CHIRAGH SUN ENGINEERING LTD. Versus I.D.B.P.
ORDER
1. The plaintiff, a public limited company, according to averments contained in the plaint, has been operating a heavy mechanical and machine tool factory as a down stream unit of Pakistan Steel Mills Corporation, Karachi and has been building specialized components for industries. The defendant No. 1, IDBP, is a banking company established under the Industrial Development Bank of Pakistan Ordinancp, 1961, with the object to provide credit facilities to industrial concerns in Pakistan. The defendant No.l on 5-4-1987, according to averments contained in, the plaint, had sanctioned grant of facility to the extent of Rs.15.142 million under the scheme for locally manufactured machinery announced by the State Bank of Pakistan, commonly known as L.M.M. Scheme. The facility, as above, was sanctioned after examining the feasibility and viability pf the project intended to be set up by the plaintiff. The grant of facility was duly approved by the State Bank of Pakistan in accordance with the L.M.M. Scheme. The sanctioned amount was disbursed by the defendant No. l by making payment directly to the manufacturers of the machinery from whom delivery was taken by the plaintiff. It is further the case of the plaintiff that the machinery was examined and inspected from time to time by the defendant No.l at the manufacturers' plants as well as at the Site of installation. On such report, the defendant No. l had verified the eligibility of the machinery for benefit under the L.M.M. Scheme and had found same manufactured locally. After installation of the machinery procured under the L.M.M. Scheme and the imported machinery which was covered by separate facility, the plant set up by the plaintiff started operation. After availing the grace period of 2-1/2 years, the plaintiff made some repayments, too. According to the plaint, suddenly on 23-2-1992 the defendant No.l informed it that as per the decision taken by the State Bank of Pakistan, the machinery, procured by the plaintiff, did not qualify for benefit under the L.M.M. Scheme with the ,result that the State Bank of Pakistan had recalled a sum of Rs.12.902 million out of the sum of Rs.14.672 million. Besides, the defendant No.2 had also imposed penalty at the rate of 25 amounting to Rs.6.5 million. Such action, according to the plaint, was allegedly taken by the State Bank of Pakistan on the basis of report submitted by NESPAK who were nominated by the State Bank of Pakistan to examine the project of the plaintiff and submit report about its eligibility under the L.M.M. Scheme. The plaintiff protested against such action and demanded re-inspection. The plaintiff's project was re-inspected by a team of NESPAK which gave a final report clearing all the items earlier found by it to be outside the scope of L.M.M. Scheme as eligible thereunder. Despite the above, the State Bank of Pakistan acting in pursuance of recall of the amount of re-finance debited the account of defendant No.l and further recovered therefrom, the amount of penalty. The defendant No.l, in turn, through letter dated 16-5-1992 informed the plaintiff that it had debited a sum of Rs.20,052,403.79 to the plaintiff's account. The plaintiff, claims that such action and subsequent declaration by the defendants to the effect that the plaintiff was a defaulter, has resulted in losses. The plaintiff, in the circumstances, has filed the present suit with the following prayer:
2. "(a) ?????? Direct Defendant No. l to specifically perform the Contract between the Plaintiff and Defendant No. 1, as amended from time to time, but excluding any arbitrary and one sided changes thereto and excluding the time taken up by the Defendants illegal actions:
(b) ??????? Issue mandatory injunction against the Defendant No. l directing it to refund/credit an amount of Rs.20,052,403.79 to the Plaintiff and all amounts charged thereon by way of interest/mark-up/penalties or otherwise as well as the effect of compounding thereof;
(c) ??????? Declare that the penalty imposed and conversion of the financial assistance under the L.M.M. Scheme was illegal and without any justification;
(d) ??????? Restrain the Defendant No.l from charging any amount by way of interest profit or any other predetermined rate of return by whatever name called upon any outstandings from the date it breached the contract it had entered into with the Plaintiff till such time that this Hon'ble Court is graciously pleased to issue a decree for the specific performance thereof or till such time that it agrees to perform the said Contract;
(e) ??????? Declare that the black-listing of the Plaintiff and declaring it to be defaulter by the Defendants was unjustified and illegal and direct the Defendants to withdraw the same;
(f) ???????? Direct the defendant No.l to render accounts to the Plaintiff after removing all effect of the illegal penalty and conversion as stated in Prayer No.(b) above;
(g) ??????? Restrain the Defendants from instituting any proceedings or action against the Plaintiff or in respect thereof by way of purported recovery of dues or otherwise until the determination of the present suit;
(h) ??????? Restrain Defendant No. l from instituting against the Plaintiff or in respect thereof any proceedings for recovery under the Industrial Development Bank of Pakistan Ordinance, 1961 and in particular proceedings under section 41 thereof;
(i) ???????? For a money decree in the sum of Rs.150,000,000 as damages to be paid by the Defendants, jointly and severally, to the Plaintiff; or
(ii) ??????? For a decree of Rs.150,000,000 which should be credited adjusted from the accounts of the Plaintiff with Defendant No. l and the balance thereof be paid to the Plaintiff;
(j) , Exemplary costs;
(k) ??????? Any other/further/additional/better relief (s) which this Hon'ble Court may deem fit and proper to grant in the facts and circumstances of the case."
3. In the written-statement,, the defendant No. l while refuting the claim of the plaintiff has taken up the position that the defendant No.2 had found the machinery procured and installed by the plaintiff to be beyond the L.M.M. Scheme and had recalled the re-finance. The amount which had been recalled alongwith the penalty since had been debited to its account by the defendant No.2, in accordance with the terms contained in the Sanction Letter, the plaintiff had become liable for such amount which was debited to its account by the defendant No.l. After such adjustment, the finance granted to the plaintiff had to be treated as one provided from the banks own resources which carried markup at the rate of 22% without rebate and 15% with rebate. It is further the case of defendant No.l that the plaintiff even otherwise had committed default in repayment of the finances granted to it and could not maintain claim for damages. It is denied by the defendant No. l that the plaintiff did not suffer any losses on account of the recall of re-finance, as above.
4. The written-statement filed by the defendant No.2 is mainly based on the fact that the verification made by the Consultant namely NESPAK was final and the second report had subsequently been withdrawn by NESPAK. According to the defendant No.2 the recall of finance was in terms of the conditions contained in the pro forma of application for grant of re-finance submitted by the defendant No. l and such terms were well within the knowledge of the plaintiff.
5. On 15-8-1996, with consent of the parties, the following' two preliminary issues were settled:
(1) ??????? Whether the machinery used by the plaintiff was within the L.M.M. ?????? Scheme or not?
(2) ??????? Whether the State Bank of Pakistan Defendant No.2, herein rightly imposed the penalty on the I. D. B. P. /Plaintiffs? If so, its effect and, what should the order be?
6. In support of their respective contentions in relation to the two issues, the parties have filed a number of documents and have also led oral evidence. The plaintiff has examined its Chief Executive Rana Mushtaq Ahmed as Exh. 62 whereas the defendant No. l has examined one Razin Afaq Syed as Exh.63. The defendant No.2 has examined one Qasim Nawaz who is posted as Regulating Officer of the defendant No.2. The relevant substance, however, is contained in the documentary, evidence bulk of which was exhibited on the basis of admission recorded thereon.
7. I have heard all the learned counsel and have perused the record with their assistance. My findings on the two preliminary issues are as follows:
8. ISSUE NO. 1.
9. In relation to this issue the learned counsel for the plaintiff has referred to Circular No.4 of 1986 issued by the defendant No.2 whereby the L.M.M. Scheme was partly modified. The learned counsel has referred to the amended para.2 of Part A of the L.M.M. Scheme which is as follows:-
10. "On being satisfied about the viability of project, an approved D.F.I./Nationalised Commercial Bank may provide financial assistance to the local purchaser at a concessional rate of return for financing the purchase of locally manufactured machinery. For the purpose of the Scheme Locally Manufactured Machinery would include only those plants, machinery, equipment, transport equipment, cargo vessels, ships, fixtures, fittings, accessories and consumer durables which are to be used for industrial applications and which undergo processing in Pakistan subject to the following conditions:
(i) ???????? Individual machine and equipment using imported components of C.I.F, value up to 20% of the F.O.B. invoice value of the individual machine/equipment will be eligible for 100% financing under the Scheme;
(ii) ??????? For individual machine and equipment using more than 20 % imported components as described in (i) above but not more than 80 % , the refinance shall be limited to the difference between the F.O.B. invoice value of the individual machine/equipment and the C.I.F. cost of the imported components;
(iii) ?????? Individual machine using more than 80 % imported components will not qualify for financing under the Scheme even in part i.e., to the extent of the indigenous components. "
11. It is contended by the learned counsel that the machinery procured and installed by the plaintiff fully conforms to the requirements of L.M.M. Scheme which was monitored throughout by the defendant No. 1. It is pointed out by the learned counsel for the plaintiff that the procedure prescribed under the L.M.M. Scheme was such that the plaintiff really had no say. The feasibility and viability of the project was evaluated in advance by the defendant No. l whereafter the finance was sanctioned. All the details in relation to viability of the project were submitted by the defendant No.l to defendant No.2 after whose approval, the tenders were invited for procurement of the locally manufactured machinery. Such tenders were invited by the defendant No.l and the entire process of financing for procurement of the machinery and the-selection of manufacturer for supplying the machinery was performed by the defendant No.l. The orders were placed by the defendant No.l for supplying machinery at the site of plaintiff's project. The manufacturing plants of the suppliers were inspected by the defendant No. 1. Such position is in fact admitted by all the parties to these proceedings. The plaintiff's learned counsel has then referred to five inspection reports which are on the record as Exh.23 to Exh.27 and show that the Authorised Officers of the defendant No. l had inspected the machinery supplied to the plaintiff by the local manufacturer from time to time. The inspection, notes also contain clear report to the effect that the machinery supplied to the plaintiff was locally manufactured and was brand new. The installation of such machinery was also duly monitored and verified by the officers of defendant No. 1. On such basis it is contended by Mr. Kazi Faez Issa that the machinery procured and installed by the plaintiff was locally manufactured and was certified to be eligible for L.M.M. Scheme by the Officers of defendant No. l itself. It is further urged by the learned counsel for the plaintiff that there was really no material to show that the machinery installed by the plaintiff did not qualify for benefit under the L.M.M. Scheme. Mr. Kazi Faez Issa has further urged that the defendant No. l did not have any material muchless substantial for recall of the finance and refusal of benefits under the L.M.M. Scheme. The defendant No. l could not act mechanically in kpassing on the liability over to the plaintiff. Reference has been made to reprot allegedly submitted by NESPAK to the effect that 16 items did not qualify for benefit under L.M.M. Scheme. According to the plaintiff such inspection was conducted by NESPAK behind its back and without notice to the plaintiff. After coming to know about the decision taken by the defendant No.2, plaintiff applied for reinspection of the project contending that each and every item objected to by NESPAK fully qualified for benefit under the L.M.M. Scheme and that the plaintiff had been prejudiced on account of the inspection having been carried out ex pane. It is further pointed out that in pursuance of the objections put forth by the plaintiff, the defendant No.2 had required NESPAK to re-inspect the project which was consequently re-visited by a team of Experts from NESPAK. This time the report dated 3-9-1992, Exh.35, which was submitted by NESPAK contained clearance with regard to the plaintiff's project except three items but shortly thereafter, upon re-examination of machinery and verification of papers, yet another all clear report dated 23-9-1992, Exh.39, was submitted by NESPAK to the defendant No.2. The plaintiff's case is that upon submission of such reports the objections raised through the first report allegedly submitted by NESPAK stood waived completely. The plaintiff has made reference to letter dated-5th November, 1992 allegedly written by Q.Ghouse Mohinuddin, the Deputy Director of defendant No.2 which has been reproduced in para.12 of the plaint. As per the contents of such letter the defendant No.2 had clearly written to the General Manager Engineering of NESPAK that the project of the plaintiff did qualify for re-finance 'under the L.M.M. Scheme without any doubt. However, such letter despite notice and direction has not been produced in evidence by the defendant No.2. What is significant is that in the written-statement, the assertion with regard to the above-referred letter, dated 5th November, 1992 has not been denied by any of the two defendants. Mr. Kazi has therefore, referred to Order VIII, Rule 5, C.P.C. and submits that contents of the letter be deemed to have been admitted. Reliance has been placed on the case of Badat & Co., Bombay v. East India Trading Co.--AIR 1964 SC 538 and Tildesley v. Harper--(1876)7 Ch.D. 403.
12. In reply, Mr. Abrar Hassan appearing for defendant No.2 has referred to the application form attached with the L.M.M. Scheme which is Exh.49. In the proforma of application which is to be filled by the Financing Institution, the State Bank of Pakistan, has been invested with power to verify the cases of refinance, at random, through independent Consultants. On the basis of such term, it is urged by Mr. Abrar Hassan that the defendant No.2 had the unqualified authority to verify any case of re-finance which power has lawfully been exercised in the present case through appointment of NESPAK for the inspection of the plaintiff's project in order to verify as to whether the piaiAtiff had lawfully been granted facility under the L.M.M. Scheme. Mr.Abrar Hassan has further referred to letter dated 11-1-1993 which is Ex.64/2 whereby NESPAK had informed the State Bank of Pakistan that due to non-availability of reasons in support of the second report and due to resignation by Dr.Seema Aleem the General Manager Engineering who had authored the earlier reports, third report dated 23-9-1992 was withdrawn and the first report was being affirmed. As to how and why was such letter written by NESPAK has remained unexplained. The learned counsel for defendant No.2 has quite emphatically urged that the plaintiff could not sue the defendant No.2 for want of privity of contract between them. It is urged that the defendant No. l had availed the refinance from the defendant No.2 and had entered into the agreement to extend benefit to the plaintiff under the L.M.M. Scheme. All the documents have been executed on the one hand between the defendants Nos. l and 2 and on the other hand between defendant No. l and the plaintiff. There was no agreement between the plaintiff and defendant No.2 with the result that the defendant No.2 was not responsible for any claim made by the plaintiff. It was pointed out to Mr.Abrar Hassan that the plea regarding liability of defendant No.2 to the plaintiff had not been pleaded in the written-statement or in the counter-affidavit, and therefore, such being a plea of fact could not be allowed to be raised at this stage.. The learned counsel in support of the authority for recall of re-finance and imposition of penalty has again referred to the contents of pro forma of application attached with Exh.49 which contains the clause empowering appointment of consultants for inspection.
13. Mr. A. I. Chundrigar appearing for defendant No. l has contended that the defendant No.2 on the basis of inspection allegedly carried out by its Consultant had recalled the re-finance and imposed penalty at the rate of 25%. The amount of re-finance which was recalled alongwith penalty was debited by defendant No.2 from the account of the defendant No. l which under the Finance Agreement and the terms contained in the Sanction Letter was eligible for conversion into facility granted by the defendant No. l itself and the entire amount had to be debited to the account of the plaintiff. The result stipulated under the Sanction Letter was that the entire facility had to be treated as one granted from the Bank's own resources and had to carry larger rate of mark-up. The defendant No. l had no say in the matter nor had it been associated with the inspection allegedly carried by the Consultant appointed by the State Bank of Pakistan. It is further pointed out that the fourth report dated 11-1-1993 allegedly submitted by NESPAK was not based on physical inspection of the machinery which had been installed in the year 1990. The defendant No. l had regularly examined and satisfied itself that the machinery was eligible for benefit under the L.M.M. Scheme. The action taken by the State Bank of Pakistan, besides being unwarranted was evidently indicative of harassment of the plaintiff. As to the question of penalty, Mr.Chundrigar has urged that the defendant No.2 had recovered the same taking undue advantage of its position vis-a-vis the defendant No.l. The defendant No.2, in the present case had recovered penalty only on the basis of the stipulation contained in the pro forma of application which had to be submitted by the defendant No. 1. The levy, as above, was thus based on a contract between the two defendants. The defendant No.2, according to Mr. Chundrigar, had not suffered any loss and on the basis of principle laid down in the cases of Province of West Pakistan v. M/s. Mistri Patel and another PLD 1969 SC 80 and the case of Mohammad Karimuddin and 3 other v. Kanza Food Industries Ltd. Karachi and 4 others PLD 1982 Kar. 590 was not entitled to claim penalty.
14. Reverting to the contentions of Mr.Kazi Faez Issa I find that a reference to the L.M.M. Scheme is necessary. The scheme itself has been produced as Exh.49. The L.M.M. Scheme contains a detailed rather cumbersome procedure for grant of re-finance and the disbursement of amount. Care has specially been taken to ensure that the payment under the Scheme. is not disbursed except for utilization thereunder and the Financing Institution is required to undertake regular inspections and to monitor the grant and disbursement of the finance. All the documents including charge documents are executed between the borrower/customer and the Financing Institution. It is an admitted position that the plaintiff in the present case had executed all the required documents in A favour of the defendant No. l who had evaluated the feasibility of the project and thereafter, monitored the entire process. A number of Inspection Reports submitted periodically by the officers of defendant No. l show that the requirements of the L.M.M. Scheme were faithfully complied by the plaintiff as well as the defendant No. l and the note contained in Exh.24 dated 9-8-1989 which is one of the inspection reports shows that the amount of re-finance was properly utilized for acquiring brand new locally manufactured machinery. Relevant portion of Exh.24 is as follows: '
15. "80% locally manufactured machinery worth Rs.12.156 million manufactured and supplied by different machinery manufacturers have also arrived at site (Details given in enclosed Annexure 'C'). The same was as per our approved quotations and- in brand new condition. Most of the above machinery equipment were found in-assembled form on the day of inspection. The some will be assembled at the time of erection/inspection of the entire plant/machinery. The sponsors vide their letter dated 8-8-1989, have requested us for the release of Rs.43,98,600 being 60% cost of locally manufactured machinery supplied by M/s Ansari Technical Services Karachi (Rs.5.039 million) and M/s G.S.K. Engineering Company, Karachi (Rs.2.292 million). "They have submitted the (sic).
16. Besides the inspection reports, the learned counsel for the plaintiff has shown me from the annexures to the inspection reports that the various machinery including the 16 items about which doubt was expressed by M/s NESPAK in their first report dated 26-9-1991 Exh.64/1, was locally manufactured and had been received from the local manufacturers. In order to further substantiate his contentions, the learned counsel for the plaintiff has taken me through the correspondence which followed the above-referred first report (Exh.64/1). The first document referred is dated 27-2-1992 and is Exh.34. Through such document the defendant No.2, State Bank of Pakistan, had forwarded objections of the plaintiff in relation to the first report to M/s NESPAK for their comments. In reply through letter dated 21-4-1992, Exh.55, NESPAK had offered re-inspection of the project. It appears that NESPAK had conducted re-inspection of the plaintiff's plant subsequently and another report was forwarded through letter dated 3-9-1992 which is Exh.35. The letter dated 3-9-1992, cleared all but three items in relation whereto further clarification was sought from plaintiff: This was followed by another letter dated 23-9-1992, Exh.39 showing that all the items including the 16 items about which doubt was expressed earlier, were cleared as admissible under the L.M.M. Scheme. It was on the basis of such report that, according to the plaintiff, letter was written by the Deputy Director of State Bank of Pakistan on 5th November, 1992 which is quoted in para. 12 of the plaint. The subsequent letter ,dated 11-1-1993, Exh.64/2, referred by the learned counsel for the defendant No.2 appears to have been manipulated and procured from NESPAK. It is strange that none of the parties has summoned NESPAK or its representative to explain the contradictory position reflected from the different reports and letters. The ground for recall of the report forwarded on 3-9-1992 as is mentioned in the letter dated 11-1-1993, in any case, does not inspire confidence. The learned counsel for defendant No. l on this issue has supported the stand taken by the learned counsel for the plaintiff. My finding, therefore, on preliminary issue No.1 is in the affirmative and the plaintiff has succeeded in showing that the machinery used by it was within the L.M.M. Scheme and was eligible for benefit thereunder.
17. ISSUE N0.2
18. The burden to prove this issue lies on the defendant No.2. Mr.Abrar Hassan in order to show that the defendant No.2 had rightly imposed the penalty and recalled the re-finance, has referred to terms contained in the pro forma of application annexed with Exh.49, the L.M.M. Scheme. The relevant paragraphs contained in the said pro forma are as follows:
19. "5. We understand that the State Bank has a right to appoint independent consultants for verifying cases of refinance on random basis and agree to reimburse the cost so incurred in case the report of consultants indicates any irregularities on our part.
6. We agree to pay back any amount of refinance disbursed to us by the State Bank on the basis of this application if the State Bank subsequently concludes that such refinance was wrongfully claimed and also pay fine on such finance at the rate of 25 % per annum for the period for which such finance is availed by us immediately on demand made by the State Bank."
20. The pro forma of application is not part of the Scheme itself and in any event had to be filled in by the Financing Institution. The defendant No.2 has not produced the original application submitted by the defendant No.l but has merely relied upon the pro forma. Evidently, the application, if filled by the defendant No.l, must be available in original with the defendant No.2 and should have been produced. However, such document despite being relevant has been withheld by the defendant No.2. Moreover, the terms contained in,the application form which is addressed to the Chief Manager of the State Bank of Pakistan and had to be filled by the defendant No. l can hardly bind the plaintiff who was not party to it nor had been provided its copy. The plaintiff can lawfully be bound only in regard to the terms of the Scheme and the documents executed by it in favour of .the defendant No.l. The learned counsel for defendant No.2 was not able to show me from the Scheme, Exh.49, that any order could be passed by the defendant No.2 for recall of re-finance or about) imposition of penalty. Under the terms of the Scheme, the defendant No.2 could have refused grant of re-finance before its approval. In the present case the contention of the plaintiff as well as that of the defendant No. l is that the f defendant No.2 had considered all the documents and the eligibility of the plaintiff's project for the benefits of L.M.M. Scheme and the re-finance was approved after conscious application of mind. In any event, the only ground for recall of re-finance and imposition of penalty being that the machinery installed by the plaintiff did not qualify for benefits under the L.M.M. Scheme, having been found by me to be contrary to facts, the finding on this issue too has to be in the negative. In the circumstances, I hold that the State Bank of Pakistan could ndt lawfully recall the re-finance and impose penalty on the defendant No. l or the plaintiff.
21. As regards the arguments of Mr. Abrar Hassan that the plaintiff cannot sue the defendant No.2 for want of privity of contract, I have perused the written-statement filed by the State Bank of Pakistan and find that such plea does not find mention therein and cannot be allowed to be raised.
22. As to the effect of my findings, any further deliberation may affect the other issues which will be settled in the matter on the basis of pleadings of the parties. Consequently, I leave the matter there and the office is directed to put up the matter for further orders or hearing as per Rules.
23. A.A./C-13/K ?????????????????????????????????????????????????????????????????????????????????????? Order accordingly