BANQUE INDOSUEZ Versus BANKING TRIBUNAL FOR SINDH & BALOCHISTAN

MAMOON KAZI, J.‑‑‑ This petition calls in question the order dated 31‑3‑1988 passed by the learned Banking Tribunal for Sindh and Balochistan, Karachi, holding that it had no jurisdiction to entertain the suit filed by the petitioners against the respondents Nos.2 to 5 and consequently, ordering return of the plaint for presentation to the Court having jurisdiction.

2. The facts of the case are that the petitioner is a bank and carries on business of banking in Pakistan. Respondent No.2 is a private limited company and respondents Nos.3 to 5 are its directors. They are also guarantors of the loan taken by respondent No.2.

3. It has been alleged that in 1983, on the guarantee of respondents Nos. 3 to 5, the petitioner extended credit/finance facility to respondent No.2 on interest basis which was the mode of providing banking facilities at that time. The respondents executed a promissory note, guarantees and other necessary documents to secure the repayment of the loan. The facility at the request of the respondents was enhanced by the petitioner from time to time and on 21‑1‑1987 a sum of Rs.14,879,956.47 was outstanding against the said respondents.

4. Interest‑based‑banking was abolished in Pakistan with effect from 1‑1‑1985 and on the 31st December, 1984 Banking Tribunals (Ordinance LVIII of 1984) was promulgated ,which came into effect at once. Thereafter respondents Nos.2 to 5 were requested by the petitioner either to liquidate their outstanding liabilities or execute fresh documents on non‑interest basis if they wished to enjoy the banking facility provided by the petitioner. Consequently, the said respondents executed a promissory. note dated 21‑1‑1985 for Rs.14,879,956.47 and promised to pay the said amount together with profit and fine, if any, at the rate as may be prescribed by the State Bank of Pakistan from time to time. The said respondents also executed amongst other documents an agreement for finance on mark‑up basis and personal guarantee to the extent of Rs.15,000,000.00.

5. Thereafter the said respondents failed to export and/or realize the profits of export within time prescribed by the State Bank of Pakistan, therefore, the petitioner paid these sums on behalf of the respondents to the State Bank of Pakistan on different dates as the amount fell due. The respondents defaulted in the payment of their out standings and they also failed to respond to the various notices sent to them by the petitioner, consequently, the petitioner filed a suit for recovery of Rs.20,951,475.96 before the learned Banking Tribunal (respondent No.l) in accordance with the provisions of the said Banking Tribunals Ordinance, 1984.

6. Respondents Nos.2 to 5 raised the preliminary objection to the jurisdiction of the said Tribunal to try the suit which was upheld by the Tribunal as pointed out earlier. The learned Tribunal held:

"There is, however, no specific provision in this Ordinance or the Banking Tribunals Ordinance, for conversion or substitution of a interest‑based facility, by a facility, not based on interest. Secondly, the term finance, as defined in section 2(e) of the Banking Tribunals Ordinance, does not include, ' an interest based facility converted into non‑interest based facility '

On the facts and for the reasons stated above, the amounts for which pronotes and other documents were executed, in the two suits, in January and February, 1985, cannot be termed "finance" as defined in section 2(e) of the Ordinance, because the amount in each case was by itself inclusive of accumulated interest, on the original advance, given by the Bank."

7. Mr. S.A. Sarwana, learned counsel while assailing the order passed by the learned Tribunal has argued that the Tribunal has put a completely untenable and unwarranted interpretation upon the term "finance" as given in the Banking Tribunals Ordinance. According to the learned counsel, the learned Tribunal has failed to take into consideration the fact that simultaneously with the promulgation of the Banking Tribunals Ordinance, 1984, the Banking and Financial Services (Amendment of Laws) Ordinance, 1984 was also promulgated whereby certain laws relating to banking and finance were amended, which had also to be taken into consideration by the learned Tribunal. In any case, it was contended that, the learned Tribunal exceeded its jurisdiction by looking into transactions prior to the execution of fresh documents signed under the non interest banking system.

8. Prima, facie, Mr. Sarwana appears to be right. Although we would rather have preferred that the case had been contested on behalf of the respondents as well but curiously enough none of them has defended the instant petition. When a question of law is raised we would rather determine the same after taking into consideration the view put forth by all the parties concerned. However, we have to decide this case after taking into consideration the contentions of Mr. Sarwana only.

9. The preamble of the Banking Tribunals Ordinance shows that it has come into force to provide for a machinery for recovery of finance provided by banking companies under a system of financing which is not based on interest. The term "finance" has been defined in section 2(e) of the Ordinance 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, " (The rest of the definition is not relevant to the question for determination).

For the purpose of determining claims filed by a banking company against the customer in respect of or arising out of finance provided by it or for exercising jurisdiction for the same purpose section 4 of the said Ordinance provides for establishment of Banking Tribunals. The term "customer" has been defined to mean "a person who has obtained finance from a banking company or is the real beneficiary of such finance, and includes a surety and an indemnifier". According to section 5(3), Banking Tribunal has been vested with exclusive jurisdiction in respect of matters to which the jurisdiction of the Banking Tribunal extends under the said Ordinance, which would include a decision as to the existence or otherwise of finance and the execution of a decree passed by a Banking Tribunal. Section 5(3) is, however, subject to the proviso but we are not concerned with the same at present.

10 The main question which appears to have been considered by the Banking Tribunal while passing the impugned order was whether the outstanding dues of the petitioners which originally included interest which had accrued on the principal amount could possibly be converted into a non‑interest bearing facility so as to bring it within the jurisdiction of the Banking Tribunal.

11. Mr. Sarwana, as we have pointed out earlier, has firstly argued that reference to the amendments introduced through the Banking and Financial Services (Amendment of Laws) Ordinance, 1984 which was simultaneously promulgated with the Banking Companies Ordinance, 1984 indicates that transition from interest bearing to non‑interest bearing system was clearly contemplated by the legislature. The learned counsel has referred to the newly added sections 30A and 93‑D in the Companies Ordinance, 1984. The said section provides as follows:‑‑

"Section 30A. 'redeemable capital' includes finance obtained on the basis of participation Term Certificate (PTC), Musharika Certificate, Term Finance Certificate (TFC), or any other security or obligation not based on interest, other than an ordinary share of a company, representing an instrument or a certificate or specified denomination, called the face value or nominal value, evidencing investment of the holder in the capital of the company on terms and conditions of the agreement for the issue of such instrument or certificate or such other certificate or instrument as the Federal Government may, by notification in the official Gazette, specify for the purpose.

93‑D. Continuance of charge and priority .‑‑‑Where a charge over any property has been or is created by any person in favour of a banking company to secure any interest‑based facility extended by the banking company to such person and such facility is at any time converted into or substituted by any facility not based on interest, such charge shall continue to remain valid and shall maintain its priority in favour of the banking company against all charges created by such person in favour of any other person subsequent to the original date of registration of such charge."

12. In fact, the learned Banking Companies, Tribunal has itself referred to section 93‑D just reproduced by us in this judgment but the view taken by it in this regard was that primarily the section provides for "saving of the validity of a charge" created in favour of a banking company, but it fails to specifically provide for conversion or substitution of one facility by the other. Since there was no express provision in the Banking Tribunals Ordinance for conversion or substitution of one facility by the other the learned Tribunal was of the view that section 93‑D could hardly be relied upon as a substitute for such omission in the said Ordinance. The learned Tribunal was further of the view that the definition of the term "finance" as defined in section 2(e) of the aforesaid Ordinance does not include an interest‑based facility which has been converted into a non -interest based facility.

13. In our opinion, the view taken by the learned Tribunal does not appear to be correct. Firstly, as is evident from the facts of the case, the original contract which provided for charging of interest by the petitioners was substituted by a new contract. Respondents Nos.2 to 5 executed a promissory, note dated 21‑1‑1985 for Rs.14,879,956.47 in favour of the petitioners and they also executed a new agreement for finance on mark‑up basis and a personal guarantee to the extent of Rs.15,000,000.00 in favour of the petitioners. Consequently the original facility for advance credit on the basis of interest was converted into a finance accommodation agreement on non‑interest basis. The substitution of a new obligation for an old one is known as "novatio". In case of novatio of a contract the rights of the parties under the original contract must be completely extinguished giving way to different rights under the subsequent agreement. Section 62 of the Contract Act provides that "if the parties to a contract agree to institute a new contract for it, or to rescind or alter to the original contract need not be performed". In Abdul Qayoom v. Ziaul Haq (PLD 1962 (W.P.) Karachi 334), in a suit brought for recovery of a debt the evidence led by the plaintiff showed that the defendant owned a debt to a firm. A fresh agreement was entered into by a document whereby the defendant acknowledged that a sum of Rs.10,000 was due from him to the said firm which formed the consideration of the agreement entered into between him and the plaintiff. It was held by a Division Bench of this Court that under the new agreement the liability of the defendant under the original contract was completely extinguished and there was a fresh contract substituting the old contract by introducing new business and it was in the nature of novation of a contract within the meaning of section 62 of the Contract Act. In S. Sibtain Fazli v. Star Film Distributors (PLD. 1964 SC 337) the above principle was re‑affirmed by Hamoodur Rahman, J. In the following words:‑‑

"It is an essential element of novation, when new contracting parties are substituted, that the rights and obligations of original contractors 'shall be extinguished and the right and the liabilities of new contracting parties accepted in its place. "

This principle is so well established that we hardly dwell further upon this issue. Suffice it to say that when the previous credit accommodation based on interest gave way to the new finance agreement executed on non‑interest basis the original contract was completely extinguished and no reliance could be placed upon the former for interpretation of the terms of the letter. In that case what the Court was only required to do was to look into the new agreement and to determine whether the same was in conformity with the definition of finance agreement given in section 2(e) of the Banking Tribunals Ordinance, 1984. We find that the learned Tribunal has determined this issue by going behind the new agreement thus coming to a conclusion that the same was not an agreement for :'finance" .

14. It appears to be nobody's case that the agreement dated 21‑1‑1985 is not in conformity with the definition of finance referred to in this judgment. A cursory look at the said agreement shows that the same relates to purchase of goods up to the value of rupees fifteen million. The petitioners at the request of respondent No. l had agreed to purchase the goods referred to in the said agreement and subsequently sell back the same to the petitioners on the basis of mark‑up on the terms set out in the agreement. Consequently, there is no controversy on the point that the agreement in question was an agreement for finance and the claim between the petitioners and respondents Nos.2 to 5 had arisen out of such agreement. The learned Tribunal was therefore, vested with powers under the Banking Tribunals Act to try such claim. The finding of the Tribunal that loan advanced on interest basis cannot be converted into non interest basis by execution of fresh documents on mark‑up basis under the new system, as has already been pointed out, is not warranted by law and the policy of the legislation which had introduced non‑interest bearing system in respect of "finance" between the Banks and the customers. In case the agreement on the basis of which the claim of the petitioner against respondents Nos.2 to 5 had arisen, was in conformity with the definition of "finance", the Tribunal was under legal obligation to exercise jurisdiction in the matter and therefore, it clearly appears to have erred in declining to exercise such jurisdiction.

15. In the result, we allow this petition by declaring that the suit (Suit No.224/87) filed by the petitioners before respondent No. l was competent. The respondent No. l shall, therefore, proceed with the same in accordance with the provisions of the Banking Tribunals Ordinance, 1984. The parties are left to bear their own costs.

A.A./B‑254/K Case remanded.