pakistan submitted that the High Court had misconstrued, misinterpreted and misapplied the provisions of section 27 of the Banking Companies Ordinance vis-a-vis their interaction with sections 41-A, 41-B and 41-C. The High Court fell into error in holding that the action of cancellation, of licence of the Indus Bank Limited was disproportionate and transgression of power. In the facts and circumstances of the case and in the presence of proof of serious charges against the Indus Bank, it was neither necessary nor appropriate for the State Bank of Pakistan to have first exhausted the powers available under sections 41-A and 41-B of the Ordinance, 1962, for the removal of Directors and other managerial personnel of the Indus Bank and/or the supersession of Board of Directors of the Bank. The State Bank was not only to see the viability of functions of an individual bank but the financial health and stability of the structure and the economy as a whole were also to be taken into consideration. In some cases, the evil may be effectively suppressed by the Governor by taking , recourse to the provisions of section 41-A or section 41-B of the Banking Ordinance. But in the present case, the cancellation of licence of the Indus Bank Ltd. Was the only proper option left to the State Bank of Pakistan. The administrative and financial management of the Indus Bank was concentrated in the hands of Mr. Khurshid Sohail, his family members and cronies. The High Court while exercising its constitutional jurisdiction was not supposed to substitute its judgment for that of a statutory authority. It was further submitted that the situation contemplated by section 27(4) of the Ordinance was quite different from the one visualized by section 41-A or 41-B. The operation of section 27(4) was not intended to be neutralized by sections 41-A and 41-B of the Ordinance. 5. He contended that the licence of the Bank was cancelled after issuance of show cause notice and a regular inquiry as requested by the Chairman of the Board of Directors of the Indus Bank. According to its own showing, the High.-Court found that no effective relief could be granted to the respondent. Therefore, it ought not have entered into further discussion of questioning the legality of cancellation of licence. He further argued that in the matter of winding up and appointment of a liquidator, of a Banking Company, the provisions of section 318 or 319 of the Companies Ordinance were not attracted.
---
## Page 4
6. He submitted that the High Court had dilated upon only on ground No,(i) of order dated 21-9- 2000 of the Governor, State Bank and had drawn incorrect conclusions with regard thereto. The record clearly showed that practically all substantive powers were vested with Mr. Khurshid Sohail, Chairman of the Board of Directors of the Indus Bank who was its de facto Chief Executive within the meaning of section 2(6) of the Companies Ordinance, 1984. He was an industrialist by profession and not a banker. After retirement of Mr. Rahat H. Khan and vacation of office of Chief Executive Officer by him with effect from 31-7-1998, the Indus Bank did not bother to seek prior approval of the State Bank, for a period of almost one year till 29-5-1999, for the appointment of a new Chief Executive. He made a reference to letter dated 20-8-1999, and a chart of organizational structure from the Indus Bank to the State Bank of Pakistan to show that functions and powers of Chairman of Board of Directors, the President, Chief Executive and Managing Director of the Indus Bank were combined in one person. The letter dated 11-1-2007, from the Deputy General Manager, Export Processing Authority, Ministry of Industries, Production and Special Initiatives, Government of Pakistan to the Joint Official Liquidator of Indus Bank Ltd. Clearly indicated that Mr. S. Khurshid Sohail, B Gloucestar Square, London, was also the Chairman of the Messrs Franklin Development S.A. 19 Rassu Industrial Estate, EBBW Vale, Gwent, South Wales, Great Britain. Subsequently, Mr. Amanullah Khan was appointed by the Indus Bank as Chief Executive Officer without prior approval of the State Bank. Thus one of the essential conditions of licence of the Indus Bank of obtaining prior approval of the State Bank for the appointment of Chief Executive was violated. 7. He next argued that the licence of the Indus Bank was also validly cancelled on another ground No,(iv) to the effect that the placement of funds by the Bank with petitioner No,1 under Portfolio Management Scheme amounted to mismanagement of the affairs of the Bank and misuse of position by the concerned Directors for their own benefit. The High Court did not dispute the finding of the Governor in that regard. It was proved on record that huge funds of the Indus Bank were drained away through Mr. Khurshid Sohail and the Franklin Credit and Investment Company, the respondent No,1, which owned major shares of the Indus Bank. The. Annual Eighth Report of 1999 made it clear that advances of Rs,642.874 million being 72% of the total loans were the nonperforming loans. The Bank had defaulted in meeting the minimum threshold of capital deposit of Rupees 500 million as required by B.P.R.D. Circular No,36 dated 4-11-1997 of the State Bank of Pakistan despite availing a moratorium from the State Bank. The Indus Bank had blatantly violated the circular letter dated 19-4-1999 and also the provisions of Prudential Regulation No,XXI (Fund Management Services) of Prudential Regulations. 8. The learned counsel stated that where an order passed by an Executive Authority was based on several grounds, it could not be struck down merely for the reason that one or more such grounds were invalid, vague or irrelevant or nonexistent. In support of his arguments, he relied on the cases of Mr. Rafique Ahmed Sheikh v. The Crown PLD 1951 Lahore 17(22), Maher Alvi v. Pakistan and 5 others PLD 1980 Kar. 609 (650), Khalid Malik v. Federation of Pakistan PLD 1991 Karachi 1(99) and Mohtarma Benazir Bhutto and another v. President of Pakistan and others. PLD 1998 SC 388 (541- 542). 9. He contended that after winding up of the Indus Bank, it was only the official liquidator who might have sought for restoration of the banking licence. He made a reference 'to paragraphs 5 and 6 of certificate submitted by the learned counsel for the respondents, along with C.R.P.No,65 of 2002. The learned counsel argued that the Civil Appeal No,293 of 2001 by Indus Bank or Mr. Khurshid Sohail was not competent as it was the official liquidator who could have filed the appeal. Moreover, the respondents with. 75% share had not filed any appeal against the winding up of the Bank by the Peshawar High Court. 10. On the other hand, Mr. Anwar Mansoor Khan, Sr. Advocate Supreme Court, learned counsel for the respondents submitted that, it was the Central Board of the State Bank and not its Governor
---
## Page 5
alone which alone could pass an order of cancellation of the licence under section 27(4) of the Banking Companies Ordinance. The terms "Governor" and "State Bank" were not interchangeable. He referred to provisions of section 41-C of the Ordinance where the Governor, State Bank was specifically empowered to take action under sections 41-A and 41-B. Therefore, the exercise of power of cancellation of licence by the Governor, State Bank, was without jurisdiction. 11. He further argued that assuming some irregularity was committed by the Indus Bank Ltd. Even then there was no justification for taking extreme measure of cancellation of licence or winding up of the Bank. By virtue of sections 41-A and 41-B of the Banking Companies Ordinance, the Governor State Bank was empowered to order the removal of Directors and other managerial staff or supersession of Board of Directors of the Indus Bank Ltd. Rather than cancellation of its licence. The grounds mentioned by the State Bank in its order dated 21-9-2000 were invalid, non-existent and insufficient to warrant an action under section 27(4) of the Ordinance. He relied on the case of Independent Newspapers Corporation (Pvt.) Limited v. Chairman Fourth Wage Board 1993 SCMR 1533, wherein it was held as follows:-- "When expressed statutory power is conferred on a public functionary, it should not be pushed too far, for such conferment implies a restraint in operating that power so as to exercise it justly and reasonably. In the words of Scarman, L.J. 'excessive use of lawful power is itself unlawful." ' He also referred to the case of one Kumar v. Union of India AIR 2000 SC 3689-(2001) 2 S.C.C. 386=2000 SOL case No,636, in support of his submission that doctrine of proportionality of action ought to have been applied to see whether or not the extreme steps of cancellation of licence and winding up of the Indus Bank were called for on the basis of minor changes. He contended that jurisdiction of the Court to pass a winding-up order being discretionary, it would be open to the Court to decline to pass such an order, and every possible effort was to be made to avoid winding- up of the company. Reference was made to the cases of Habib Bank Ltd. v. Hamza Board Mills PLD 1996 Lahore 651, Taj Company Ltd. In re: (NLR 1996 Un-reported cases 799, Alliance Motors (Pvt.) Ltd. In re: 1997 MLD 1966 (Karachi), New Swadeshi Mills of Ahmedabad v. Dye-Chen Corporation (1986) 59 Com cases 183, (186-187), In re: Messrs Pakland Cement Limited 2002 CLD 1392, Sudersan Chits (India) Ltd. v. Sukumaren Pillai (1985) 57 Com. Cases 85). 12. It was next contended that the Indus Bank Ltd. Had not yet been practically wound up. A mere winding-up order passed by the High Court would not finally wind-up a Banking Company. In terms of section 319 of the Companies Ordinance, the Court was empowered, on the application of any creditor or contributory, made within three years of a winding-up order, to stay, withdraw, cancel or revoke all proceedings in relation to the winding-up. An order under section 328 had not so far been made. A banking company would be dissolved by an order under section 350 of Companies Ordinance, when the affairs of a company had been completely wound up, or when the Court was of the opinion that the official liquidator could not proceed with tie winding-up of the company for want of funds and assets. According to him, the limitation period of three years provided by section 319 for making an application thereunder would start from the date of dismissal of review petition No,65 of 2002 by this Court on 10-11-2006. Therefore, the application dated 6-9-2007, by Mr. S. Khurshid Sohail, under section 319 made and pending before the Peshawar High Court was very much within time as a review petition, like an appeal, were also a continuation of the winding up proceedings. He referred to the case of Collector Land Acquisition Abbottabad and 2 others v. Lal Khan. PLD 2002 SC 277 that the appellate proceedings being continuation of the original suit, the limitation was to be reckoned from the date of appellate order. He further argued that the limitation in making an application by Mr. S. Khurshid Sohail under section 319 would not commence until the appeal in hand was decided by this. Court. The three respondents held 75% shares of the Bank and possessed locus standi to challenge the cancellation of licence of the Bank before the High Court.
---
## Page 6
13. He argued that Mr. S. Khurshid Sohail was not a shareholder of a foreign company as alleged by the petitioner. The criminal proceedings instituted at the behest of the Governor, State Bank, against the directors of the Indus Bank, including Mr. S. Khurshid Sohail had resulted in their acquittal. The so-called lapses on the part of the Indus Bank were rectifiable and would not call for drastic action of cancellation of licence. The executive power was required to be exercised justly, fairly and reasonably for the advancing and not defeating the purpose of the relevant statute. The action against the Indus Bank was mala fide, abuse of position and without justification. The cancellation of licence was, therefore, rightly held, by the High Court, to be without lawful authority. Reliance was placed on the cases of Syed Ali Abbas v. Vishan Singh PLD 1967 SC 294, S. Vankatachalam Iyyer v. State of Madras AIR 1957 Madras 623(626), Manak Lal v. Dr. Prem Chand Singhri PLD 1957 SC (India) 346 (351-352), Jamil Ahmed v. Province of Sindh 2001 YLR 1837, Reserve Bank of India v. Patiala Central Bank Ltd. AIR 1961 Kerala 268 at P.275, District Magistrate Lahore v. Faqeer Sayyed Fayyazuddin PLD 1965 SC 371.. (377-378), Associated Provincial Pictures House Ltd. v. Wednesbury Corporation (1947) 2 All.E.R. 680, The Presiding Officer v. Sadaruddin Ansari and others PLD 1967 SC 569 (579), Krishna Murari Aggerwala v. The Union of India AIR 1975 SC 1877 (1882-1883), H. Lavender and sons Ltd. v. Minister of Housing and Local Government (1970) 3 All E.R. 871 (872) and Muhammad Jamil Asghar v. The Improvement Trust PLD 1965 SC 698. 14. He stated that in the meantime, Messrs Rehman Iqbal, Umar Iftikhar, a firm of Chartered Accountants, had also submitted report dated 13-7-2006, to the effect that the Financial Health of the Bank and availability of cash and liquid securities guaranteed full payment to all the depositors within 30 days. It was further opined that the Financial Health did not warrant Bank's liquidation particularly when so much support for the Bank had been demonstrated by its shareholders, depositors and directors over the last 6 years. The joint liquidators had also finally submitted their report to the effect that after making payments to all the public depositors and after meeting all other liabilities of the Bank 'there still remained a surplus of 394 million rupees. As per audited balance sheet of the Bank, as it stood on 30th January, 2004, the surplus funds amounted to Rs,661 million were available. Neither the liquidators nor the auditors had pointed out any incident of misappropriation or fraud in the accounts prepared and audited by them. Therefore, there was no occasion for cancellation of licence and winding up of the Indus Bank Ltd. 15. As regards the non-appointment of Chief Executive, he argued that Indus Bank was not at fault in any manner. By letter dated 30th July, 1999 the Bank had requested the State Bank to approve any of the three persons namely S.M. All Sohail, Arif All Siddiqui and Amin R. Khan to be the Chief Executive. It was further pointed out therein that S.M. All Sohail had neither acted in the capacity nor was delegated the power of Chief Executive. By another letter dated 11-1-2000 the Indus Bank, had sought the approval of the State Bank for appointment of Amanullah Khan, as Chief Executive. It was obvious that the State Bank of Pakistan itself remained sitting over the matter and passed on the buck to the Indus Bank. The cancellation of licence on that ground was without any basis. 16. We have heard the learned 'counsel for the parties at length and have also perused the voluminous record of the case with their able assistance. Before proceeding further, we consider it necessary to examine the question whether or not the power conferred on the State Bank of Pakistan by section 27(4) of the Banking Companies Ordinance, 1962, could be exercised by the Governor so as to cancel the banking licence of the Indus Bank Ltd.. It would be proper to reproduce below the provisions, of section 27 of the Ordinance, 1962, for the sake of convenience:-- "Licensing of banking companies.--(1) No individual or association or body of individuals, not being a company shall carry on banking business in Pakistan and, save as hereinafter provided, no company shall carry on banking business in Pakistan unless it holds a licence issued in that behalf by the State Bank; and any such licence may be issued subject to such conditions as the State Bank may think fit to impose.
---
## Page 7
(2) Every banking company in existence on the commencement of this Ordinance, before the expiry of six months from such commencement, and every other company before commencing banking business in Pakistan, shall apply in writing to the State Bank for a licence under this section: Provided that nothing in subsection (1) shall be deemed to prohibit a banking company in existence on the commencement of this Ordinance from carrying on banking business until it is granted a licence in pursuance of this section or is by notice in writing informed by the State Bank that a licence cannot be granted to it. Provided further that the State Bank shall not give a notice as afore-said to a banking company in existence on the commencement of this Ordinance before the expiry of the period…
Read the unabridged text and precedent citation network on Al Wakeelo Legal Research Platform.