' MUNIB AKHTAR, J.---The present leave to defend application, filed under section 10 of the Financial Institutions (Recovery of Finances) Ordinance, 2001 (''2001 Ordinance") arises in somewhat unusual (and rather interesting) circumstances. Learned counsel for the defendants Nos,1 and 2 stated that the latter defendant ("WAPDA") being in financial need for purposes of its Mangla Dam operations, decided to raise funds by issuance of "sukuk" certificates. Sukuk certificates are essentially a form of Islamic based redeemable financing on which the holder of the certificate is entitled to a fixed return known as a rental payment. It may (at the risk of some oversimplification and perhaps even confusion) be roughly likened to an Islamic financing version of a bond, although of course a bond pays interest whereas the return on a Sukuk is non-interest based, and there are other, more fundamental, conceptual differences between the two types of financing. It is not necessary however, to delve deeper into the legal nature of sukuk financing in this decision. Learned counsel submitted that the defendant No, 1 was a special purpose vehicle created for the purposes of the Sukuk issue, but in every sense relevant for present purposes, a complete identity between the two defendants can be assumed. Herein after, the term "defendants" refers, unless the context otherwise requires, to the defendants Nos,1 and 2.
2. Learned counsel submitted that the total value of the issue, and hence the funds raised by WAPDA, was Rs,8 Billion, which was represented by 1.6 million Sukuk certificates ' of Rs,5,000 each. A physical certificate representing 500 Sukuk certificates was also made available, and it appears that a total of 388 such certificates (representing 194,000 Sukuk certificates having a total face value of Rs, 970 million) were issued. The remainder of the placement (having a value of Rs, 7.03 Billion represented by 1.406 million Sukuk certificates) was, it appears, directly issued in book entry (i,e,, electronic) form and held on the CDC system. (In any case, and regardless of the strict accuracy of the foregoing description, the present suit is concerned only with some of the certificates that were issued initially in physical farm.) As is at once obvious the intent was for the Sukuk certificates to be traded, especially on the financial (or money) market in many ways in the same manner as shares are traded on the stock exchange. As will presently be seen, this is a crucial and fundamental aspect of the present case.
3. Learned counsel for the defendants submitted that of the certificates issued in physical form, 300 (representing 150,000 Sukuk certificates having a total face value of Rs,750 million) were acquired by the National Fertilizer Corporation (Pvt.) Ltd. ("NFC"), which was therefore the first and direct allottee of these certificates. The necessary entries in this regard were made in the register maintained for purposes of the Sukuk issue. On or about 12-2-2009, a letter purportedly issued by NFC was received in which it was stated that the latter had sold certificates having a face value of Rs,180 million to one Messrs Swift Engineering Solutions ("Swift"). This amount was represented by 36,000 Sukuk certificates embodied in 72 physical certificates. It appears that these physical certificates were surrendered and in lieu thereof, six physical certificates were issued in the name of Swift, with each such certificate now representing 6000 Sukuk certificates (instead of, as had been previously the case, 500). Of course the total face value came to Rs,180 million, since each Sukuk certificate, as before, continued to have a value of Rs,5,000.
4. It appears that almost immediately, Swift sold off the Sukuk certificates to Al-Meezan Investment Management Co. Ltd., which runs a financial fund under the name of Meezan Islamic Income Fund ("Meezan Fund"). The close similarity of names between this entity and the plaintiff (Meezan Bank Ltd.) indicates, correctly, that they belong to the same group although learned counsel for the plaintiff insisted (and this was central to his case) that the operations of the two are wholly separate and distinct. It appears that after acquiring the 36,000 Sukuk certificates from Swift (now embodied, as has been seen, in 6 physical certificates), the Meezan Fund asked, by letter dated 14- 3-200 (written on its behalf by CDC), for the Sukuk certificates to be transferred to book entry form on the CDC system. The physical certificates were surrendered, and the Sukuk certificates were put in electronic form on or about 17-3-2009.
5. So far, so goad but now (as they say) the plot thickens. It will be recalled that the holders of Sukuk certificates are entitled periodically to a fixed return, called rental payments. On 24-4-2009, a letter was received by the defendants from 'NFC. This was in relation to the 7th rental payment made on the Sukuk certificates. As far as the defendants were concerned, they had made payment in full to the respective holders thereof. NFC however, raised issue with the payment that it had received. It stated, in effect, that it had received the rental payment only in respect of 114,000 Sukuk certificates (having a face value of Rs,570 million) and no payment for the remaining 36,000 Sukuk certificates (having a face value of Rs,180 million), and asked that the balance rental payment be remitted to it. The balance payment being demanded by NFC was of course, in relation to the Sukuk certificates that had been sold off to Swift and thereafter transferred by it in the manner noted above. When the defendants communicated this position to NFC however, it immediately wrote back on 25-4-2009 stating that it had never disposed of any of the Sukuk certificates, stating that the "transfer of these certificates, if any, incorporated in the books of Wapda is therefore, illegal". The defendants were asked to cancel the transfer and restore" the certificates in NFC's name. Thereafter, there was some urgent correspondence between the defendants and NFC, with the former explaining the transfer transaction and the latter sticking by its guns That it had not made any transfer at all and that the transaction was illegal and demanding remittance of the balance rental payment.
6. On account of the foregoing, the defendants felt constrained to constitute an internal team, which examined in minute detail the 72 physical certificates that had been allegedly lodged by NFC for transfer to Swift. Belatedly, it was realized that these certificates could well be forgeries. The defendants immediately write to CDC on 29-4-2009 asking it to stop Any further transfers or transactions in respect of the 36,000 Sukuk certificates identified therein until further instructions were given by the defendants. No explanation was however provided as to why the defendants wished for the transactions to be suspended. It appears that this letter also came to the knowledge of the Meezan Fund. However, by the time this letter was sent (or perhaps notwithstanding its issuance), the Meezan Fund had sold off many (if not all) of the certificates in the course of trading on the financial market to a number of different institutions, which included the plaintiff. It appears that the plaintiff had acquired 22,000 Sukuk certificates (having a total face value of Rs,110 million) from the Meezan Fund. Again, learned counsel for the plaintiff took pains to emphasize that this transaction (which appears to have been carried out in one tranche) was in the normal course of trading on the financial market, did not amount to any collusion or intentional dealing between two associated entities and indeed, that when the plaintiff acquired these certificates, it was not even aware that the seller was the Mdezan Fund.
7. In the meanwhile, the defendants reported the matter to FIA, which conducted an inquiry and eventually a criminal case, being F.I.R. 28 of 2009, was registered against several persons, including certain officers of the 'defendants. It appears that a huge seam had been perpetrated on the basis of forged documents/certificates and the use of a bogus and fictitious entity (Swift) with the connivance, collusion and active involvement of some of the defendants' officials. The criminal case is still pending.
8. As can be readily appreciated, the defendants were in a fix. On the one hand was NFC, which still held the original (genuine) 72 physical certificates embodying 36,000 Sukuk certificates and was demanding payment of rentals and rectification of the record. On the other hand were the transferees of these Sukuk certificates who had acquired the same in good faith while trading on the financial market although unbeknownst to them, the trail of their title led back to an elaborate swindle. These transferees, not unnaturally, also demanded payment of the rental amounts and their recognition as the holders of the Sukuk certificates. In these circumstances, the defendants felt constrained to file an interpleader suit in the civil courts at Lahore on or about 12-12-2009 praying therein for permission to deposit the rental payments in respect of the 36,000 Sukuk certificates in court and a determination as to who was entitled to ownership of the same. NFC, CDC, the Meezan Fund and two transferees from the latter (though not the plaintiff) were made defendants in the suit as originally filed. 'It appears that this suit is pending adjudication.
9. In the meanwhile, the Meezan Fund itself filed a suit in this Court on the original side (being Suit 1726 of 2009 filed on 22-10-2009) against the defendants as also NFC and Swift, seeking declaratory and injunctive relief in respect of the 36,000 Sukuk certificates. This suit is also pending adjudication.
10. Finally, the plaintiff also instituted the present suit under the 2001 Ordinance on or about 26-12- 2009. The plaintiffs grievance can be stated with brevity. It claims to be the owner of the 22,000 Sukuk certificates acquired by it in terms as explained above. The plaintiff contends that the transaction embodied IrS the Sukuk certificates represents "finance" within the meaning of the 2001 Ordinance and that the defendants Nos, 1 and 2 are "customers' as therein defined. The defendant No, 3 (the Federation) is sued as the guarantor of the liabilities of the defendants Nos, 1 and 2 on the transaction. The plaintiff asserts that it has not been paid the rental payment on its Sukuk certificates as was due on 22-10-2009 and that this default continued despite notice dated 30-10- 2009 and a further legal notice dated 25-11-2009. Hence the plaintiff is entitled to bring suit under the 2001 Ordinance. To this suit, the defendants Nos,1 and 2 have filed their leave to defend application, which is presently under consideration.
11; Learned counsel for the defendants made elaborate submissions and raised a number of grounds on which, he submitted, the defendants were entitled to unconditional leave to defend the suit. Learned counsel for the plaintiff was equally elaborate in his erudite reply, whereby he submitted that the leave application merited dismissal. I intend no disrespect by not referring to or considering these . Submissions since in my view the matter can be disposed of in rather different terms (which make this case . So interesting). During the course of the hearing, it appeared to me that perhaps this suit was not maintainable at all under the 2001 Ordinance, though it would certainly be maintainable as an ordinary suit on the original side (subject to whatever defense the defendants may put up). Both learned counsel made submissions on this point as well and it is to consider these submissions that I now turn. I would however, emphasize that this is entirely without prejudice to the points raised by learned counsel for the defendants on the leave application and the reply thereto by learned counsel for the plaintiff.
12. The "point of maintainability which struck me during the course of the hearing, and to which I am going to confine myself, was as follows. The plaintiff did not as such itself directly provide any finance to the defendants. That finance was of course, represented by the Rs,8 Billion issue of Sukuk certificates. Rather, the plaintiff acquired, in the manner described above, a small sliver of that financing when it purchased the 22,000 Sukuk certificates by trading in the ordinary course on the financial market. Could the plaintiff on such acquisition become a financial institution that had provided finance to the defendants within the meaning of the 2001 Ordinance? Learned counsel for the defendants submitted that this question should be answered in the negative. Learned counsel for the plaintiff emphatically submitted that the correct answer was in the affirmative. He submitted that all that was necessary was for there to be (a) a financial institution, (b) finance, and
(c) for the former to hold the latter at the time of default. Any entity that met these requirements was entitled to bring suit under the 2001 Ordinance. However, in my view, there is a distinction to be drawn between a person who is a provider of finance and someone who is a holder of debt. (I recognize that ordinarily, the words "finance" and "debt" are used to distinguish between Islamic modes and interest based financing respectively. However, in this decision, I use both terms in the context Of Islamic financing.) A provider of finance, if a financial institution as defined in section 2(a), is of course entitled to bring suit under the 2001 Ordinance (or A be sued thereunder by the customer). However, a mere holder of debt (even if a financial institution) may or may not be able to do so. In other words, in my view, there is a conceptual distinction between the two states or situations and it is implicit in the 2001 Ordinance that it applies to the former but not necessarily to the latter. It could, to put it differently, be said that every provider of finance within the meaning of the 2001 Ordinance is also a holder of debt, but every holder of debt is not necessarily a provision of finance within the meaning of that statute.
13. In my view, the crucial point to note in the present context is the definition of "customer" given in section 2(c) of the 2001 Ordinance. This provides, as presently relevant, that customer means "a person to whom finance has been extended by a financial institution". In order to fully appreciate the point, reference may also be made to the precedent legislation, being the Banking Companies (Recovery of Loans, Advances, Credits and. Finances) Act, 1997 ("1997 Act"). This statute applied to both interest based financing as well as financing under Islamic modes. It therefore used two terms, "borrower" and "customer" in relation to the separate types of financing. These terms were defined in section 2 as follows (as presently relevant):-- "(c) "borrower" means a person who has obtained a loan under a system based on interest from a banking company...
(d) "customer" means a person who has obtained finance under a system which is not based on interest from a banking company or is the real beneficiary of such finance...."
' It will be seen that the focus has always been on both the obtaining of the finance (or loan) and the entity from whom such financing is obtained, namely, a banking company or a financial institution. Thus, for the 2001 Ordinance to apply, it is crucial that the finance should originally have been provided by a financial institution. Now, normally, if there is a default, it is the financial institution that provided the finance that brings suit under the 2001 Ordinance. However, it could happen that in the meantime, the benefit of the financial obligation owed by the customer was transferred (by way of sale, assignment or otherwise) to another person, and the default occurred thereafter. For example, the original provider of finance may be a foreign bank doing business in Pakistan. But suppose that thereafter, and before there is a default, the bank decides to pull out of Pakistan and sells its banking operations/branches to another bank. There is then a default. Can the transferee bank bring suit under the 2001 Ordinance? I recognize that in this situation (which is by no means hypothetical) certain statutory provisions, such as those of the Banking Companies Ordinance, 1962 may also become applicable. However, in my view, on principle the answer to the question just posed must be in the affirmative. In this sense, and to this extent, the test of the three conditions posited by learned counsel for the plaintiff (see para 12 above) would certainly apply.
14. It will be seen from the foregoing that the crucial element in the definition of "customer" is the origination of the finance that is being sued upon: was it or was it not extended by a financial institution'? Or, to put it differently, was the original provider of finance a financial institution? The answer to this question indelibly stamps the finance for purposes of the 2001 Ordinance. An affirmative answer means that even if the finance is held at the time of the default by another financial institution, the latter will still be able to bring suit under the 2001 Ordinance even though, as transferee, it had not itself extended any finance to the customer. But equally, and this is of course decisive for present purposes, a negative answer will mean that even, if the finance is held at the time of default by a financial institution, a suit will not lie under the 2001 Ordinance if the provider (or "extender") of finance was not a financial institution. Thus, even if at the time of default the benefit of the obligation of such finance is in the hands of a financial institution, it is a mere holder of debt and is therefore, in such capacity, not entitled to bring suit under the 2001 Ordinance.
15. The example of a foreign bank pulling out of Pakistan given in para 13 is of course only one situation in which finance may be transferred to another person from the original provider thereof.
As the facts and circumstances of the present case demonstrate, there can easily be another situation, namely, where financing is obtained by a company in circumstances that indicate that it is intended or possible for the financial Obligation so incurred by the company is to be traded in the ordinary course, whether on a financial market or otherwise. The debt (or relevant portion thereof) may well be traded many times before there is a default. Can a suit be brought under the 2001 Ordinance in respect of such a debt and if so, in what circumstances? For the reasons just stated, the critical point is who originally provided the debt (or relevant portion thereof)? Or. As presently relevant, who was the original allottee of the relevant certificates that embody the debt?
Was it a financial institution within the meaning of the 2001 Ordinance? If so, then (and then alone) will a transferee financial institution (i,e,, who holds the debt at the time of default) be entitled to bring suit under the 2001 Ordinance. It would, in effect, be entitled to step into the shoes of the original provider of finance. If not, then the transferee, even if a financial institution, would simply be a holder of debt and not a provider of finance within the meaning of the 2001 Ordinance. The mere fact that the transferee is a financial institution at the time of default would not, as it were, alter the shoes in question (tc continue with the idiom just used). Of course, the first or original providers of finance would, as long as they continue to hold their portion of the obligation as such, be entitled to bring suit under the 2001 Ordinance provided that they are financial institutions within the meaning thereof. I would emphasize that the examples given in para 13 and this para are not intended to be exhaustive and there can easily be other situations where the debt or finance is held by someone other than the original provider (or "extender") at the time of default. However, the identity of the original provider (was it a financial institution or not) will be determinative of the question whether a suit can be brought under the 2001 Ordinance or not.
16. The points just made can be elaborated by the facts of the very case at hand. There can be no doubt that the financial obligation incurred by the defendants was intended to be traded, especially on the financial market. That is why the funds were raised by means of Sukuk certificates of which the major portion were directly issued in book entry (electronic) form on the CDC system.
As noted above, the original allottee of the 22,000 certificates presently in dispute was NFC. As even its very name suggests, it is not a financial institution. NFC of course claims that it continues to be the owner of the 22,000 Sukuk certificates. Suppose there had been a default in the rental payments while these certificates were still registered in the hands of NFC (i,e,, prior to the Swift "transfer"). Would NFC have a cause of action against the defendants? Could it have brought suit under the 2001 Ordinance? A positive and negative answer respectively to these questions would be unexceptionable. Indeed, any other answer would be regarded as surprising. Now suppose that NFC had itself (i,e,, without any dispute) sold off the 22,000 certificates, which were then acquired by the plaintiff by way of trading on the financial market. The first question, posed now with reference to the plaintiff, would still produce the same answer. But why should the second question now produce also an answer in the affirmative as contended by learned counsel for the plaintiff?
By what alchemy, would the plaintiff become a provider of finance in such circumstances? For it would have to be some sort of alchemy: I can think of no good reason at law at all why this should be so and good reasons, elaborated above, why this should not be so.
17. The point under consideration can also be approached from the converse situation. Suppose that the plaintiff had been the original allottee of the 22,000 Sukuk certificates. Suppose further that there was a default in the rental payments while the plaintiff continued to hold the certificates as such. How would the two questions posed in the preceding para now be answered? There can be no doubt that now both would be answered affirmatively. The plaintiff would be in the happy position of being a provider of finance, which could bring suit under the 2001 Ordinance. But suppose that prior to the default the plaintiff sold off the certificates and after trading on the financial market, NFC acquired them and then there was a default. Now, the two questions would have to be given the same answers as previously, i,e,, affirmative and negative respectively. Short shrift would be given to any attempt by NFC to bring suit under the 2001 Ordinance on the basis that it stood in the place of a provider of finance (i,e,, the plaintiff).
18. For purposes of completeness and in order to avoid possible confusion, I would also like to make a couple of additional points. I have focused on the original provider or "extender" of finance and have held that the nature of this entity "indelibly stamps" the finance for purposes of the 2001 Ordinance. This finding is quite sufficient for present purposes and fully applies in the facts and circumstances of the case at hand. But it should not be regarded as immutable. For situations can conceivably arise where even the indelible stamp may prove effaceable after all. For example, the debt (or even relevant portion thereof) may be restructured and/or refinanced by a financial institution. What would then be the situation? Here, arguably, the very nature of the debt or finance has been altered (the old shoes have, as it were, been replaced by new ones) and therefore even if the original debt or finance was not provided by a financial institution, that may no longer be relevant and hence a post-restructuring default may well be within the ambit of the 2001 Ordinance. Furthermore, I appreciate that it is conceivable that nice questions could sometimes arise even in relation to the status of the original provider of finance. For example, the original provider (or "extender") of the debt in question may not have been a financial institution, but by the time there is a default, it may come within the definition. What would then be the situation? Would it make any difference if the debt is continued to be held by the original provider or has been traded/transferred and is held at the time of default by a financial institution? These questions do not of course arise in the present case, but I mention them in order to emphasize that much may depend on the actual facts of the case, and a resolution of the resultant issues may not be a straightforward matter. However, these observations are not findings necessary for present purposes, are only tentative in nature and I expressly leave these points open to be considered and decided in an appropriate case.
19. In view of the analysis and discussion in the foregoing paras, I conclude that this suit is not maintainable under the 2001 Ordinance. Accordingly, the application presently under consideration is disposed of in the terms that the office is directed to register and fix this suit as an ordinary suit on the original side. Written statements within eight weeks from today.