SBP Exceeds Auth Case B-153 2000


Mr. Azizur Rehman, Advocate for the plaintiff.

Mr. B.M. Bangash, Advocate for the defendants.


This is an application for grant of leave to defend. It is the case of the defendant in this application that by a letter dated 15.12.1996, the plaintiff bank had agreed to restructure/reschedule the liabilities as they stood on 30.06.1996 in the sum of Rs.208.364 million. There was no rescheduling prior to this date. It is the case of the plaintiff that having agreed to have the amounts rescheduled, there were certain pre suppositions and one of those pre supposition was that the defendant company would be revived by the bank giving them an additional finance of Rs.55.000 million. This revival, according to the plaintiff is also mentioned in the aforesaid letter which has been filed with the application. It is, according to the plaintiff, categorically provided that:

“2. You may be allowed a working capital limit of Rs.55.000 M. for the smooth running of the project as CF against pledge of Raw Cotton.”

It is further stated in the said letter,

“6. That you should undertake that in case of default in payment of any two consecutive instalments this revival package would automatically stand cancelled and bank would claim the entire outstanding liabilities including penal interest etc. in lump-sum together with mark-up and other charges.”

According to the defendants the restructuring that was agreed upon was subject to additional finances being granted to the defendants and that in the event the plaintiff has not acted upon the said restructuring agreement will not be binding on them.

2. It is the case of the defendants that various agreements that were entered into were a consequence of the rescheduling that was agreed to in terms of the letter of 15.12.1996 and that the documents that were obtained, were in blank and have been filled unauthorisedly/without authority, therefore, the said agreements were not liable to be acted upon, and were void.

3. Mr. Bangash argues in this context that the present suit is based on two agreements dated 26.12.1996 and one agreement dated 24.08.1998. According to him as the said agreements are void on the face of the record, therefore, they cannot be acted upon and that the said agreements if held as such, the suit is liable to fail.

4. The defendants have filed their Affidavit in Rejoinder to the Counter Affidavit filed by the plaintiff to their application under Section 10 of the Banking Companies (Recovery of Loans Advances, Credit & Finances) Act, 1997. In the said rejoinder it has been categorically stated that the said defendants have filed suit No.B-12/2001 for damages to the extent of Rs.249,748,382.00 on account of the refusal of the plaintiff to disburse the promised amount of Rs.55 million. As a separate suit has been filed on a different cause of action, though according to Mr. Bangash, arising out of the letter dated 15.12.1996, I will desist from making further comments as to the validity or otherwise of the payments required to be made under the letter dated 15.12.1996 in the sum of Rs.55.000 million. However, by a letter dated 21.12.1996 which has been filed as Annexure P-2 to the affidavit in rejoinder, the said defendants have accepted the terms of the rescheduling/restructuring and in compliance of the directions contained in the said restructuring or rescheduling a sum of Rs.3,075,000.00 was deposited with the Habib Bank Ltd. on 21.12.1996. The only thing that is pleaded today as also in the various applications and affidavits, is that the amount of Rs.55.000 Million was not disbursed, they were not bound by the restructuring package. The acceptance is otherwise not denied. The consequence of acceptance of the offer made by the plaintiff bank are two fold. One, the facts as contained in the said letter of 15.12.1996 for restructuring and the second the conditions as contained therein. There is no denial as to the question of fact. However, Mr. Bangash states that the admission was only subject to plaintiff’s disbursing the sum of Rs.55.000 million. I do not find this plea tenable. Even if one was to say that the said amount was bound to be disbursed and there was a promise to pay a sum of Rs.55.000 million, at best the defendants could have said that the restructuring was not acceptable to them on account of refusal to pay the said amount by the bank. However, as for the facts, that have been narrated and categorised in the said letter of rescheduling such fact cannot be disputed only on the account that the conditionalities attached to the rescheduling were, according to the defendants not acted upon. In the said letter of 15.12.1996, it is categorically mentioned,

“Total outstanding as on 30.6.96 Rs.208.364 M

Less; Mark-up/Interest to be

Reversed (Jan’87-June’96) Rs.126.134 M


Balance to be restructured as Rs. 82.230 M

Per PICIC formula to be divided ————

as under;”

From the above, it will be seen that as on 30.6.1996, a total sum outstanding which included mark-up/interest was Rs.208.364 million. A categorical stipulation is made in the said letter of restructuring that mark-up/interest charged during the period from January, 1987 to June 1996 was being reversed and a sum of Rs.82.230 million was the amount that was free of any interest or mark-up. This fact has neither been denied at any point in time nor can be disputed as there is a clear reversal of the amount of mark-up/interest and is not being charged.

5. According to Mr. Bangash, however, the mark-up from January, 1985 to December 1987 has been added and has not been reversed. This, according to him is borne out of the said letter of 15.12.1996. It is stipulated that the said Rs.82.23 Million contains two portions, the first the actual debt, and the other the deferred debt. The first debt being the debt on which mark-up was to be charged and the other on which no mark-up was to be charged. According to Mr. Bangash, the debt on which no mark-up is being charged is the actual mark-up from 1985 to 1987 and such amount cannot be allowed. Mr. Bangash refers to BCD Circular No.13 and states that it is categorically provided that as from the first day of January, 1985 all finances provided by a Banking Company to a Federal Government, Provincial Government, Public Sector Corporation and Public or Private Joint Stock Companies shall only be in one of the modes provided in Annexure-I to the said circular. For the purposes of understanding clause (2) it is important to refer to clause 1 of the sì¥ÁY ¿KlbjbjóWóW -æ‘=‘=.hÿÿÿÿÿÿ]ššššššš‚‚‚‚8ºnce. Clause (2) uses the word “all finances provided”. This term clearly means all fresh finances provided. No doubt, this provision would mean that only fresh finances would not be provided. But the provision also states that there could be a conversion of the existing loans. In view of the above, BCD Circular shall be applicable to fresh finances provided or renewals made in terms of clause (1) and (2) of BCD Circular No.13 of 1984. Mr. Bangash states that the said BCD Circular No.13 does not allow interest to be charged after 1st day of January, 1985. I do not agree with this proposition as framed. No doubt, no interest can be charged in respect of fresh finances or renewals. However, the question is as to the continuance of an existing finance also. However, where there is no renewal or there is no fresh finance, BCD Circular No.13 may not be applicable. However, in view of the restructuring or renewal of facility that was being entered into on the 15th day of December, 1996, the bank has foregone the interest charged amounting to Rs.126.134 million. It is not the case of the defendant that the said amount has included in it an element of interest as in the letter of 21.12.1996 the figures have been admitted. In the letter of 26.02.1997, Annexure-P/3 to the affidavit in rejoinder there is no dispute as to the figures contained in the letter of 15.12.1996. The only dispute is regarding the disbursement of the sum of Rs.55 million as working capital. I have already stated above, that for the purposes of loss that may have been caused due to non disbursement of the said Rs.55 million, a suit admittedly has been filed. Any loss caused due to the non disbursement can be dealt with and concluded in that suit. The non disbursement could, however, not affect the admission of a specified fact that a sum of Rs.82.230 million after reversing the interest amounting to Rs.126.134 is payable. In June, 1997, the defendant, however, again applied without denying the facts contained in the letter of December, 1996 stating,

“We beg to apply for allowing us to clear the overdue loans in accordance with the package recently announced by the State Bank of Pakistan.”

Admittedly, in the said letter it has been stated that after 1987 no payments were made due to the financial crisis faced by the company and its eventual closure. Admittedly, the defendant applied to the Beg Committee for restructuring of the loan to sick industrial units and admittedly, restructuring was entered into in terms of the aforesaid letter of 15.12.1996. Admittedly, the defendant acted upon the said letter and accepted the same by making the payment of Rs.3,075,000.00. In the various letters for revival that have been filed subsequently, the contents of the letter of 15.12.1996 have not been denied. However, the calculation for arriving at a much lower figure has been made and done on the basis of the actual disbursement in 1983 and 1984. During that period interest was payable. The claim of Rs.35,425,600.00 is made in the letter of 19.06.1997, that such is the only amount due and payable. A perusal of the said letter will show that interest has not been added to the loan granted in 1983 and 1984 when BCD Circular No.13 had not come into play and had not been enforced.

6. The dispute that is being raised is one of law. These are questions that can be decided without evidence being led. It will be a futile exercise to allow leave for the purposes of leading evidence to determine a question of law. It is thus, in my opinion that there is no genuine or bona fide dispute, especially in view of the fact that the amount of Rs.82.230 Million has been accepted. In view of the above, the application is dismissed. However, as regards the determination or quantification of the amount payable, the defendant shall have the right to proceed in the matter and assist this Court.

7. Upon the refusal to grant the said application for leave to defend I propose to dispose of the present suit also. The suit has been filed on the basis of an agreement dated 26.12.1996. It is categorically stated in the plaint that the plaintiff had granted a demand finance to the defendant No.1 which was rescheduled with repayments to be made in 20 instalments wherefor, the defendant executed demand promissory note, the agreement of financing and the facility letter. In addition, they mortgaged various properties. It is the case of the plaintiff that another facility in the sum of Rs.30.640 million was granted which was the amount of frozen mark-up. According to the plaintiff the defendant No.1 entered into an agreement for financing and signed and executed as security a demand promissory note for the said amount. The defendant also entered into another agreement for financing whereby, they agreed to pay a sum of Rs.14.678 million for the frozen mark-up as on 24.08.1998. The agreement for financing thus entered into was in respect of the above in the sum of Rs.14.678 million. In respect of the above, three separate and according to the plaintiff distinct finances, the defendants are liable to pay to them a sum of Rs.121.871.778.00. On a question from this Court and in reply to the contention of Mr. B.M. Bangash that mark-up cannot be included in a restructuring package, Mr. Azizur Rehman stated that such could be done. He further states that under the Banking Companies Ordinance, 1962 the word loans, advances and credit have been defined to include finances as defined in the Banking Tribunals Ordinance, 1984. The Ordinance in section 2(e) defines a finance to mean:-

“(e) ‘finance’ includes an accommodation or facility under a system which is not based on interest but provided on the basis of participation in profit and loss, mark-up or mark-down in price, hire-purchase, lease, rent-sharing, licensing, charge of fee of any kind, purchase and sale of any property, including, commodities, patents, designs, trade marks and copyrights, bills of exchange, promissory notes or other instruments with or without buy-back arrangement by a seller, participation term certificate, musharika certificate, modarba certificate, term finance certificate or any other mode other than an accommodation or facility based on interest and also includes guarantees, indemnities and any other obligation, whether fund based or non-fund based, and any accommodation or facility the real beneficiary whereof is a person other than the person to whom or in whose name it was provided; and” (Underlining is mine.)

Mr. Azizur Rehman states that finance includes ”accommodation or facility”. According to him an accommodation in terms of the Webster’s dictionary means:-

“accommodation …1. Act of accommodating, or state of being accommodated; specif.: a Act of fitting or adapting, or state of being fitted or adapted; adaptation; adjustment; — often followed by to. “The organization of the body with accommodation to its functions.” Sir M. Hale. b Adaptation of conduct in order to comply or conform; obligingness. c Provision of what is needful or desirable for convenience; specif., the giving of pecuniary aid.”

According to him, the mark-up or interest that is accrued on a loan or finance is capitalised and once it is capitalised it becomes a part of the loan and cannot be separated or distinguished. Mr. Azizur Rehman refers to the meaning of the word capitalise as contained in Webster’s New International Dictionary of the English Language, Second Edition, 1937 which is as under:-

“Capitalise …1. To convert into capital, or to use as capital; hence, to make use of for the sake of profit; to turn to one’s immediate advantage.”

Mr. Azizur Rehman has also referred to the case of HASHWANI HOTELS LIMITED. v. FEDERATION OF PAKISTAN and others (PLD 1997 S.C. 315) in which it has been held:-

“…One view can be that each amount of disbursement will constitute an accommodation or loan agreement, the other view can be that he disbursements of the various amounts made by the banks were in performance of the above three loan agreements already executed. If we were to prefer the above first view, it will affect the vested right of the banks to recover interest at the rate of 14% under the loans agreement and, therefore, the construction which does not affect the vested right of a party is to be preferred.”

It has further been held:-

“A perusal of the above quoted definition indicates that it includes loan of money and, therefore, it can be held that the word “accommodation” used in the above Circular of 15.02.1981 refers to loan agreement…”

Thus, according to Mr. Azizur Rehman, the agreement entered into between the plaintiff and the defendant is one of accommodation where the loans have been restructured and upon restructuring of loan the banks have accommodated the defendant and, therefore, it is obligatory upon the defendant to pay back the entire amount agreed upon. According to Mr. Azizur Rehman the word obligation has been defined in the Oxford dictionary to mean:-

“Obligation …1. The act of obligating, or binding , oneself to a course of action; a putting under a promise, vow, or oath, as in initiation into an organization (see OBLIGATE, v.,5)

2. The agreement, promise, contract, oath, or the like, by which one is obligated or bound.

3. That which a person is bound to do or forbear; any duty imposed by law, promise, or contract, by the relations of society, or by courtesy, kindness, etc.

4. That which obligates or constrains; the binding power of a promise, contract, oath or vow, or of law; as, the obligation of conscience, of affection, or of ideals.

5. State of being bound ‘legally or morally’. “Bound in filial obligation.

6. State of being indebted for an act of favor or kindness; also the act itself; as, to place others under obligations.

7. Obs. a Binding tie. b Liability. c Civility.

8. Law. A bond with a condition annexed, and a penalty or non-fulfilment. In a larger sense, it is a formal and binding agreement or acknowledgement of a liability to pay a certain sum or do a certain thing.”

He states that as there was an accommodation it was the obligation of the defendant to have abided by the contract and promise made as, the obligation is in fact a state of being indebted for an act done by the plaintiff for him. On this question I do not agree with the finance of Mr. Azizur Rehman. The definition of finance as contained in the Banking Tribunals Ordinance, 1984 categorically states that “Finance includes an accommodation or facility under a system which is not based on interest but provided on the basis of participation in profit and loss, mark-up or mark-down in price…” The word accommodation or facility has to be read in conjunction with the words “not based on interest” and in reading the fact that it is not based on interest, reference will have to be made to the provisions of BCD Circular No.13 issued by the State Bank of Pakistan in respect of the finances to be granted in terms of the Islamic system of banking.

8. Mr. Azizur Rehman, however, states that under section 25 of the Banking Companies Ordinance, 1962, the State Bank has exceeded its authority to issue such directions. According to him under section 25 of the said Ordinance, the State Bank of Pakistan could have issued such a direction as legislation in respect of Islamic modes of financing could only be done by legislation. He refers to section 21 of the Enforcement of Shariat Act, 1991 and states that under the said provision all laws are to be enacted exclusively by Majlis-e-Shoora (Parliament) and the Provincial Assembly as the case may be and no law shall be deemed to have been made unless it is made in the manner laid down in the Constitution. Mr. Azizur Rehman states that this is a deeming provision and in view of the definition given of the word “deem” in the case of SIRAJUDDIN v. SARDAR KHAN (1993 SCMR 745) a fiction of law has been created and that any law that is promulgated or devised through a mode other than by an Act of the Parliament or the Provincial Assembly shall be void and not liable to be acted upon. According to him, therefore, the State Bank Circulars are invalid and void thus incapable of being acted upon. It will be of importance to note that the Banking Tribunals Ordinance, 1984 was a law promulgated by the Parliament and the word ‘finance’ was defined to mean an accommodation or facility under a system not based on interest. By Ordinance LVII of 1984 the Banking Companies Ordinance, 1962 was amended and the definition of “loans advances and credits” included finance and the definition as contained in the Banking Tribunals Ordinance, 1984. Thus by incorporation the ‘finance’ was brought within the purview and scope of sections 24 and 25 of the Banking Companies Ordinance, 1962. In addition to the above, by the promulgation of the Ordinance LVII of 1984 being the “Banking and Financial Services (Amendment of Laws) Ordinance, 1984 many other amendments were brought about, so that the State Bank of Pakistan could enforce the Islamic System of Banking in Pakistan. In Section 7 of the Ordinance of 1962, the words, “participation term certificates, term finance certificates, and such other instruments as may be approved by the State Bank”were inserted. In section 7 a new clause (aa) was inserted,

“(aa) the providing of finance as defined in the Banking Tribunals Ordinance, 1984;”

It is thus clear from the insertion, that the Act was amended to bring in the Islamic provisions of law. The State Bank of Pakistan in terms of section 25 of the Banking Companies Ordinance, 1962 issued directions giving details as what is, ‘finance in the system not based on interest’. In view of the above and in view of Hashwani’s case afore referred the provisions contained in section 25 allows the State Bank of Pakistan to give directions to the Banking companies and the non banking financial institutions (NBFIs) also to act in accordance with such directions. Such directions are binding on all the banks NBFIs. In view of the above, it is clear that the directions are as a consequence of promulgation of the Statute or an Act of the Parliament. Otherwise also under Section 25 the State Bank can give directions to the bank whenever it is satisfied that it is necessary or expedient in public interest. It has done so therefore. Infact the agreements entered into subsequently by banks are the sale and purchase of commodities. The concept is one which is contemplated by BCD Circular No.13 of 1984. The banks can therefore not take a place otherwise. The State Bank have acted within their authority in issuing the said circulars. I do not, therefore, agree with the proposition of Mr. Azizur Rehman in this respect also.

9. I will now come to the question of what is actually due as discussed while dismissing the application for leave to defend the plaintiffs have deleted and reversed interest or mark-up to the extent of Rs.126.134 million by the said restructuring agreement. In para 3 of the plaint an amount of Rs.51.484 million has been shown to be the amount payable on the date of entering into the said agreement. The said amount was repayable in 20 instalments commencing on the date of agreement and ending on 25.12.2000. The amount payable was Rs.108.834 which is stated to be the repurchase price. Amazingly there is another facility which is named as the second facility. In para 7 of the plaint, it is stated, “ The plaintiff at the request of the defendant No.1 with regard to demand finance-2 agreed to freeze mark-up of Rs.30.640 million……..” It is this amount of Rs.30.640 million that is reflected in the letter dated 15.12.1996. The agreement that was entered into is Annexure-I to the plaint in which there is no further mark-up added to this amount. Ex facie the aforesaid amount of Rs.51.484 million and Rs.30.746 million come to Rs.82.230 million. Admittedly and as stated in the plaint itself the said amount of Rs.30.640 million is nothing but mark-up. However, having discussed the above, it is clear that in the intervening period from 1985 to 1996 there has been no rescheduling, renewals or fresh finances were granted. BCD Circular No.13 clearly states that it shall be applicable to fresh finances granted. Admittedly, the rescheduling is 15.12.1996 on which date the agreed interest portion has been deleted to come to the figure of Rs.82.230 million. Admittedly, the amounts have remained with the defendants. In view of the above, it is clear and is my considered opinion that the second facility was of frozen mark-up. I am not inclined to grant the amount of frozen mark-up. The amount of debt is said to be Rs.51.484 million, whereas the amount disbursed was Rs.354,425,600.00. If it is said that no amount was repaid from 1983 to 1985 the difference between is Rs.16.059 million. A calculation of interest at the rate of 16% per annum for 2 years would come to Rs.16.495 million. Thus the amount of Rs.51.484 million has in it the amount of interest included upto 1985. The question is that there is no new finance or rescheduling, as such whether this would be a continuance of an existing finance. In BCD Circular No.32 dated 26.11.1984 it is provided that, “…as from the 1st January, 1985, interest wherever charged by a banking company/development financial institution in any of the item of bank charges shall be replaced by a non-interest mode considered appropriate by it. The cut off date is 1.1.1985. No interest or mark-up can be granted as from that date. Admittedly, the amount of Rs.30.746 million is frozen mark-up, and as discussed above, is after 1985. Such cannot be allowed. The amount of Rs.51.484 million in respect of the first two finances are only payable. There is third facility also which was entered into on 24.08.1998 in respect of mark-up in the sum of Rs.14.678 million. I have already discussed that no fresh amounts, renewals can be granted or entered into in regards to the payment made or otherwise in respect of the interest or mark-up. The aforesaid amount of Rs.14.678 million are in my opinion, therefore, not payable by the defendants. I am however inclined to grant service charges on the amount of Rs.51.484 million from 1985 to the date of filing suit so that till 1995 the service charges shall be calculated at 1% per annum into the number of years. Such is based on BCD Circular No.7 dated 28.03.1984 where the banks could fix their own rate. The amount comes to Rs.5,148,400.00. From 1995 to 2000, when the suit was filed the rates would be 0.13% per year as provided by BCD Circular No.6 dated 11.2.1996, where the rates have been fixed. The amount comes to Rs.73,622.00. The total service charges are therefore, Rs.5,222,022.00. On record also are details of various payments alongwith the affidavit in rejoinder filed with the application for leave to defend. The first payment was made on 21.12.1996 in the sum of Rs.3,075,000.00. In January, 1998, various sums were paid which come to a total of Rs.0.915 million. The total amount, therefore, paid is Rs.3,990,000.00. Out of the aforesaid amount of Rs.56,706,022.00 the amount paid is liable to be deleted. Upon deletion of the aforesaid amount, the defendants are liable to pay a sum of Rs.52,716,022.00. The suit is, therefore, decreed against the defendants jointly and/or severally in the sum of Rs.52,716,022.00 with costs and mark-up at 16% per annum without being compounded payable at the last instance. The suit is also decreed for sale of the mortgaged property and hypothecated or pledged goods.