HABIB BANK LIMITED Versus AL-JALAL TEXTILE MILLS LTD

ORDER

1. By order dated 20-11-2000 leave was granted and written statements have been filed by the defendants. The preliminary question that was raised and issue framed, therefore, was "whether the rescheduling of finance granted in 1992 can be recovered through a subsequent agreement under which 'no actual disbursement has been made". Today the written statements are on record. It has been held in the case of U.B.L. v. Gravure Packaging in Suit No.493 of 1998, that such cannot be allowed. Mr. Tasawur Ali Hashmi states that under the new law, namely the Financial Institutions (Recovery of Finances) Ordinance, 2001 such is allowed as, it has become a part of "obligation" which is defined as under:--

2. "Obligation" includes--

(i) any, agreement for the repayment or extension of time in repayment of a finance or for its restructuring or renewal or for payment or extension of time in payment of any, other amounts relating to a finance or liquidated damages; and

(ii) any and all representations, warranties and covenants made by or on behalf of the customer to a financial institution at any stage including representations, warranties and covenants with regard' to the ownership, mortgage, pledge, hypothecation or assignment of, or other charge on assets or properties or repayment of a finance or payment of any other amounts relating to a finance or performance of an undertaking or fulfilment of a promise; and

(iii) all imposed on the customer under this Ordinance, and

3. According to him all extensions granted rescheduling allowed is liable to be taken in account. According to Mr. Hashmi, due to the amendment and promulgation of the Ordinance of 2001, it is the obligation and the duty of the 'Customer' under section 3 of the said Ordinance of 2001 that he fulfils his obligations to the financial institution. According to him it is binding on the customer to pay all the claim made by the plaintiffs being the sums due upon a finance being rescheduled. According to him, this is the law for the time being in force and such a claim is also liable to be allowed by this Court.

4. In the case of United Bank Limited v. Grauvre Packaging this question has been dealt with exhaustively and it has been held as under:--

55. When one is talking of novation of contract it will be seen as to what is the dim for novating the same. The position will have to be seen in its true, proper and correct perspective. The agreement for financing as is termed by the banks is nothing but an agreement of sale and purchase of tangible' properties, goods or commodities. Once the goods are purchased by the bank, the bank makes a payment for the purchase of the goods which according to the agreement is termed as the sale price. The goods are thereafter sold to the customer and such sale is the resale/repurchase on a marked-up price. There are, therefore, two distinct transactions under the said single agreement. The first being the purchase by the bank for consideration. It is at this juncture that the 'sale price' is disbursed to the seller namely, the customer. This is the amount that the bank say is the 'finance' or 'the 'amount to be paid to the customer. The second is in respect of resale by the bank to -the customer but such is the actual Murabaha transaction/Bai Muajjal. Thus before entering into this transaction, the bank has to be the owner of the goods/property being sold to the customer. It is thus the first transaction that is entered into. After sale to the bank, and the bank paying the sale price, being the 'consideration' of purchase by them of a defined good/property/commodity, they can by the 'Bai Muajjal' transfer that title to the customer, that they have acquired by purchase of the said property. It is a well -established principle of law that no one can transfer a title, better that what he has. Thus the sale is concluded between the bank and the customer upon such purchase price as may be agreed, the repurchase price. It is thus price, which is liable to be, paid by the customer on deferred payment. After the second transaction, i.e. the sale by the bank to the customer is concluded, the contract of sale and purchase is finalised, the bank becomes an unpaid seller where the purchaser is liable to pay the repurchase price. This, the purchaser (customer) is indebted to the bank for the repurchase price payable within the period prescribed. Thus repurchase price becomes the debt. Thus the only thing required under the said agreement is recovery of debt, the goods having been sold and consumed by the customer. Such is the loan or debt. Therefore, a clear distinction between the agreement entered into and the debt paid or payable therefore is to be looked into. Once the debt has been determined the contractual obligation under the agreement is concluded and it is the debt how that becomes payable. The amount will be the liability of the customer and such cannot be increased by addition bf any mark-up. A perusal of section 23 of the Contract Act categorically states, that consideration or object of an agreement is lawful unless it is of such a nature that if permitted, would defeat to 'provision of any law. A subsequent agreement whereby, there is a settlement of previous debt or is renewal .thereof shall in fact amount to defeating the provision of the specific law available. Such will not be novation but an independent agreement contemplating an actual sale and purchase. Such an agreement entered into only for renewing the previous debt shall be a void agreement. The position in law is absolutely clear. I had also referred to the clear instructions of the State Bank in Regulation XVI above. Such renewal will only be Window Dressing and that all profits shown will be nothing but added mark-up. Mark-up cannot be allowed to be added on an `existing debt', as there can be no agreement between the parties in respect of that 'specific debt' except that there could be enlargement of time, and that, too without increase in the debt payable.

56. The subsequent agreement technically would have no nexus with the previous agreement in which a debt had been created. It is a fresh agreement: An agreement by which fresh commodities, goods or articles are to be sold or purchased, therefore, when goods are sold under the fresh contract there shall be consideration by actual and physical payment in the statement of account and not merely adjustment stating that an amount is due and therefore, the bankers can exercise lien. A lien can only be exercised on a credit in the account of the bank to set 'off a liability and not by additional credit to set off to the previous, debt. A debit will not be a credit of the customer and where it, is not a credit of the customer. Section 171 of the Contract Act shall not apply. Section 171 clearly stipulates that a banker in the absence of a contract shall have right to retain a security for such balance goods (bailed to them). A loan or finance or debt given to a customer shall not be an amount or goods bailed to the banking company as such, no right can be claimed.

57. The subsequent agreement does not have any stipulation that there could be a set off by a subsequent finance. Even if it were there, the question would be that such an amount could be, where a mark-up has been added thereon for the purposes of adjustment of marked-up price. I am of the considered view that such cannot be done. The argument therefore that the subsequent agreement is a novation and that once a contract is novated the previous contract cannot be looked into is not correct in the present scenario.

58. If it is presumed for the sake of argument that the- last agreement that had been entered into is the agreement on the bass of which the amount due is payable by the defendants/customers then we will have to look into the contract itself. Admittedly, the contract is one of sale and purchase of commodities. In the circumstances it shall be governed by the Sale of Goods Act, 1930. Sale is defined in section 4 which reads as under:

5. "4. Sale and agreement of sale .---(1) A contract of sale of goods is a contract whereby the seller transfer or agrees to transfer the property in goods to the buyer for a price. There may be a contract of sale between one part-owner and another.

(2) A contract of sale may be absolute or conditional.

(3) Where under a contract of sale the property in the goods is transferred from the seller to the buyer, the contract is called a sale, but where the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell.

(4) An agreement to sell becomes a sale when- the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred."

6. It will be seen that a distinction is created in 'Sale' and 'Agreement of sale'. A contract of sale is, where the seller transfers or agrees to transfer the property in the goods fork a price and such could be absolute or conditional. Subsection (4) of section 4 of the Sale of Goods Act above states, that the 'Agreement of Sale' becomes a 'Sale' when the time elapses or conditions are fulfilled subject to which the property in the, goods has to be transferred. It clearly implies that there has to be conclusion as to the transfer of property in the goods which is the principal element of sale. This Act also came under scrutiny by the Shariat Appellate Bench of the Supreme Court in the case of Islamic Republic of Pakistan v. Public At Large (supra) and in the judgment in the case of Federation of Pakistan v. Awamunnas (1998 SCMR 2041) that, a contract of 'Sale' or 'Ijarah' of a commodity shall only be valid where the 'commodity' is in existence and that there has to be a transfer of such property. Whilst dealing with the concept of 'agreement of sale' it was stated that where the goods did not, exist, the Islamic Injunctions do not recognize such agreement. Sale cannot take place, but an Agreement of Sale can be entered into and this agreement is not a complete 'Sale' of 'Goods'. The sale will only accrue when the commodity is' transferred to the purchaser or consideration thereof has been paid. From the principle laid down we see that the agreement which is a subsequent one does not have the ingredients of a sale and at best be treated an 'Agreement to Sell', such agreement can possibly be specifically enforced whereby, the purchaser may seek direction against the seller upon payment of actual consideration to sell his property, but if such is not done the purchase price repurchase price mentioned, in the said agreement will not, be taken to be -a debt payable by the purchaser. If money has actually been transferred or handed over to him there are only two possibilities, one is the transfer of the property for which money had been given, or the return of the money that had been given to him. The customer will therefore only be liable to the extent that was actually paid to him. If there was damage caused due to the refusal to sell the commodity' if there was one then such shall be required to be proved. The judgment of the Supreme Court was delivered in 1988 has also been reaffirmed in the judgment of Dr. M. Aslam Khaki. I am also of the same view and either where the resultant would be that it is the principal amount that was actually paid would become due but where there is a sale, the sale price has been transmitted and resale is made, the resale price will be payable by the defendants to the plaintiff. It is well settled principle of law that parties cannot contract out of the provisions of the Act. See in the case of Woman Shirniwas Kini v. Ratlal Bhagwandas & Co. (AIR 1956 SC 689) it has been held that an agreement to waive an illegality is void on the ground of public policy. Similar views have been taken in the case of Anayat Ali Shah v. Ameer Hussain (1995 MLD 1714).

59. We now come to another question, i.e. whether an agreement without consideration is a valid agreement. Section 25 of the Contract Act reads as under:--

7. "25. Agreement made without consideration is void unless:--

(1) it is expressed in writing and registered under the law for the time being in force for the registration of documents and is made on account of natural love and affection between parties standing in a near relation to each other, or unless

(2) it is a promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, something which the promisor was legally compellable to do, or unless

(3) it is a promise made in writing and signed by the person to be charged therewith, or by his agent generally or specially authorized in that behalf, to pay wholly or in part a debt of which the creditor might have enforced payment but for the law for the limitation of suits.

8. In any of these cases such an agreement is a contract."

9. The subsequent agreements of finance are not covered by the exception to the general principle, that an agreement without consideration is void. Section 24 of the Contract Act reads as under:--

10. "24. If any part of a single consideration for one or more objects, or any one or any part of any one of several considerations for a single object, is unlawful, the agreement is void."

11. It will be seen that if any part of a single consideration is unlawful the agreement is void.

12. The said judgment referred to above was passed under the Act of 1997. The question is, whether the same principles would apply in the present Ordinance of 2001.

13. The definition of 'finance' is almost the same in both the laws except for addition of a few more transactions. The Word 'obligation' has been introduced in the present Ordinance of 2001 and has been defined and has been reproduced hereinabove. It is clear, from the word 'obligation' that it only refers to the enlargement and extension of a time. It is not provided in the definition of obligation that restructuring or renewals would be an increase in the amount payable on the date of it being restructured, renewed or rescheduled. The question is that the Meaning has to be given in light of the existing law. For as extensive analysis, we need to look at the Act of 1997. The said Act provided for levy of interest on loan. The term 'loan' has been done away with. Loan under the Act of 1997 is defined as "(f)" 'loan' means a loan, advance and credit under the system based on interest and includes..." Doing away with the term 'loan' means that the system based on interest has also been done away with. The new law thus seems to be a consequence of the judgment by the Honourable Shariat Appellate Bench of the Supreme Court of Pakistan in the case of Dr. M. Aslam Khaki v. Syed Muhammad Hashmi (PLD 2000 SC 225). In that case they have-held that all laws are to be brought in conjunction with the Islam and Sunnah. Naturally, the law being introduced now is and ought to have been in consequence with the Dr. Aslam Khaki's case. It will be seen that in that judgment it has been held that mark-up on the repurchase, purchaser cannot be allowed, being against the Injunction of Islam. It was held as under:--

14. "Let us now analyse each one of these transactions separately. The first transaction mentioned in sub-clause (1) is that of mark-up in price. What is meant by this term is the transaction of Murabaha or 'Bai Muajjal', the details of which have been explained in paras. above as well as in paras. 189 and 218 of judgment of Mr. Justice Muhammad Taqi Usmani. It has been mentioned there that this technique was suggested by the Council of Islamic Ideology but was distorted to the worst extent by the banks when they applied it in practical terms. The learned Federal Shariat Court, therefore, observed that "mark-up system, as in vogue, is held to be repugnant to the Injunctions of Islam" (para. 262 of the judgment of the FSC) and consequently, it ordered that the word "mark-up" be deleted from this sub-clause.

15. We have already held that although the mark-up system as in vogue in our banks is repugnant, to the Injunction of Islam; yet it is not correct to assert that the transaction of Murabaha or Bai 'Mu'ajjal in itself is prohibited. If the transaction fulfils the necessary conditions spelled out above, it cannot be held repugnant to the Injunction of Islam. But the reference of this transaction in this clause, in the context of a return on a promissory note or a bill of exchange in not according to the basic principles of a Murabaha transaction. The reason is that Murabaha or Bai 'Mu jjal is a transaction of sale effected on the basis of deferred payment. One of the basic conditions of this transaction, like any other sale, is that the price is fixed at the time of the original contract of sale. This price may include a margin of mark-up (profit) added on the cost incurred by the seller. To determine the amount of mark-up, the seller may take different factors into consideration, including the deferred payment, but as already explained once the price is fixed, it will be attributable to the commodity and cannot be increased or decreased unilaterally, because as soon as the sale is accomplished, the price of the commodity became a debt payable by the purchaser. If this debt is evidenced by a promissory note or a bill of exchange it is not different from a note or a bill evidencing a loan, and no return, whatsoever, can be charged over that note or bill, because it will amount to charging interest on debt.

16. Sub-clause (i) of the proviso to section 79 provides that if the purchaser in a Murabaha or Bai 'Mu'ajjal transaction did not pay the price, evidenced by a promissory note or a bill of exchange, a further return at the original rate of mark-up shall be payable by the purchaser for the whole period within which the price remained unpaid after its maturity. For example A purchased a commodity for Rs.100. B agreed to purchase it from him on a mark-up 10%. The commodity is, thus, sold to B for a price of Rs.110 to be paid after one year, say, on 31st January, A promissory note in the amount of Rs.105 is signed by B in favour of A. Now, this promissory note is nothing but an instrument evidencing a debt payable by B to A, which includes the original mark-up allowed by the Shariah. If B does-not pay Rs.110 to A on 31st January, sub- clause (i) of the proviso to section 79 of the Act, 1881 provides that a further, return on the same rate of mark-up i.e. 10% in the above example, shall be payable by B to A for the whole period of non-payment after 31st January. This provision is repugnant to the Injunction of Islam because after the sale price becomes a debt, no return on it can be claimed by the seller from the purchaser."

17. In fact the order of the Court in the Dr. Aslam Khaki's case goes further to read as under:--

18. "If the purchaser could not pay at the due date because of his poverty, the Qur'anic command is very clear that he should be given more time till he is able to pay. The Holy Qur'an says:

19. And if he (the debtor) is poor, he must be given respite till he is well-off.

20. However, if the purchaser has delayed the payment despite his ability to pay, he may be subjected to different punishment, but it cannot be taken to be a source of further 'return' to the seller on percent., per annum basis as contemplated in section 79."

21. It is clear that the Shariat Appellate Bench of Supreme Court of Pakistan in the aforesaid case has categorically said that the bank should, give time, but it cannot be source of further return. The new law and the intention could not be other than the pronouncement of the Supreme Court of Pakistan. The words 'interest' and 'loans' have been deleted. The word 'obligation' does not also grant any further return, but only allows "extension of time in repayment of a finance or for restructuring or renewal or for payment of extension of time in payment of relating to finance or liquidated damages is the import of the Aslam Khaki's case. It is clear this only relates to either extension of time for the restructuring of a schedule of payment, to be of 'finance'. Further in fact the word 'obligation' says "amounts relating to a finance". Under section 9 of the Ordinance, 2001 it is clear, that the Legislature uses the word "obligation with regard to any finance". This obligation would mean, only an obligation vis-a-vis the 'finance' and nothing more. The word 'finance does not contemplate any addition to a debt. In fact it is only the amount due under contract mentioned therein, that are debts. It is only this amount that is due I am clear in my mind, therefore, that no addition or mark-upon mark-up can be allowed and roll over or rescheduling or restructuring can be done but without any addition of any amount on the debt payable under the first agreement. There is therefore no change and the principles enunciated in the judgment referred above shall be applicable. The issue is thus answered.

22. Mr. Tasawur has filed the break-up of the 'Running Finance Account' (RF Account) and Fixed Assets Finance, the F.A.F. amount. Mr. Salman seeks a few days so that he could refer the matter to his clients. Adjourned to 25-9-2001. Mr. Talib has filed an application today in Court under Order XXXIX, rules 1 and 2. Let this application be numbered. However an interim order is passed that the plaintiffs are restrained from taking any action contemplated by the letter dated 12-9-2000 till the next date of hearing. Copy of the application has been supplied to Mr. Tasawur Ali who waives notice. Let him file a counter-affidavit if any, before the next date of hearing.

23. S.A.K./H-92/K Order accordingly.