Tariq Saleem Sheikh,J :- This is an appeal under Section 22 of the Financial Institutions (Recovery of Finances)
Ordinance, 2001 (the "Ordinance), which impugns Order dated 17-9-2015 passed by the learned Judge Banking Court-II, Lahore, whereby the Objection Petition of the Appellant was dismissed.
2. Brief facts of the case are that Respondent No.1 extended financial accommodation by way of "Sale & Lease Back Facility" in the sum of Rs.28,600,000/- to Respondent No.2 and leased CNG stations equipment (the "Lease Assets") to it in terms of Sanction Advic e dated 9-6-2007. The said facility was secured against the following securities: i) Mortgage of House No.503, Block-W , Phase-III, Defence Housing Authority , Lahore, owned by the Appellant. ii) Personal guarantees of Respondents No. 3 & 4 who were the partners of Respondent No.2, the firm in whose name the finance was extended. iii) Personal guarantee of the Appellant.
3. Respondent No.2 failed to pay the lease rentals whereupon Respondent No.1 filed a suit for recovery of Rs.20,939,252/- (with costs of suit and cost of funds) against the Appellant and Respondents No.2 to 4 in the Banking Court at Lahore. In response to the summons issued by the Banking Court the Appellant filed an application under Section 10 of the Ordinance seeking leave to defend the suit (the "PLA"). However , Respondents No. 2 to 4 did not enter appearance and the Banking Court decreed the suit exparte for Rs.20,843,075/- against them vide judgment and decree dated 26-1-2009. To their extent the suit was automatically converted into execution proceedings under Section 19(1) of the Ordinance and the Banking Court proceeded accordingly . So far as the Appellant was concerned, his PLA was dismissed and a decree for Rs.20,843,075/- was also passed against him vide judgment and decree dated 12-11-2013. The Appellant filed RFA No. 1393/2013 thereagainst before this Court.
4. During the course of execution proceedings qua decree dated 26-1-2009, Resp ondent No.1 filed an application before the Banking Court for possession of the Leased Assets on 28-1-2009. This application was accepted vide order dated 28-1-2009 and the Court directed the bailiff to deliver their possession to Respondent No.1 (Decree- holder). However , this order was not implemented whereupon Respondent No.1 made another application for the same purpose on 3-3-2009. The Court allowed this second application as well vide order dated 3-3-2009 and while doing so also appointed a Local Commission who was tasked to prepare inventory of the Leased Assets at the time of their delivery to Respondent No.1. On 3-6-2009, the Local Commission submitted his report before the Banking Court/Executing Court that Respondent No.1 had asked him to postpone the preparation of the inventory . Record does not show that order dated 3-3-2009 was ever implemented and the Leased Assets were ever delivered to Respondent No.1 in pursuance thereof. In the meantime, the Appellant traced certain personal properties of Respondents No. 3 & 4, brought them to the notice of the Banking Court/Executing Court and prayed that the same may be attached and sold for the satisfaction of decree dated 26-1-2009 that was outstanding against Respondents No. 2 to 4.
5. As already stated, the Appellant preferred RFA No. 1393/2013 before this Court against judgment and decree dated 12-11-2013 that was passed against him by the Banking Court. However, Respondents No. 2 to 4 did not file any appeal against their decree dated 26-1-2009. Since this Court had issued an injunctive order in RFA No. 1393/2013, at one stage the Banking Court/Executing Court adjourned all the proceedings pending before it.
However, when the same were subsequently revived and the Court issued process for the sale of the mortgaged property (i.e. House No. 503-W, Phase-III, DHA, Lahore), the Appellant challenged the same through an Objection Petition dated 24-2-2015. This petition was dismissed by the learned Banking Court vide order dated 17-9-2015.
Hence, this appeal.
6. The learned counsel for the Appellant contended that the impugned order was contrary to law and facts and thus could not be sustained. He argued that, firstly, the Leased Assets constituted the prime security in the instant case.
Respondent No.1 had misappropriated the same in connivance with Respondents No. 2 to 4. It could not be permitted to sell the mortgaged property owned by the Appellant. Secondly , the Leased Assets were lost due to acts of omission and commission of Respondent No.1. Since the value of the Leased Assets was Rs.28,600,000/- which exceeded the decretal amount, the Appellant stood discharged under Section 141 of the Contract Act, 1872 (the "Contract Act"). And lastly , the Banking Court/Executing Court had adjourned the execution proceedings sine die vide order dated 20-5-2014. Respondent No.1 filed an application for their revival which was accepted by the Court vide order dated 5-6-2014 only to the extent of Respondents No. 2 to 4 qua decree dated 26-1-2009.
Execution proceedings with regard to decree dated 12-11-2013 were never revived . They still stand adjourned sine die and all the orders passed in respect thereof and all the steps taken for sale of the mortgaged property were coram non judice .
7. On the other hand, learned counsel for Respondent No.1 vehemently opposed the contentions raised by the Appellant and supported the impugned order. He argued that the Appellant?s Objection Petition was misconceived and was based on misreading/non-reading of record. He also contended that Section 141 of the Contract Act had no application to the facts and circumstances of the instant case.
8. Respondents No. 2 to 4 have not put up appearance despite service. Therefore, they are proceeded exparte.
9. We have heard the learned counsel for the parties and have perused the record.
10. Since the controversy in this case mainly revolves around Sections 139, 140 and 141 of the Contract Act, we reproduce them hereunder for ready reference:
139. Discharge of surety by creditor 's act or omission impairing surety' s eventual remedy .--If the creditor does any act which is inconsistent with the rights of the surety , or omits to do any act which his duty to the surety requires him to do, and the eventual remedy of the surety himself against the principal debtor is thereby impaired, the surety is discharged.
140. Rights of surety on payment or performance .-- Where a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety , upon payment or performance of all that he is liable for , is invested with all the rights which the creditor had against the principal debtor .
141. Surety' s right to benefit of creditors securities .--A surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of surety-ship is entered into, whether the surety knows of the existence of such security or not; and if the creditor loses, or without the consent of the surety , parts with such security , the surety is discharged to the extent of the value of the security .
11. Admittedly , in the instant case the finance facility that Respondent No. 1 extended to Respondent No. 2 was "Sale & Lease Back Facility ." Respondent No. 2 was the original owner of the CNG stations equipment (herein referred to as the "Leased Assets"). Under the said arrangement he sold it to Respondent No. 1 for valuable consideration which then leased it back to Respondent No. 2. Consequent upon the said sale the title in the Leased Assets vested in Respondent No. 1 and Respondent No. 2 held its possession merely as a lessee. This legal relationship which is fundamental to the concept of the facility in question was reiterated in Lease Agreement dated 11-06-2007. Articles 7.01 and 13.02(b) whereof are reproduced hereunder: "Article 7.01. Title, ownership and the right of the property in and to the property/machinery/equipment leased hereunder shall at all times remain vested in First Punjab Modaraba and the Lessee covenants and agrees not to do or perform any act prejudicial thereto. Without limiting the generality of the foregoing, Lessee agrees not to do any act to encumber , convert, pledge, sell, assign, re-hire, underlet or lease lend, conceal, abandon, give-up possession, damage, or destroy the said property/machinery/equipment or any one or more of the accessories or part thereof."
"Article 13.02. The lessee agrees and undertakes with First Punjab Modaraba: a) ... b) This is a contract of lease only and the Lessee shall under no circumstances become the owner of the property/machinery/equipment leased hereunder or the agent of First Punjab Modaraba for any purpose whatsoever. Subject to the prohibition against assignment hereinbefore set out, this agreement shall enure to the benefit of and be binding upon the parties hereto and their respective heirs, executors administrators, successors and assigns."
12. Since the Leased Assets were owned by Respondent No. 1, the contention of the Appellant that they constituted prime security in the instant case does not hold water . Sanction Advice dated 09-06-2007 enumerates the securities for the finance and the Leased Assets are conspicuously missing from that list. The Sanction Advice rather unequivocally states that these assets would be the property of Respondent No. 1. In the circumstances, Sections 139 & 141 of the Contract Act are not attracted and the Appellant's reliance thereon is inapt.
13. Without prejudice to the foregoing, we may examine the question as to whether the Appellant can invoke Sections 139 & 141 to avoid liability if the aforementioned transaction is re-characterized.
14. Sections 139 and 141 have come up for consideration before the Courts in a number of cases over the years.
In "The Central Exchange Bank Ltd. (in liquidation), through the Liquidator , the State Bank of Pakistan, Lahore v.
Mst. Zaitoon Begum etc." (PLD 1968 SC 83), the customer pledged certain goods to the bank to secure an overdraft. By way of "additional security" he also deposited some fixed deposit receipts which were in the name of his wife. The pledged goods were removed from the custody of the bank without cash payment. Since the value of the pledged goods exceeded the overdrafts, it was held that the lady was entitled to the benefit of Section 141 as a surety . The Hon'ble Supreme Court of Pakistan held: "Section 139 lays down that if the creditor does any act which is inconsistent with the rights of the surety, or omits to do any act which his duty to the surety required him to do, and the eventual remedy of the surety against the principal debtor is thereby impaired, the surety is discharged...Section 141 enacts that a surety is entitled to the benefit of every security which the creditor has against the principal debtor, at the time when the contract of suretyship is entered into, whether the surety knows of the existence of such security or not; and, if the creditor loses, or, without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security.' The earlier security was obviously lost by the Bank by its own act and as the value of the goods pledged was approximately Rs. 1,26,000/-, which greatly exceeded the outstanding loans due to the Bank, the failure of the Bank to pursue its remedy against that security completely discharged the liability of Mst. Zaitoon Begum. It is clear that she could not have, if she paid off the Bank, pursued any remedy against the pledged goods which were no longer available. Under both the sections, the result, in the circumstances of this case, would be identical."
15. In "Amrit Lal Goverdhan Lalan v. State Bank of Travancore and others " (AIR 1968 SC 1432) , the bank extended a loan which was to be secured by a pledge of goods. The borrower subsequen tly failed or neglected to repay whereupon the bank sold or otherwise disposed of all the securities either by public auction or by private contract for the liquidation of the debt and then sued the guarantor for the shortfall. The Respondent alleged misconduct on the part of the bank and invoked Section 141 of the Contract Act to avoid liability . Weekly stock statements showed that there was a deficiency in the quantum of the pledge and during the course of evidence the bank's representative deposed that "he did not know how the shortage occurred." The Supreme Court of India held that the shortage was brought about by the negligence of the bank and the surety was discharged. It further observed: "As pointed out by this Court in State of Madhya Pradesh v. Kaluram, (1967) 2 SCJ 823: (1967) 1 SCR 226: 1967 Lab LJ 55 the expression "security" in this section is not used in any technical sens e; it includes all rights which the creditor has against the property at the date of the contract. The surety is entitled on payment of the debt or performance of all that he is liable for the benefit of the rights of the creditor against the principal debtor which arise out of the transaction which gives rise to the right of liability . The surety is therefore on payment of the amount due by the principal debtor entitled to be put in the same position in which the creditor stood in relation to the principal debtor . If the creditor has lost or parted with the security without the consent of the surety the latter is by the express provision contained in Section 141 discharged to the extent of the value of the security lost or parted with...
It is true that Section 141 of the Indian Contract Act has limited the surety's right to securities held by the creditor at the date of his becoming surety and has modified the English rule that the surety is entitled to the securities given to the creditor both before and after the contract of surety . But subject to this variation, Section 141 of the Indian Contract Act incorporates the rule of English law relating to the discharge from liability of a surety when the creditor parts with or loses the security held by him."
16. In "State Bank of Saurashtra v. Chitranjan Rangnath Raja" (AIR 1980 SC 1528) , the bank extended cash credit inter-alia against pledge of groundnut oil tins. There was a concurrent finding of the Courts below that the bank was utterly negligent with regard to the safe keeping and handling of pledged oil tins and that security was lost owing to that negligence. The Supreme Court of India held that Section 141 of the Contrac t Act would be attracted and the surety would be discharged to the extent of the security lost. The Supreme Court noticed the following statement of law in Halsbury's laws of England (4 Edn., V ol. 20, para 280, p. 152): "280. Effect of loss of securities. On paying the guaranteed debt the surety is entitled to have all securities held by the creditor for the debt handed over to him by the creditor in exactly the same state and condition in which they were originally provided, whether they were in existence at the date of the contract of suretyship or came into existence subsequently. Consequently, any act of the creditor interfering with or impairing that right will, to the extent at all events of any loss inflicted, relieve the surety from liability, and, if it has the effect of altering or purporting to alter the contract of suretyship, discharge him altogether. Thus, where there is a mortgage security given in respect of a debt which is subsequently guaranteed, the creditor must hold the security for the benefit of surety, so that, on paying the debt, the surety may obtain a transfer of the mortgage in its original unimpaired condition. If the creditor does not fulfill his duty in this respect the surety is discharged."
The Indian Supreme Court observed that the above statement of law was reflected in Sections 140 and 141 of the Contract Act.
17. A close look at the above-mentioned judgments would show that they are distinguishable from the facts of the case that we have before us. In all these cases there was a pledge which was lost due to the negligence of the bank. However , one may argue that, as the Supreme Court of India observed in Kaluram's case, the term "security" in Section 141 was not used in a technical sense, it should be given a wider meaning. Even if this argument is accepted, a question would arise as to whether the surety would be discharged due to every inaction or act of omission of the creditor . In this context we may refer to the American Jurisprudence Vol. 50, page 978, para 114 which elucidates this proposition as under:th "114. Failure to enforce Security. While the authorities appear to be in entire agreement on the proposition that a surety is discharged, at least to the extent of the value of the security lost, where the creditor, without the surety?s consent, affirmatively releases collateral security, there seems to be some difference of opinion where a loss is claimed to have occurred through the inactivity of the creditor. The general rule, however, is that in the absence of an express agreement to use diligence, or a special request to act, or such peculiar circumstances as to render prompt action of the creditor an absolute duty, mere inaction or passive negligence on the part of the creditor in failing to take steps to secure the collection of his debt from collateral security given to him by the principal debtor is not sufficient of itself to discharge or release a surety from his obligation to pay the debt.
The reason for this rule is that a surety is amply protected against the inaction or passive neglect of the creditor by virtue of the fact that if he desires to expedite payment, he may himself pay the debt, acquire all the securities, held by the creditor, and become subrogated to all the rights of the creditor. Thus, as respects collateral securities, the rule is the same as respects the collection of the debt of the principal debtor. The creditor is under no obligation of active diligence for the protection of the surety, so long as the surety himself remains inactive. Until the surety moves in the matter, it is enough that the creditor holds himself in readiness to transfer to him, when he applies, all the securities he holds, that he may have the benefit of such securities in aid of his own responsibility. The mere failure of a creditor to sell or foreclose against collateral in his hands will therefore not ordinarily discharge the surety.
"In general, sureties are not released by the failure of a creditor to enforce a mortgage or other lien which he has taken to secure the payment of his debt. Where, however, there is an agreement or understanding between the creditor and the surety, with reference to the enforcement of the security, the creditor is bound to active diligence, and if by his negligence the property held as collateral is lost or destroyed, or surrendered, the surety will be exonerated to the extent of the loss, for the reason that the understanding or agreement to look after the security and see that the property pledged as security shall be applied to the debt destroys the duty of the surety to be vigilant and produces a false confidence, but for which he might take security for his own indemnification. Also, of course, if the creditor undertake to enforce the collection of the collateral and is negligent in the manner of enforcing it, the surety is discharged to the extent of the loss thereby resulting."
18. We have already held that the Leased Assets were the property of Respondent No. 1 and were not a security for any finance obtained by Respondent No. 2. Respondent No. 1 twice made an application to the Banking Court/Executing Court for repossession of the Leased Assets but did not pursue the matter to take over their possession from Respondent No. 2. Even if on re-characterization of the transaction it is found that they did constitute a security , in view of the principles mentioned in the preceding paragraph, the Appellant is not discharged under Section 141 owing to mere inaction of Respondent. More importantly , there is no evidence on record that the Leased Assets have actually been lost, destroyed or misappropriated.
19. Now we advert to the last objection of the learned counsel for the Appellan t regarding revival of execution proceedings qua decree dated 12-11-2013. Admittedly the proceedings were previously adjourned sine die and the learned Banking Court/Executing Court resurrected them without notice to the Appellant. There cannot be two opinions that the Appellant was entitled to a notice as he claims. However , at this stage the objection seems merely technical. The Appellant has already joined the proceedings and is duly represented in the Banking Court. Further , no prejudice has been caused to him due to non-issuance of notice. As such, in the peculiar circumstances of the case, this objection is also rejected.
20. In view of the foregoing, the impugned order dated 17 09-2015 does not call for any interference. Accordingly, this appeal is dismissed with no order as to costs. revisions by the competent authorities. Therefore, it is advisable to consult the official sources or legal professionals for the most up-to-date and accurate information.