2000 C L C 896

 
[Karachi]
 
Before S. Ahmed Sarwana, J
NATIONAL BANK OF PAKISTAN---Plaintiff       f:fa
 
versus
 
Messrs WEST PAKISTAN TANKS TERMINAL
(PVT.) LTD. ---Defendant
 
Suit No. 1278 of 1999, decided on 19th November, 1999.
 
 
 
(a) Banking Companies (Recovery of Loans, Advances, Credits and
Finances) Act (XV of 1997)--
----S. 10---Leave to defend suit---Limitation---Starting point---Court is
required to take the first date of publication as the starting point of
limitation for the purpose of filing an application for leave to defend the
suit.
 
Qureshi Salt and Spices v. M.C.B. 1999 SCMR 2353 ref.
 
 
(b) Banking Companies (Recovery of Loans, Advances, Credits and
Finances) Act (XV of 1997)---
----Ss. 10 & 11---Rejection of application for leave to defend the suit---
Effect---Jurisdiction of Court---Scope---Where application for leave .to
defend suit was rejected, Banking Court was empowered to decree the
suit as prayed for---Court before passing judgment and decree was
bound to ensure that the claim of the plaintiff was in accordance with
law and that the Court did not grant any relief to the plaintiff which the
latter was not entitled to under the law. 
 
 
(c) Islamic Jurisprudence---
---- Banking---Mark-up beyond the period of finance cannot be granted
under the principles of Islamic Finance.
 
H.B.L.v. Farooq Compost 1993 MLD 1571 rel.
 
 
(d) Banking Companies (Recovery of Loans, Advances, Credits and
Finances) Act (XV of 1997)---
----Ss. 10 & 11---Contract Act (IX of 1872), S.74---Suit for recovery of
Bank loan---Leave to defend suit---Claim of liquidated damages by
plaintiff/Bank---Validity---Person complaining of the breach of contract
was entitled under S.74 of Contract Act, 1872 to claim reasonable
compensation from the party committing such breach, not exceeding the
amount specified in the agreement between the parties---Reasonable
compensation is a question of fact---Where the plaintiff/Bank had
neither shown nor indicated in any document as to how the liquidated
damages had been calculated and how the liquidated damages claimed
were reasonable compensation, such claim was contrary to the
provisions of Contract Act, 1872 and the same was rejected. 
 
 
(e) Banking Companies (Recovery of Loans, A_ dvances, Credits
and Finances) Act (XV of 1997)---
----Ss. 10 & 11---Where no serious and bond fide dispute was raised by
the defendant/borrower, the application. for leave to defend the suit was
dismissed.
 
 
(f) Banking Companies Ordinance (LVII of 1962)---
----S. 33-B---Prudential Regulations, Reglns.III &
XVIII---Responsibilities of Bank Officers---Where an Officer of a
Bank, who is responsible for disbursement of loans. acts negligently or
omits to take reasonable degree of care in extending a loan or credit
facility as required by the Prudential Regulations and consequently, the
Bank suffers loss, the Bank is justified in suing such Officer for
recovery of the loss suffered by the Bank. 
 
 
(g) Banking Companies Ordinance (LVII of 1962)---
----S. 33-B---Criminal breach of trust---Bank Officer, when acts
negligently or does not exercise the degree of care and caution expected
of a prudent banker, such Officer of Bank is guilty of criminal breach of
trust. 
 
Noorullah Manji for Defendant No.1
 
 
JUDGMENT
 
National Bank of Pakistan, plaintiff herein, has filed this suit for
recovery of Rs.137,428,643.04 against West Pakistan Tanks Terminal
(Pvt.) Limited (defendant No. l) and its Directors/Guarantors Amir Ali
A. H, Ganji, Hashim Ganji, Sadruddin Ganji (defendants Nos.2 to 4
respectively), who had obtained Export Refinance (Pre-shipment-I)
Facility from the plaintiff. Under the agreement of finance, dated
30-3-1992, defendant No1 was required to pay back the purchase price
of Rs.56,302,000 on or before 30-3-1993. Defendant No. l utilized the
facility and paid back only part of the purchase price within the agreed
period. Consequently, plaintiff filed this suit against defendant No. l and
its guarantors. According to the documents available on record the
bailiff was not able to serve the summons as the office of the defendant
No. l was closed and defendants Nos.2 to 4.were not available when he
visited their office and residence at the address given in the plaint. The
defendants were, however, served by publication in the daily "Dawn" of
20-9-1999 and daily "Nawa-e-Waqt" of 18-9-1999.
 
On 16-11-1999, Mr. Manji, learned counsel for defendant No. l
filed an affidavit without any application seeking leave to defend under
section 10 of the Banking Companies (Recovery of Loans, Advances,
Credits and Finances) Act, 1997. Under the provisions of the Banking
Companies Act, 1997 upon an application moved by a defendant within
21 days of service the Court is empowered to give leave to defend the
suit if a serious and bona fide dispute is raised thereby; provided where
service has been validly effected only through publication in the
newspapers the Banking Court may extend the time for filing an
application for leave to defend if satisfied that the defendant did not
-have knowledge thereof. The application for conaonation has to explain
each day of delay. This cannot be done unless an application stating
sufficient reason for condonation is made Qureshi Salt and Spices v.
M.C.B. 1999 SCMR 2353, 2360. In the instant case, defendant No1 has
neither filed any application for leave to defend nor for condonation of
delay on the ground that the defendants had been served only through
publication. Defendant No.2 has filed only an affidavit on behalf of
defendant No. l without any application. The affidavit can be ignored
and the suit decreed on the basis of the statements in the plaint which is
verified on oath. However, exercising powers under section 151, C.P.C.
for the ends of justice I have decided to treat the affidavit as an
application for leave to defend the suit.
 
The defendants were served through publication in Daily
"Nawa-eWaqt" of 18-9-1999 and in Daily "Dawn" of 20-9-1999. For
the purpose of filing an application for leave to defend the Court is
required to take the first A date of publication as the starting point of
limitation Qureshi Salt and Spices v. M.C.B. (bid). The first
advertisement appeared in Daily "Nawa-e-Waqt, therefore, 18-9-1999
will have to be taken as the starting point of limitation. It could be
argued that defendants Nos.2 to 4 being Gujrati speaking do not read
"Nawa-e-Waqt" which is an Urdu Newspaper. Giving the defendants the
benefit of doubt and assuming for the sake of argument that the
advertisement in the Daily "Dawn" of 20-9-1999 is the starting point of
limitation, the application for leave to defend should have been filed on
or before 11-10-1999. The affidavit of defendant No.3 seeking leave to
defend which is being treated as an application was, however, filed on
16-11-1999. The request for leave to defend is, thus, patently barred by
limitation.
 
Mr. Manji, learned counsel for defendant No.1, makes an oral
motion that time to file the application for leave to defend may be
extended pursuant to the proviso to section 10 of the Banking
Companies Act, 1997. I am afraid this request cannot be granted
because no such request has been made by defendant No. l in the
affidavit. Mr. Manji being a senior counsel, while drafting the affidavit
should have filed an application for condonation of delay of should have
at least made such a request in the affidavit. He states that he did not do
so because of instructions of his clients. In such circumstances, the
request of Mr. Manji is not justified and is accordingly rejected.
 
In view of the rejection of the application for leave to defend, the
Court is empowered to decree the suit as prayed. However, before
passing any judgment and decree it is the duty of every Court to ensure
that the claim of the plaintiff is in accordance with law and that the
Court does not grant B any relief to the plaintiff which the latter is not
entitled to under the law. In order to ensure that the judgment and decree
passed against the defendants is in accordance with law. The Court on
2-11-1999 directed Mr. Quraishy, learned counsel for plaintiff, to file a
summary of account giving the breakup of the claim with details of
finance advanced together with mark-up charged
 
thereon, mark-up for the Cushion Period. Liquidated Damages or any
other amount debited to the Account of defendant No. l He has filed a
statement of account duly verified on oath according to which the
plaintiff claims a total amount of Rs.137,428,643.04only. The said
statement includes mark-up beyond the agreed period of finance as
well as 20 percent liquidated damages which according to Mr.
Quraishy, the bank is entitled to recover under clause (9) of the
Agreement of Financc, dated 30-3-1992. The mark-up beyond, the
period of finance cannot be granted under the principles of Islamic
Finance H.B.L. v. Farooq Compost 1993 MLD 1571. Further, under
section 74 of the Contract Act, 1872, in case of breach of contract the
person complaining of the breach is entitled to claim from the party
who has committed the breach reasonable compensation not exceeding
the amount specified in the agreement between the parties. What is
reasonable compensation is a question of fact. The plaintiff has neither
shown nor indicated in any document as to how the liquidated
damages have been calculated at 20 percent or offered to prove that the
liquidated damages claimed are reasonable compensation in the
present circumstances. The claim of liquidated damages is, thus,
contrary to the provisions of the Contract Act and the law laid down
by the superior Courts and is, therefore, rejected. It is also an
established law that the bank cannot charge any amount over and
above the agreed amount or mark-up on the agreed price as it is
prohibited under the principles of Islamic System of Finance. If this
claim was allowable under the law, the plaintiff would have produced
the relevant State Bank Circular' in this behalf. This has not been done.
Accordingly, the claim for mark-up beyond the agreed period is also
rejected.
 
Defendant No. l has failed to raise any serious and bona fide dispute;
accordingly their deemed application for leave to defend is hereby
dismissed. Consequently, the plaintiff's claim is decreed jointly and
severally against all the defendants in the sum of Rs.53,448,731.56
only together with mark-up at the rate of 18.94 % which is the present
rate for similar finances. The plaintiff shall also be entitled to costs.
Plaintiff has also prayed for sale of the hypothecated stocks specified
in the letter of hypothecation executed on 4-5-1992. Accordingly, the
prayer for sale of the hypothecated stocks is also granted.
 
On going through the documents, I find that the plaintiff bank which at
that time was Mehran Bank Limited and has now been merged with
National Bank of Pakistan, extended finance facilities in the sum of
Rs.50 million merely on the basis of guarantees of Amir Ali A.H.
Ganji, Hashim Ganji and Sadruddin Ganji and a letter of
hypothecation of movable described in the Schedule which is totally
blank and without obtaining any tangible security. It appears from the
application for credit facility. dated 25-2-1992, a copy of which is on
the record, that the credit was recommended by the Branch Manager,
Manager, Sub-Manager and the Zonal Chief of the Mehran Bank
Limited and thereafter approved by the Executive Committee of the
bank as is evident from the initials of its members.
 
It is pertinent to mention, here that every officer of a company, is
entrusted with the property belonging to the company and if he fails to
exercise such degree of care as a reasonable person might be expected
to take of his property in the circumstances and the company in
consequence of such failure suffers loss he would be liable to the
company for such loss arising from his negligence. Similarly, a Bank
Officer, who is entrusted with the money of the bank and who is
responsible for recommending, approving or advancing credits
facilities to customers is required to exercise due care and caution
before sanctioning or providing any loan or facility to the customer
and obtain sufficient security so that the bank may not suffer any loss
if the customer fails to pay back the loan. To forestall any negligence
or lapse on the part of the banks the State Bank of Pakistan (SBP) has
issued under the provisions of the Banking Companies Ordinance,
1962 guidelines to all banks to regulate the business of banking in
Pakistan in the form of Prudential Regulations. Regulations III and
XVIII, which are relevant, for the purpose of this suit read as
follows:---
 
"Regulation III
 
Limit on .Bank's exposure against unsecured advances.--- No bank
shall provide financing facility in any form of a sum exceeding
Rs.1,00,000 (Rur pes one hundred thousand only) to any one
individual or person without obtaining realisable securities of the value
not below the outstanding amount. Financing facilities granted without
securities including those granted against personal guarantees shall be
deemed as 'clean' for the purpose of credit regulations. Provided
further that---
 
(a) at the time of granting a clean facility, banks shall obtain a written
declaration to the effect that the borrower in his own name or in the
name of his family members, has not availed of such facilities from
other banks so as to exceed the prescribed limit of Rs.1,00,000 in
aggregate;
 
(b) no clean facility shall be granted to frustrate the objective of credit
restrictions in force for the time being.
 
(c) the purpose for which a clean facility is .sanctioned. shall be
expressly stated in the sanction letter.
 
Clean facilities granted to finance the export of commodities eligible
under export finance scheme shall be exempt from the per party limit,
on clean facilities.
 
The aggregate exposure of a bank against all its clean facilities shall
not, at any point, of time, exceed the amount of the bank's capital and
general reserves (free of losses).
 
Any violation or circumvention of the above Regulation shall render
the bank liable for penalties under the Banking Companies Ordinance,
1962.
 
Advances given to employees of a bank in accordance with their
entitlement, shall be exempt from the application of the Regulation II."
 
 
"Regulation XVIII
Minimum conditions for grant of finance facilities.--- Each bank is
mandated to institute such system or procedure or take such steps as it
deemed fit to ensure that defaulters are not accommodated. Every bank
is, therefore, required to obtain information about the total outstanding
liabilities to banks and financial institutions (from Credit Information
Department of the State Bank) of any applicant seeking financial
accommodation involving the sum of Rs.0.5 million or more before
approving any lending. In case of those who are reportedly in default
no fresh accommodation whether fund based or otherwise would be
allowed unless rescheduling or restructuring of outstanding liabilities
is done to the satisfaction of lending banks by the respective
borrowers. If in exceptional circumstances, a bank decides to provide
such financing to any person, firm or company who is reportedly a
defaulter as per information supplied by the Credit Information
Department or any other Batiks/D.F.Is. It shall place on record
circumstances or reasons necessitating grant of any accommodation in
such cases. The State Bank may, if necessary, undertake special
inspection of such exceptions. "
 
Consequently, if an officer of the bank who is responsible for
disbursement of loans acts negligently or omits to take the reasonable
degree of care in extending a loan as required by the Prudential
Regulations and consequently the bank suffers loss, the batik would,
be justified in suing such an officer for recovery of the loss suffered by
it. It is apparent from the copy of the application of credit facilities and
the credit approval that the guidelines provided in the Prudential
Regulations were not followed by the Branch Manager, Manager,
Sub-Manager and the Zonal Chief of Mehran Bank Limited. The
members of the executive Committee also did not discharge their duty
as required.
 
When an officer of the bank acts negligently or does not exercise
degree of care and caution expected of a prudent banker, he would also
be guilty of criminal breach of trust. Section 408 of the Pakistan Penal
Code defines Criminal Breach of Trust as follows:-- .
 
"408. Criminal breach of trust by clerk or servant.--- Whoever,
being a clerk or servant or employed as a clerk, or servant, and being
in any manner entrusted in such capacity with property, or with any
dominion over property, commits criminal breach of trust in respect of
that property, shall be punished with imprisonment of either
description for a term which may extend to seven years, and shall also
be liable to fine."
 
In the present case, the officers of Mehran Bank described above
including the Members of the Executive Committee were entrusted
with the property of the bank which included the subscription of the
share-holders and the monies deposited by the customers and
depositors of the bank. They were required to advance loans and credit
facilities to borrowers as prudent bankers in light of the guidelines
provided in the Prudential Regulations. By failing to do so, they acted
with wilful dishonesty and prima facie are guilty of criminal breach of
trust under section 408 of P.P.C. which is punishable by imprisonment
of either description for a term of which may extend to ten years and
shall also be liable to fine. This section is included in the First
Schedule of the Offences in Respect of Banks (Special Courts)
Ordinance, 1984 for which an employee of a bank can be prosecuted
in the Special Court established for this purpose.
 
It is apparent that the Members of the Executive Committee and other
Officers of the Bank, namely, Branch Manager, Manager, Sub -
Manager and Zonal Chief should have refused to approve the facility
without obtaining tangible and/or reliable security in the form of a
mortgage, pledge or counter-guarantee from another bank. As a
consequence of their negligence, the bank has suffered a loss of over
Rs.53 million. It cannot be denied that all persons who put their
signatures on such documents would be jointly and severally guilty of
criminal act or acts and the bank would be justified in commencing
criminal action against them as well as civil action for recovery of
financial loss suffered by it. In the presence of these facts the bank
should have held an enquiry against such officers and members of the
Executive Committee and commenced proceedings against them
which does not appear to have been done. It would, therefore, be
appropriate if an enquiry against such officers and Members ~of the
Executive Committee is initiated and appropriate civil and criminal
action taken against them, if so required.
 
Office is directed to send a certified copy of this order to the President
of plaintiff-Bank at its Head Office, address for information with
direction to trace all these persons and take appropriate civil and
criminal action against them. The Officer Incharge of Mehran Bank's
Affairs shall submit a report on the action taken by 15-3-2000.

 A copy of this order shall also be sent to Mr. R.A. Chughtai, Deputy
Governor. State Bank of Pakistan to ensure that appropriate action is
taken in this case as well as in other cases involving similar
misconduct by the officers of all nationalized banks. In addition, he
shall issue appropriate instructions/warning to all bank officers of the
risk and personal liability involved arising from such improper,
negligent or imprudent conduct and submit a report of the action taken
in this behalf.

 
The office shall also send a certified copy of this judgment to the
Chairman, National Accountability Bureau, Islamabad for information
and necessary action, if deemed fit.
 
To come up in Court for consideration of the report of the plaintiff
Bank on 13-3-2000.
 
Q.M.HJM.AX/N-4/K                                                              Order
accordingly.