' MUNIB AKHTAR, J.---The appellant, a banking company (herein after the Bank"), has filed this appeal under section 22 of the Financial Institutions (Recovery of Finances) Ordinance, 2001 ("2001'
Ordinance") against the judgment and decree dated 2-9-2009 of the learned Banking Court III, Karachi. The Bank had filed the banking suit against the present respondents as defendants. Leave to defend the suit was granted, and five issues were framed, of which the learned banking court considered and decided only the first two, which were as follows:-- "(1) Whether the Court has no jurisdiction to entertain the present Suit?
(2) Whether the Suit is not maintainable in law?"
' For reasons that are considered below, the learned banking court concluded that the suit did not come within the ambit of the 2001 Ordinance and ought not to have been filed in terms thereof.
Accordingly, the issues were decided against the Bank, and it was ordered that the plaint be returned under Order VII, Rule 10, C.P.C. For presentation before a court of competent jurisdiction.
2. Briefly stated, the facts are that the respondent No,1 ("the Company") is a public limited company and the other respondents were, at the material time, its directors and/or sponsors. The Company wished to increase its share capital and for this purpose intended to make a public offering of fresh capital in the amount of Rs, 20 million, represented by 2,000,000 shares of a par value of Rs, 10 each. For purposes of the issue, the Company entered into an underwriting agreement with the Bank, dated 4-7-1993 ("the underwriting agreement"), whereby the latter agreed to subscribe and take up to 1,000,000 shares in the event that the issue was undersubscribed on the public offering, for consideration of an underwriting fee. By another agreement of the same date ("the sponsors' agreement"), the Bank agreed with the other respondents that should the Bank have to take up any shares under the underwriting agreement, then on suitable notice being given by the Bank, They would take up the underwritten shares in terms as stated in the agreement. The Company was also a party to the sponsors' agreement.
3. The public offer being undersubscribed, the Bank was required to, and did, take up 891,250 shares of the Company under the underwriting agreement, for which of course it paid the subscription amount to the latter. Subsequently, the Bank called upon the other respondents to take up the aforesaid shares under the sponsors' agreement. This, according to the Bank, they failed to do and ultimately, the Bank filed its suit under the 2001 Ordinance sometime in 1996. The suit was disposed off by the learned banking court in the manner already described. Although the suit was filed under predecessor legislation, the Banking Tribunals Ordinance, 1984 ("1984 Ordinance") and then continued under its successor legislation, the Banking Companies (Recovery of Loans, Advances, Credits and Finances) Act, 1997 and ultimately decided under the 2001 Ordinance, before us the appeal was argued on the basis that there was no difference between these statutes as would be presently material.
4. Before the learned banking court, learned counsel for the respondents argued that the matter fell outside the 2001 Ordinance, since the underwriting obligation undertaken and performed by the Bank did not constitute "finance" within the meaning of section 2(d) thereof. None of the respondents was therefore a "customer" within the meaning of section 2(c). Since a suit under the 2001 Ordinance could only be brought in respect of a default in fulfillment of any obligation with regard to any finance (see section 9), the suit was not maintainable as filed. The learned banking court was referred to two single Bench decisions of this Court, reported as National Bank of Pakistan v. S.G. Fibre Ltd. And others 2004 CLD 689 and Bank Alfalah Ltd. v. Iftikhar A. Malik 2003 CLD
363. Regarding itself (quite correctly) as bound by these decisions, the learned banking court applied and followed the same, and decided the two aforementioned issues against the Bank. Of the cited cases, the first mentioned decision ("SG Fibre") is more relevant; since the issue there also arose out of an underwriting obligation fulfilled by the bank concerned, and the failure of the company's directors/sponsors to take up the underwritten shares in terms of their agreement with' the bank. It was held that the transaction did not come within the scope of the 2001 Ordinance.
5. Learned counsel for the Bank focused attention on SG Fibre and respectfully submitted that that decision ought to be reconsidered. He submitted that underwriting transactions undertaking by financial institutions came within the scope of "finance", and in this regard relied on sub-clauses (i) and (iii) of section 2(d). Thus, the matter clearly fell within the scope of the 2001 Ordinance, and the learned banking court had erred in concluding otherwise. Learned counsel prayed that the judgment and decree be set aside and the matter remitted to the banking court for further proceedings in accordance with law.
6. Learned counsel for the respondents submitted that the decision of the learned single Judge in SG Fibre was correct and fully applicable to the facts and circumstances of the present case. On this basis alone, the appeal ought to be dismissed. During the course of the hearing, another point emerged and we invited learned counsel to assist us with regard thereto. Section 7 of the , Banking Companies Ordinance, 1962 ("1962 Ordinance") provides the forms of business in which banking companies may engage. Subsection (1) states that a banking company may, in addition to the business of banking, "engage in any one or more of the following forms of business", and then follows a long list comprising of 18 clauses, which constitute those additional forms. One of the businesses so made permissible is the underwriting of shares. The definition of "finance" in section 2(d) of the 2001 Ordinance is not exhaustive, but inclusive. This in fact, was the position also in the predecessor legislation. It seemed to 'us therefore, that it was at least arguable that the conduct of underwriting business, and the provision of funds in terms of an underwriting transaction, may constitute finance within the meaning of section 2(d), which could result in the respondents being "customers" and hence the (alleged) default in fulfilling the obligations under the sponsors' agreement may be tantamount to a breach within a meaning of section 9. If so, then the suit would be maintainable under the 2001 Ordinance. As is obvious, this emergent point was a matter of more relevance for the' respondents (inasmuch as if upheld, would result in the appeal being allowed) and we therefore invited them, in particular, to make submissions thereon.
7. First however, the submissions made by learned counsel for the Bank may be considered. As presently relevant, section 2(d) provides as follows:--
(i) an accommodation or facility provided on the basis of...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...;
(ii) facility of guarantees, indemnities, letters of credit or any other financial engagement which a financial institution may give, issue or undertake on behalf of a customer, with a corresponding obligation by the customer to the financial institution; .:.."
Taking the first point, learned counsel submitted that shares were property, and therefore the subscription of the underwritten shares by the Bank was a purchase of property within the meaning of sub-clause (i) and thus within the scope of the definition of "finance". With respect, we are unable to agree. It is no doubt true that shares are property, being regarded as moveable property of a particular type, i,e, choses in action. It is equally true that under our law, share certificates are goods, being e.g. Expressly so defined in the Sale of Goods Act, 1930. (Under English law, share certificates are only evidence of title in the shares represented by such certificates.)
However, we are here concerned not with already issued shares' or existing share capital, but rather a fresh issuance of shares on an increase in the share capital. Once the fresh shares are issued to (and in the name of) the concerned subscriber, he becomes a shareholder (and member) of the company and at that time he is the holder of property in the sense just stated.
However, the act of issuance of fresh share capital itself by the company is not a sale of property.
In our view therefore, sub-clause (i) of section 2(d) does not apply.
8. Turning to the second point taken by learned counsel, we are also, with respect, unable to agree that sub-clause (iii) has any application. The reason is that this relates to a "financial engagement"
(of which guarantees, indemnities and letters of credit are but particular examples) where the financial institution undertakes an obligation on behalf of a customer, and there is 'a corresponding obligation by the customer to the financial institution. The obligation undertaken by the financial institution is to a third party; it is only then that it can be "on behalf of a customer". In the present case, the underwriting obligation was owed by the Bank not on behalf of the Company (the putative customer) but rather to it. And of course, the "corresponding" obligation, i,e, that of the other respondents to take, up the shares under the sponsors' agreement was not owed by the Company but by its directors and/or sponsors, who are, in law, ' separate and distinct persons. We may note, before proceeding further, ,that in the written synopsis filed by learned counsel for the Bank, submissions were made also with regard to the remaining three issues that had been framed by the learned banking court, but not touched upon in view of the decision on the first two issues. The appeal was also heard only on the basis as the matter had been dealt with in the impugned judgment. We therefore do not address the written submissions with regard to the remaining three issues.
9. We now turn to consider the point on which we invited learned counsel to assist us, stated in para 6 above. Ms. Fareeda Mangrio, learned counsel for the Company, submitted that an underwriting agreement was in the nature of insurance in case the public offer was undersubscribed. Learned counsel relied on Naini Gopal and others v. State of Uttar Pradesh (1965)
35 Comp. Cas. 30, a decision of the Indian Supreme Court. Learned counsel further submitted that underwriting transactions were not included in the definition of "finance" in any of the relevant statutes, including of course the 2001 Ordinance. Reliance was placed on three decisions of this Court, Moghul and Sons v. NIB Bank Ltd. And another 2012 CLD 1915 (DB), Procter and Gamble Pakistan (Pvt.) Ltd. v. Bank Alfalah Ltd. 2007 CLD 1532 (SB) and Karachi Electric Provident Fund v.
National Investment (Unit) Trust 2003 CLD 1026 (SB). Learned counsel submitted that the expression 'banking business" had a broader and wider connotation than "finance", and hence the provisions of the 1962 Ordinance could not be relied upon to interpret and apply the latter term, which alone (and not "banking business". As such) was relevant for present purposes. More generally, it was submitted' that the 1962 Ordinance on the one hand and the special banking laws on the other (i,e,, the 2001 Ordinance and its predecessor legislation) were not in pari materia and hence no reliance could be placed on the former while interpreting the latter. On, the facts, it was submitted that the latest audited accounts of the Bank appeared to show that it no longer carried the undersubscribed shares that it had taken up in its books, which meant that it must have disposed off the same. Thus, the very basis or alleged cause of action had ceased to exist. It was submitted that the point raised ought to be decided in the negative, i,e,, that the 2001 Ordinance did not apply on any such basis.
10. Mr. Kashif Paracha, learned counsel for the respondents Nos.2 to 4 and 7 to 8 also prayed for the same answer. Learned counsel recounted the relevant facts and submitted that although the definition of "finance" had been amended from time to time in the various statutes, it had never included underwriting transactions. Learned counsel referred to the well known principle of interpretation that while making any law or amending an existing law, the law maker is presumed to be familiar with the corpus of the then existing legislation. Hence the fact that banking companies could engage in underwriting business under section 7 of the 1962 Ordinance must be presumed to be known to the law maker. Despite this, such business was never included in the definition of "finance". Learned counsel further contended that the 1962 Ordinance itself did not contain a definition of "finance"; rather, it simply used that which had been contained in the 1984 Ordinance. The business of underwriting was dealt with separately from finance. Thus, the latter could not be regarded as including the former. Learned counsel submitted that while the definition of "finance" was admittedly inclusive and not exhaustive, it did not relate to underwriting transactions. In his written synopsis, learned counsel gave an exposition of the substance of such transactions.. He submitted that the essence of such transactions was not debt financing, which was what was meant by "finance" as used in the special banking laws. It was rather the raising of equity capital, which was in all material respects, and both legally and financially, substantively different. It amounted to an investment in the share capital of the company concerned. Learned counsel also submitted that the respondents whom he represented could not be regarded as indemnifiers or guarantors so as to bring them within the meaning of "customer". Learned counsel contended that the sponsors' agreement was void, being contrary to the provisions of section 95 of the Companies Ordinance, 1984. In support of his contentions, learned counsel relied on several reported, decisions, many of which were those relied on before the learned banking court and by Ms. Fareeda Mangrio. It is not necessary to refer to the decisions specifically.
11. Learned counsel for the Bank was, understandably, content simply to submit that the issue that had been raised ought to be answered in the affirmative, i,e, that on the basis thereof the matter did come within the ambit of the 2001 Ordinance.
12. We have carefully considered the submissions made by learned counsel for the respondents.
We accept that "finance" as used in the 2001 Ordinance cannot be regarded as including the obligation undertaken by a financial institution in an underwriting transaction. This is so for two principal reasons. Firstly, as pointed out, both commercially and legally there is a well-accepted distinction between equity financing and debt financing. An underwriting transaction and obligation goes to the former and not the latter. C Secondly, in section 7 of the 1962 Ordinance, which as noted above lists several types of additional businesses that banking companies can engage in, the underwriting business and the business of providing finance are stated in two separate sub-clauses ((a) and (aa) respectively). Sub-clause (a), which lumps together several types of businesses, does refer to the business of "the lending or advancing of money either upon or without security", and the latter is also covered by "finance" as used in the 2001 Ordinance.
However, the separate listing of these types of business (i,e, underwriting and finance) does point towards underwriting business not being "finance". Therefore, we hold that the issue raised in para 6 above Ought to be answered in the negative, i,e, that the obligations undertaken by a financial institution in respect of an underwriting transaction ought not to be regarded as "finance" within the meaning of section 2(d) .
13. Accordingly, we conclude that the learned banking court reached the correct result in the impugned judgment and decree, which should be upheld. This appeal fails and is hereby dismissed.