'SHAHID KARIM, J.---The plaintiff-Bank filed a suit for recovery of Rs,86,114,234.04 along with costs of fund and for the sale of pledged shares.
2. Application for leave to defend was filed by the defendant. In the application for leave to defend, the defendant has raised a claim, in the nature of set off, for a sum of money allegedly recoverable by him from the plaintiff-Bank. The effect of this set off shall be determined during the course of this judgment.
3. The learned counsel for the petitioner/defendant at the -outset does not deny the sanction or availing of the credit facility vide sanction dated 9.5.2008. He also does not deny the terms and conditions conveyed to the defendant vide letter dated 10.05.2008. The defendant also does not deny the liability which stands against him. The precise submission of the learned counsel for the petitioner/defendant is that the defendant has a legitimate claim which is recoverable by him from the bank and it had to be set off against the plaintiff's demand. The only question, therefore, to be seen in this application for leave to defend is as to whether the claim of set off by the defendant can formulate a valid defense for the purposes of an application for leave to defend.
4. The learned counsel for the petitioner/defendant submits that a core condition of the terms and conditions which was agreed between the parties was that the shares which wore pledged as security in the CDC account were under the lien and the control of the plaintiff-Bank. The drawing power (DP) was to be monitored on a regular basis in terms of credit division letter No,CD/AM/206 dated January 21, 2004. The defendant acknowledges that the facility was the working capital requirement and for purpose of investment in shares. The following standard terms and conditions are relevant for the purposes of deciding the instant application according to the learned counsel: e) The Drawing Power (DP) under the credit line is to be determined after applying the margin prescribed at point (3) above to the latest available valuation of the securities covering the credit line. You could avail the credit line up to the amount of the DP or limit, whichever is lower. i)
Exposure will be allowed only against shares pledged in CDC account and on BAL's approved list of shares. k) You will top up your DP as and when it will get short and will not remain it short for three consecutive days. Should the DP remain short for three consecutive working days you irrevocably and unconditionally authorize the bank to sale out your securities pledged/held with the bank. In) Shares will be held in CDC account before allowing disbursement of facility and your D.P will be monitored on daily basis.
5. A reading of clauses K and M' cumulatively, according to the learned counsel for the defendant, would lead to the ineluctable conclusion that the defendant as customer was required to top up the DP as and when it gets short and should not be allowed to remain short for three consecutive days. Should the DP remain short for three consecutive working days, the defendant, by the same term irrevocable and unconditionally authorized the bank to sale out the securities pledged and held with the bank. Also by clause `m' the shares were to be held in the CDC account before allowing disbursement of facility and the DP was required to be monitored on a daily basis.
6. The primary question raised by the learned counsel for 'the petitioner/defendant is that when the crash of Stock Exchange occurred in the year 2008, it was the obligation of the plaintiff-Bank to have sold the shares which were pledged with it and a failure to do so resulted in the cumulative loss which needs to be set off against the claim of the plaintiff-Bank. According to the learned counsel, the defendant is entitled to leave to defend on this question as also that the claim of set off can only be determined once leave is granted.
7, The submissions made by the learned counsel for the defendant are nuanced and do not have any legal legs to stand upon. Firstly, a set off cannot be claimed in an application for leave to defend and can only be claimed in a written statement filed under a regular suit filed before court under section 9 of the Code of Civil Procedure (CPC). There is no basis for the arguments of the learned counsel for the defendant that simply because a set off has been claimed in the application for leave to defend, the defendant is entitled to the grant of leave. The application for leave to defend has to be seen on its own merits and the substantial questions of law raised therein have to be weighed without recourse to any claim of set off set up by the defendant. We must bear in mind that this Court is exercising jurisdiction under a special and a special procedure has been prescribed regulating the suits filed under that law. The normal and recognized mode of trial is not applicable to the suits filed under the special jurisdiction of this Court. Be that as it may, notwithstanding the claim of set off which would require evidence to be taken down and proved, at best, the plea raised could be urged as a substantial question of law for the grant of leave to defend and no more. This would be independent of the plea of set off. Whether the plaintiff bank acted prudently and with good commercial sense could legitimately be put forth as a ground for the grant of leave to defend.
8. The stance of the learned counsel for the defendant that in terms of the provisions of the Contract Act, 1872 (Contract Act), the defendant is entitled to a set off as the plaintiff-Bank failed to fulfill this obligation to sell the shares is also misplaced and erroneous. There is no corresponding duty on the plaintiff-Bank either under the terms of the agreement or under the general law of Contract for the plaintiff-Bank to sell the pledged shares under certain conditions. By clause 'k' of the terms and conditions, the plaintiff-Bank has been authorized to sell the pledged shares but that does not mean that there is a corresponding duty on the plaintiff-Bank to sell those shares at any cost. In this regard, section 176 of the Contract Act would come into play, which reads as follows: "176 If the pawnor makes default in payment of the debt, or performance, at the stipulated time of the promise, in respect of which the goods were pledged, the pawnee may bring a suit against the pawnor upon the debt or promise, and retain the goods pledged as a collateral security; or he may sell the thing pledged, on giving the pawnor reasonable notice of the sale.
'If the proceeds of such sale are less than the amount due in respect of the debt or promise, the pawnor is still liable to pay the balance. If the proceeds of the sale are greater than the amount so due, the pawnee shall pay over the surplus to the pawnor. "
9. From a reading of the provisions of section 176 of the Contract Act, reproduced above, it is evident that the provision confers a right on the Pawnee to bring a suit against the Pawnor upon the debt or price if the Pawnor makes default in payment of the debt or performance at the stipulated time of the promise. At the same time, the Pawnee may retain the goods pledged as a collateral security. The section also gives a right to the bank to sell the goods pledged on giving the Pawnor reasonable notice of the sale. These are alternate remedies which the bank may exercise at its discretion. According to the learned counsel for the plaintiff-Bank, a financial institution in this case, the option most suited to the bank was exercised and the bank chose to bring the instant suit and to retain the goods pledged as a collateral security. According to him, therefore, there is no corresponding duty on the plaintiff-Bank to have sold the shares at a certain time.
10. However, the main plank of the argument of the learned counsel for the defendant is that had the pledged shares been sold by the plaintiff-Bank at the proper time, then instead of claiming from the defendant the suit amount, the plaintiff-Bank could have recovered the amount of the suit from the sale of the pledged shares. That relevant time, according to the learned counsel, is the year 2008 when the Stock Exchanges throughout the world suffered a crash and the prices of the shares stumbled. Once again, this argument is presumptive and tendentious. We have to take into consideration the fact that the goods which are pledged with the plaintiff-Bank and which are the subject matter of the instant suit are shares and stocks which are traded in the stock market. These shares have a value attached to them. Also, the value of these shares is not constant and fluctuates with the currents of the market. It would, therefore, be otiose to raise the argument that the shares ought to have been sold when the market was at its lowest index. The learned counsel for the defendant is not in a position to controvert the fact that the value of the shares might be much higher at this point of time as the shares may have recovered the value that was lost during the crash of 2008. Perhaps this was precisely why the bank did not make the commercial decision of selling the shares at the time when the capital markets were at their lowest ebb. The shares would have been off-loaded at a deflated price and it was reasonable for the plaintiff bank to have waited for an opportune moment so that the markets were more stable and the price of the shares had regained their value.
11. However, as a prefatory, it must be stated that section 176 is, in essence, a right which has come to vest in the pawnee. That right cannot be converted into a corresponding obligation at the whim of the pawnor. In other words, a right in the pawnee and a discretion to exercise that right at the most opportune moment cannot be asserted as an obligation from the standpoint of the pawnor.
That would be tantamount to taking away that right. In effect, therefore, the entire foundational basis of section 176 would fall away. Section 176 would then be reduced to being a painting to be looked at, merely.
12. The key words in section 176 are 'makes default in payment of the debt, or performance, at the stipulated time of the promise'. Thus the right under section 176 is triggered on the default at the stipulated time. That right is not engaged, as contended by the learned counsel for the defendant, when the price of the goods (shares in the present case) falls below a certain threshold. That would amount to reading into the law what is not provided. If there was no default and the stipulated time had not arrived, the mandate of section 176 was not engaged. Merely because price of shares took a plunge would not be circumstance to compel the pawnee to sell. Shares as a commodity are susceptible to ebbs and flows in value and cannot be equated with perishable goods.
13. The learned counsel for the defendant has also not brought forth any correspondence by the defendant at the relevant time calling upon the plaintiff-Bank to off load the shares and to sell them in order to recover the debt owed to the plaintiff-Bank.
14. The principle underlying section 176 has been settled as far back as in A.M. Burg v. Central Exchange Bank Ltd. (PLD 1966 (W.P.) Lah. I) in the following terms: ".... It is a right of the pawnee-pledgee either to bring a suit upon the debt or to sell the things pledged upon giving a reasonable notice of sale. Both these rights are concurrent and they are provided in section 176 of the Contract Act. Under this section, as interpreted in Percy F. Fisher v.
Ardeshir Hormasji Gazdar (2) the pawnee has a right of action for the debt notwithstanding the possession of the goods, subject to the pawnor 's right to redeem the goods upon tender of the amount due before the sale. In Nim Chand v. Jaga Bundhu Ghose (3), it was held:-- "There can be no doubt that when movable property is pledged to person for money lent, he acquires, a special property therein; he has a charge upon it for the satisfaction of the loan advanced, and he is entitled under section 176 of the Contract Act, either to bring a suit against the owner upon the debt or promise, retaining the goods pledged as collateral security, or he may sell the things pledged upon giving reasonable notice of the sale."
'It is, therefore, clear that the right to proceed against the property is not merely accessory to the right to proceed against the debtor personally. Thus a pledger cannot compel the pledgee to exercise the power of sale or its adjustment as a means of discharging or satisfying the amount due to him. The pledger, therefore, is competent in law to use for his debt without selling the pledged property and adjusting its price towards the payment of the debt. He has, however, to keep the property pledged in tact so that he may be able to hand over the security to the pledger on payment of the debt by him. "
15. In the case cited above, reliance was plated on a judgment of the House of Lords reported as Ellis and Company's Trustees v. Dixon Johason (1925) AC 489, p.
493. The rule which was iterated by the House of Lords (which rule holds good to this day) is a rule of equity and is a complete answer to the submission sought to be urged by the learned counsel for the defendant. It is that the creditor is not entitled to recover the amount of his secured debt when he cannot return the security. The facts in that case are somewhat similar to the case in hand. It was held by the House of Lords that the stock-brokers could not have maintained an action for their debt if they were not in a position to restore the shares which he had pledged as a security, since payment of the defendant would entitle him to the return of the security which lie had furnished. (page 7).
16. A survey of the case-law on section 176 can be found in Faysal Bank Ltd. v. M/s. Zamindar Rice Mills (2007 CLD 1164). The proposition, was summed up in the following observations:-- "33. An examination of the statutory provision applicable and the judgment referred to hereinabove reveals that in case the pledgee sues for recovery of the original debt: he is required to keep the pledged goods in tact to be returned to be pledgor, who always his right to redeem the same. In the eventuality of sale after reasonable notice, the amount realized therefrom is to be adjusted against the debt date. The question of such adjustment only arises when and if the goods are actually sold.
34. However, where the pledged goods are lost, damaged or otherwise not available for delivery to the pledgor, in equity, the pledgee cannot seek recovery of the debt secured thereby and pledgor is entitled to an equitable set off by way of adjustment of the value of the lost pledged goods and can always sue the pledgee for damages for the loss suffered on account of the damaged of lost pledged goods. "
17. The learned counsel for the plaintiff-Bank has relied upon a judgment of Karachi High Court reported as Bank of Punjab v. First National Equities Limited (2010 CLD 903). The issue in that judgment was precisely the one which has been raised by the defendant in the application for leave to defend. The entire case law on the subject has been analyzed in the said judgment and it would suffice to refer to some of the paragraphs in that judgment to rebut the arguments raised by the learned counsel for the defendant. In paragraph 13 of the judgment, it was observed by the Karachi High Court: "13. In the case of American Express Bank Ltd. (supra) while declining the leave to defend application learned Single Judge of this Court had observed that defendant is not entitled to leave to defend on the ground that he had counter-claim against the plaintiff. The learned Judge dealt with the above issue in the following words:-- "The facts of the above case are similar to the facts of the present case; and respectfully the judgmeni of the Division Bench I would hold that the defendant No,] is not entitled to leave. On the ground that it has a counter claim against the plaintiff 'In view of the above, it is not necessary to discuss the merits of the defendant's allegation that the pledged goods were sold for less than their proper value.
'The upshot of the above discussion is that the defendant No,1 has failed to disclose any defence.
Consequently, leave to appear and defend the suit cannot be granted to it. That disposes of C.M.A.
1443 of 1987 in so far as it relates to defendant No,1.
14. In the case of Messrs Razaq and Cohany (supra), learned Division Bench of this Court while dealing with the subject has held as under:-- "As regards counter-claim of the appellants in respect of damage to the consignment exported, that is not germane to the point of issue viz, about grant or refusal of the leave to appeal.
(7) If the pleas being raised by the appellants are accepted for the purpose of granting leave to defend, that would change entire complexion of the suit, making it an ordinary suit and thus frustrating the very purpose for which Order XXXVII was incorporated in the Code of Civil Procedure, containing the provisions comparable to similar provisions in the rules of the Supreme Court in England. The purpose of legislating the provisions contained in Order XXXVII of the Code of Civil Procedure, has been explained by the Supreme Court of Pakistan in the case of Abdul Karim Jafrani v. United Bank Limited 1984 SCM R 568 in the following words-- "The overall object envisaged by the legislature was to provide for expeditious disposal of litigation involving commercial transactions of a particular nature by a summary Procedure so that the defendant does not have the means open to exploitation in the ordinary procedure for trial of suits to prolong the litigation and prevent the plaintiff from obtaining an early decision by raising untenable and frivolous defences.
(8) We find that the appellants have not made out a case warranting interference in exercise of discretion by learned Single Judge. Accordingly this appeal stands dismissed in limine."
18. The Karachi High Court relied upon a judgment of the Supreme Court of Pakistan reported as Siddique Woollen Mills and others V. Allied Bank of Pakistan (2003 SCM R 1156) for the following proposition: "15. Finally the honourable Supreme Court of Pakistan in the case of Siddique Woollen Mills etc. (supra), while dealing with the issue has held as under:-- "4. In the course of arguments we have perused the written statement filed by the petitioners before the Banking Court which was in the fact treated as an application for leave to appear and defend wherein liability towards outstanding amount of the respondent-Bank was not denied except raising the plea that the bank has retained the goods of the petitioners unauthorizedly. In our opinion it does not constitute a defence in favour of the petitioners independently nor it gives rise to a bona fide dispute between the parties because in such like cases the Court is required to examine the liability and its acceptance by the borrower. As far as question of sustaining losses by the borrower on account of conduct of the Bank is concerned it can be sorted out in some other forum instead of claim relief on such basis from the Banking court. A Banking Court in exercise of its jurisdiction under section 10 of the Banking Companies (Recovery of Loans, Advances, Credits and Finances) Act, 1997 can only entertain defence of the borrower if prima facie a bona fide dispute has been disclosed."
16. The examination of the above-quoted extracts from the judgments of the honourable Supreme Court of Pakistan and the High Court it is crystal clear that by raising claim of set-off or counter- claim defendant will not be entitled to grant of leave. If leave is granted on this ground alone, it will change the complexion of the suit instituted under a special law i.e, Ordinance, 2001. The claim, if any, defendant has against the plaintiff, can properly be dealt with by the Court of competent jurisdiction including the Banking Court in accordance with law through separate proceedings."
19. Further, in paragraphs 35 and 36, the following observations are pertinent: "35. In case of Salim Adamjee (supra) another learned Division Bench of this Court has dealt with the provision of section 176 of the Contract and has held as under:-- "Section 176 of the Contract Act is applicable to this case. It is as under:- 'If the pawnor makes default in payment of the debt; or performance, at the stipulated time of the promise, in respect of which the goods were pledged, the pawnee may bring a suit against the pawnor upon the debt or promise, and retain the goods pledged as a collateral security; or he may sell the thing pledged, on giving, the pawnor reasonable notice of the sale. If the proceeds of such sale are less than the amount due in respect of the debt or promise, the pawnor is still liable to pay the balance. If the proceeds of the sale are greater than the amount so due, the pownee shall pay over the surplus to the pawnor.
'According to this situation, the `pawnee' has a right either to file a suit in case the pawnor makes default in payment of debt or sell the things pledged on giving reasonable notice of the sale. It is an admitted position that the respondent No,I had sent notice to the appellant for the sale of pledged shares as back as September, 1998. The respondent No,] thereafter, could sell the pledged shares on any date to reimburse themselves by the sale of the pledged shares. The object of the notice is that the pawnor, being the owner of the property shall have priority to get back his property by clearing the dues outstanding against him. It is based upon equitable principles. On one hand, it provides fair opportunity to the pawnor to get back his property and on the other, it also safeguards the interest of the Pawnee. The right of respondent No,] to sell the pledged shares was absolute and could not be bracketed with the possible rise in price of shares."
36. In the case Messrs Crystal Enterprises 6 others (supra) a learned Division Bench of Lahore High Court has held as under:-- "Under the provisions of the Contract Act, the pledgee Bank was entitled either to sell the goods prior to the filing of the suit or to file its suit and to retain the pledged goods as collateral security.
It is clear that the bank exercised the second option and it therefore, entitled to retain the imported goods in its custody, as collateral security."
20. It is clear from a reading of the Karachi High Court and the case relied upon in that judgment that the claim of set off made in the application for leave to defend cannot be considered as a defense giving rise to a substantial question of law and fact. It cannot be considered for the purposes of the grant of leave to defend. Secondly, there is no duty cast upon the Pawnee to sell the goods at any cost under given circumstances and the Pawnee has an option to bring the suit and to retain the pledged goods as security. That is the option which has been exercised by the plaintiff-Bank in this case.
21. In view of the above, the defendant has failed to raise any substantial question of law and fact in the application for leave to defend which is hereby dismissed.
Main Case
22. As a consequence thereof, the suit of the plaintiff-Bank is decreed to the amount of Rs, 86,114,234.04/- along with costs of funds according to law. The costs of the suit are also granted.