INDUSTRIAL DEVELOPMENT BANK OF PAKISTAN vs FRIENDS SPINNING MILLS
This matter concerns a dispute between a plaintiff-Bank and a defendant-Company regarding the enforcement of a settlement agreement reached through the State Bank of Pakistan (SBP) Committee. The core legal question was whether the plaintiff-Bank could unilaterally deviate from the SBP Committee's binding settlement terms by demanding the redemption or sale of pledged shares before any default occurred. The Court held that the decision of the SBP Committee, issued under BPD Circular Letter 8 dated 10-3-2003, constitutes a binding resolution upon both the bank and the customer. The Court determined that the Bank's attempt to sell the pledged shares, contrary to the specific terms of the settlement, was unlawful and in derogation of the Committee's decision. The key principle laid down is that SBP circulars possess the force of law, and once a dispute is resolved by the SBP Committee, the resulting settlement is binding on the parties; a bank cannot unilaterally modify these terms or act as a judge in its own cause to bypass the established settlement framework.
- Does a decision rendered by the State Bank of Pakistan Committee under BPD Circular Letter 8 have binding effect on the parties to a banking dispute?
- Can a bank unilaterally modify or deviate from the terms of a settlement decided by the State Bank of Pakistan Committee?
- Is a bank permitted to sell pledged shares as security before an event of default occurs, where such sale contradicts the terms of a binding settlement?
- Clause 17, SBP Circular 29 dated 15-10-2002
- Clause 3, BPD Circular Letter 8 dated 10-3-2003
ORDER
Learned counsel for the defendant-Company states that the State Bank of Pakistan Committee constituted pursuant to clause 17 of the SBP Circular 29 dated 15-10-2002 has given its decision on the dispute between the plaintiff-Bank and the defendant-Company. The said Committee has been empowered by BPD Circular Letter 8 dated 10-3-2003, under its clause 3 to render decisions that are binding upon the parties, namely the bank and the customer whose dispute has arisen under BPD Circular 29 aforementioned. In the case of the applicant a decision of the SBP Committee made in its 63rd meeting held on 16-6-2004, finds the total outstanding liability of the applicant-Company to be Rs.26.964 million.
2. The mode of settlement of that liability by the defendant is also specified in that decision. These terms provide that after full payment of the settlement amount, the security documents including personal guarantee shall be released by the Bank. The plaintiff-Bank holds certain shares of the defendant-Company as pledged security for the outstanding liability. On account of capital injections made by the defendants to revive the project, the value of those shares has risen manifold. Capitalizing on this rise in value of their security, the plaintiff-Bank has sought by the impugned letter dated 23-12-2004, for the defendant to redeem these shares at face value failing which they will be sold in the market. Learned counsel for the applicant-Company submits that demand raised in the letter dated 23-12-2004 by the plaintiff-Bank is violative of the foregoing settlement terms decided by the SBP Committee and communicated to the parties vide their letter dated 12-7-2004. Accordingly, it has been prayed that the plaintiff-Bank be restrained from selling the shares as threatened and to act strictly in accordance with the decision of SBP Committee communicated by letter dated 12-7-2004.
3. Learned counsel for the plaintiff-Bank has stated that the decision of the SBP Committee is subject to implementation in accordance with the over all scheme and object of the SBP Circular No.29 of 2002. By such approach the demand made by the Bank to realize its security is valid action within the scheme of SBP Circular 29. No other ground has been urged.
4. The decision of the SBP Committee constitutes a binding resolution between the plaintiff-Bank and the applicant (defendant) customer in terms of paragraph No.3 of BPD Circular Letter 8 dated 10-3-2003. It may be pointed out that these circulars issued by the State Bank of Pakistan have the force of law with binding effect on the Banks as held in Hashwani Hotels Ltd. v. Federation of Pakistan and others (PLD 1997 SC 315); United Bank Ltd. v. M/s. Azmat Textile Mills Ltd. (2002 CLD 542) and Tristar Industries (Pvt.) Ltd. v. State Bank of Pakistan and another (2004 CLD 257). Once the dispute has been resolved and terms of settlement have been specified by the SBP Committee then by the provisions of clause 3 of Circular 8, then reference to Circular No.29 is a pointless exercise. The decision of the SBP Committee is clear in stating that the security documents which include shares, in this case the shares pledged with the Bank, are to be returned to the defendants upon full payment of the settlement amount. Therefore, realization by sale of these shares prior to any event of default, is contrary to the decision of the SBP Committee. The demand dated 23-12- 2004 by the plaintiff-Bank based upon the premature threat of sale of shares as security without the Commission of default by the applicant is in derogation of settlement terms decided by the said Committee and therefore unlawful. Moreover the Bank cannot become Judge in its own cause to unilaterally modify the decision of the Committee. If it is aggrieved thereby the Bank must have its grievance determined by a competent forum. In the present case no such action has been taken and therefore, the SBP Committee's decision is binding on the Bank. C.M. allowed.