SHAMS MEHMOOD MIRZA, J. This suit was instituted against defendants No.1 to 10 under section 10 of the Financial Institutions (Recovery of Finances) Ordinance, 2001 seeking recovery of Rs.524,544,786.57 due under Cash Finance, Running Finance, Export Re-finance, Finance against Packing Credit , FEBP facilities.
2. Pursuant to the summons issued by this Court, defendants No.1 to 9 entered appearance and submitted their applications for leave to defend. After hearing the arguments, this Court on 17.01.2013 granted leave to defend the suit only in respect of the Cash Finance facility on the ground that the pledged stocks were allegedly removed from the custody of the plaintif f bank. The application filed by defendant No.1 to the extent of the other facilities and the applications filed by other defendants were dismissed for their failure to raise any substantial defence. Defendant No.10 did not file any application for leave to defend and as such an ex-parte judgment and decree was passed against him. The suit filed by the plaintif f bank was accordingly decreed in the sum of Rs.388,196,353.17, jointly and severally , against defendants No.1 to 10.
3. As leave to defend was granted to defendant No.1 to the limited extent of determining liability on account of loss of the pledged stocks, this Court settled the following issues arising out of the pleadings of the parties on 28.02.2013.
1. Whether the plaintif f is liable to provide setof f of the removed pledged stocks? OPD
2. Whether the plaintif f is not entitled to recover the finance allowed against the pledged stocks if plaintif f is not in a position to return the same? OPP
3. Whether the plaintif f bank removed the pledged stocks and misappropriated the same? OPD
4. Relief
4. The plaintif f bank produced in evidence Sohial Younas, the branch Manager , as PW-1 who tendered in evidence documents as PW-1/1 to PW-1/26 and Shakeel Butt, Incharge Credit, as PW-2. Defendant No.1 produced in evidence Tariq Nazir , Chief Executive Of ficer, as DW -1 and Salman Saleem, Manager Export, as DW -2.
5. The evidence of the parties was concluded in June 2012 but the decision on the case could not be made.
Arguments on the merit of the case were finally addressed by the learned counsel for the plaintif f bank on 20.11.2019 whereas the learned counsel for the defendants sought adjournment. The adjournment was granted by this Court with the condition that no furthe r opportunity shall be granted and that in case of absence of the learned counsel for the defendants the case shall be decided on merits on the next date of hearing. Today , the learned counsel for the defendants is once again not present and a request for adjournment has been made on his behalf.
This Court is not inclined to grant any further adjournment as it is a fairly old case. The case shall be decided on the basis of the available record.
6. The findings on the issues are as follows.
Issues No.1 and 3
7. Both the issues are interlinked and shall be decided together . The onus to prove these issues was on Defendant No.1. Both the witnesses of defendant No.1 tendered in evidence their sworn affidavits, the contents whereof were identical. It was stated by both the witnesses in their affidavits that the plaintif f bank was in custody of the pledged stocks lying in the godowns in which 32000 bags which were not under the pledge of the plaintif f bank were also stored and that on 01.01.2012 a large quantity of the stocks was stolen by unknown persons. It was also alleged that the plaintif f bank lodged the insurance claim the fate whereof is unknown. The witnesses of defendant No.1 also alleged that the plaintif f bank failed to protect the pledged stocks as a result whereof it suffered huge losses which are liable to be reimbursed by the plaintif f bank.
8. The witnesses did not specifically deny the availing of the Cash Finance facility or the disbursal of the amounts thereunder . It was, however , stated that the amount of the facility has been repaid. Both the witnesses, however , failed to provide any proof of the repayments.
9. It was admitted by DW-1 that all the pledged stocks were lying in the godowns located in the mill premises, which is being guarded by six armed guards appointed by defendant No.1. It was stated that there were in total 20 godowns in which the stocks pledged with various banks including the plaintif f bank were stored and that all the banks including the plaintif f bank had appointed their Muqadam to keep watch over the pledged stocks. It was admitted by DW-1 that "Muqadam keeps record of the stock / good released from the godown with delivery order from the concerned Bank. The Muqadam appointed by all Bank was efficiently performing his duty by safeguarding the stocks." It was also admitted by DW-1 that "Apart from keeping record of the pledged stock Muqadam has no duties to perform." DW-1 conceded that at the time of the incident of theft of the pledged stocks, he was out of the country and only came back on 14th/15th January 2012. He furthermore stated that at the time of theft, the guards appointed by defendant No.1 were tied up and locked in a room by the culprits. It was also alleged that defendant No.1 did not take any action against the plaintif f bank in relation to the theft of the pledged stocks or the stocks of 32000 bags allegedly lying in the godowns and that he was not aware of the culprits who stole the pledged stocks.
DW-1 acknowledge the execution of sale agreement Ex.PW -1/25 between the parties.
10. The testimony of DW-2 is not material to the resolution of the issues in this case as he was not directly involved in the affairs of the mills. He admitted in cross-examination that "I cannot affirm or deny whether sufficient / adequate steps were taken for the protection of the stocks as it did not fall within the charter of my duties."
11. PW-1 tendered in evidence, amongst others, the Letter of Pledge Exh.PW -1/7 executed between the parties, FIR dated 01.01.2012 registered by the Muqadam regarding theft of the pledged stocks, letter dated 07.04.2012 Exh.PW -1/23 addressed to the plaintif f bank by defendant No.1, its reply by the plaintif f bank Exh.PW -1/24, sale agreement dated 14.04.2012 Exh.PW -1/25 and stock report dated 31.01.2013 Exh.PW -1/26.
12. PW-1 in his affidavit clearly stated that the plaintif f bank had taken due and reasonable care of the pledged stocks and that the plaintif f bank was not at fault for the burglary that took place at the mill premises on 01.01.2012.
He stated that after the incident of theft, the parties mutually entered into sale agreement dated 14.04.2012 Exh.P- 1/25 under the terms whereof defendant No.1 has already taken possession of 11943 bags of pledged stocks. He furthermore stated that Cash Finance facility to the tune of Rs.100 Million was renewed in favour of defendant No.1 through offer letter dated 08.08.201 1 Exh.PW -1/3 and that the parties executed finance agreement Exh.PW -1/6 of which he was one of the executant. He also stated that in the FIR registered on 02.01.2012, the directors of defendant No.1 were nominated as the accused persons. PW-2 in cross-examination stated that all the finance documents were witnessed by him and that the said documents were duly executed by the defendants. PW-1 as not asked any meaningful question in cross-examination regarding the theft of the pledged stocks or the measures the plaintif f bank was required to take for their safety .
13. It is clear from the testimony of DW-1 that an incident of theft of pledged stocks occurred in the mill premises of defendant No.1 on 01.01.2012. There is no dispute that the godowns in which the pledged goods were stored were situated in the mill premises and that the mill premises were being manned by armed guards employed by defendant No.1. It is also an admitted fact that the plaintif f bank had appointed a Muqadam agency over the pledged stocks and it was included in its duty to keep record of the pledged stocks and to release the same on tender of the delivery orders. Soon after the incident of theft occurred, defendant No.1 wrote letter dated 07.04.2012 Exh.PW -1/23 to the plaintif f bank in which reference was made to the said incident and a proposal was made for purchase of the remaining pledged stocks @Rs.6500/100 K.g. This offer was accepted by the plaintif f bank through its letter dated 12.04.2013 Exh.PW -1/24 whereafter the parties entered into sale agreement dated 14.04.2012 Exh.PW -1/25. These are all admitted documents as is apparent from the cross-examination of DW-1. In none of these documents, defendant No.1 appears to have made any indication that it held the plaintif f bank responsible for the theft of the pledged stocks or specified any blame on the plaintif f bank that it did not take reasonable care of the pledged stocks. In fact, DW-1 stated in no uncertain terms in the cross-examination that "The Muqadam appointed by all Bank was efficiently performing his duty by safeguarding the stocks:" Through sale agreement dated 14.04.2012, defendan t No.1 admitted the entire liability due under various finance facilities including the C Finance. It is also evident that the security of the mill premises was assumed by defendant No.1 which had engaged armed guards for the said purpose. The guards appointed by defendant No.1 were overpowered by the culprits who tied them down and locked them in a room as per the statement of DW-1. In the circumstances, the Muqadam cannot be held to be at fault for the alleged loss of the pledged stocks. This issue shall be highlighted in more detail in the succeeding paragraphs.
14. The issue regarding the loss of pledg ed stocks has confronted this Court in a number of cases. The perennial contest in this area of law revolves around the standard of duty of care imposed on the pledgee in case of loss of pledged goods. It is often alleged by the customer that the pledged stocks being in the possession of the financial institution, a duty is cast upon it on the standard identified in section 151 of the Contract Act, 1872. On that analogy , it is argued that the financial institution is the accounting party and that in case the pledged stocks are not available or have been mis-appropriated the amount of finance cannot be claimed from the customer . There are a number of hurdles in the way of such a submission. The defendant's difficulty in running this argument is settling upon precisely whether the plaintif f bank had effective control over the pledged stocks. In the present case, it is an admitted fact that the pledged stocks were placed in a number of godowns situated inside the mill premises in which allegedly 32000 bags of stocks were also stored other than the pledged stocks. In addition to the raw material, a number of other items were also present in the mill premises including the machinery . Being the owner , the security of the mill premises was the responsibility of defendant No.1 and it was so undertaken by it by retaining the services of armed guards.
15. The pivotal question remains as to whether stocks located in the premises of the customer can be categorized to be in effective control of the financial institution through the agency of Muqadam . Section 149 of the Contract Act stipulates that the delivery to the bailee may be made by doing anything which has the effect of putting the goods in the possession of the intended bailee or of any person authorized to hold them on his behalf. Delivery is often termed as voluntary transfer of possession from one person to another . Delivery of goods need not be through an act of physical delivery and can occur through a transfer of constructive possession. A pledgee can take actual or constructive possession of the chattel (or documents of title) in order to vest his interest thereon [see Bassano v Toft [2014] EWHC 377 (QB)]. For practical reasons, where the pledged goods are stored in the premises/godowns of the customer , possession is achieved by permitting the financial institution to deploy its Muqadam over the godown, who is either handed over the keys of the lock or is permitted to put its lock over the godown. This is done in order to perfect the security of pledge and to display the indication of intent and as a notice to third parties of the security interest of the pledgee. It is said that the adherence to the identification requirement rests upon the theory that an in rem right to possession demands an identified res. However that may be, the Muqadam is the holder of keys to the godown or storage facility with an unfettered right of access to such godown. In theory , the Muqadam holds the goods on behalf of the financial institution and acts on its instructions in relation to such goods to the exclusion of the customer to ensure that the customer does not directly or indirectly regulate the collateral. This arrangement is documented by way of an agreement to which this judgment shall advert to shortly . It is noted that in the present case that the premises in which the godowns were located remained in the exclusive ownership and possession of defendant No.1. Defendant No.1 thus did not deliver the goods in possession of the plaintif f bank rather it gave access to the plaintif f bank' s Muqadam to its premises for the purposes of his deployment over the said godowns.
16. A.E.S. Tay in "The Concept of Possession in the Common Law: Foundations for a new Approach" defined possession to be "....the present control of a thing , on one's own behalf and to the exclusion of all others." In relation to the possession of goods, it was furthermore stated by the author as follows: When I keep things in my house or on my land, even though it be unlocked or unguarded, I am taking advantage of the sanctions against trespass and the general respect for them; the existence of legal rights and duties and the moral respect for them thus become part, or at times even all, of the factual basis of my control. On the other hand, when I place my goods on another's land, unbeknown to the occupier , or when I place them on a public highway , I place my control in jeopardy by neutralising, or turning against me, the sanctions applied against trespass. I do not thus automatically lose possession, but I do raise serious doubts about whether I have it.
The foundational issue of effective control thus becomes of utmost importance in relation to goods which are not stored in the premises of the pledgee. The pledgee can only be said to exercise possession and effective control simultaneously when the goods are in its custody stored in its premises. By placing its Muqadam over the godowns in which the pledged goods are stored and even putting its lock and key thereon, the financial institution cannot be said to be in control of the customer 's premises where the godowns are situated . It is this lack of control which would make the possession of the financial institution over the pledged goods constructive/notional or de jure at best. The possession (in the narrow sense of the expression) in the present case was qualified in as much as it was delivered for a specific purpose i.e. to perfect the contract of pledge and as a notice to third parties of the interest of the plaintif f bank. A duty of care can only be said to arise if the pledged goods are under the de facto as well as de jure control of the plaintif f bank and such would be the case when the pledged good s are stored and located in the premises of the plaintif f bank. Only in such an event, the security of such premises can be imputed to the financial institution for the purposes of meeting the standard laid down by section 151 of the Contract Act.
17. A. M. Burq and another v. Central Exchange Bank Limited and others PLD 1966 (W.P.) Lahore 1 is a judgment to which reference is often made for supporting the proposition that where the pledgee is not in a position to return the goods pledged, the suit founded on loan for return of money is liable to fail. It is however obvious from the facts that the twenty Nine Reams of paper of the customer were pledged in the premises of the Bank. The ratio laid down in the said judgment cannot thus sustain in cases where the pledged goods are not stored in premises belonging to the bailee and are in fact located in the property of the customer .
18. The Letter of Pledge Exh.PW -1/7 dealt with the issue of granting access to the plaintif f bank' s Muqadam. So far as it is material, clause 3 thereof reads as follows:
3. You shall be at liberty: a. .......... b. to post, at my/our cost, your guards, muccadum, godown keeper or any other person at my/our premises, or at any other place where the pledged stocks may, for the time being , be stored, to maintain control over the Pledge Assets but without any responsibility or liability on the Bank' s part in respect of the Pledge Assets. (Emphasis supplied)
It is through this clause that defendant No.1 allowed limited access to the Muquda m of the plaintif f bank to the mill premises to maintain control over the pledged stocks stored in the godowns. The nature of control of the Muqadam over the pledged stocks as per terms of the above clause was not to assume respo nsibility for its security for which defendant No.1 absolved the plaintif f bank. Similarly , the witnesses of defendant No.1 nowhere appear to have suggested in the evidence that the guards appointed by it were only required to secure other items in the mill premises and not the pledged stocks. In the absence of any contract to contrary , the pledged stocks which were stored inside the mill premises were the responsibility of defendant No.1 as they were located in its premises.
Clause 4 of the Letter of Pledge Exh.PW -1/7 is also relevant in as much as it reflects the responsibility assumed by defendant No.1 for passing on the information to the plaintif f bank regarding the quantity of stocks from time to time lying in the godown. This clause too is evident of the weak control of the plaintif f bank over the pledged stocks. This clause reads as under: I/we shall keep or cause to be kept a register of the Pledged Assets for the time being and from time to time pledged with your wherein I/we shall duly and punctually enter or cause to be entered particulars of all Pledged Assets and of all goods and merchandise consumed there from and I/we shall, weekly or an often as you may require, furnish to you a certified statement or copy of all entries which shall have been made in the said register since the last statement or copy was furnished and shall, as often as may be required produce to you, your officers or agents, the register , all accounts, and other books, invoices, bills, vouchers, instruments and papers in any way relating to the Pledged Assets or any part thereof and shall permit you, your officers and agents all such other particulars of or information concerning the Pledged Assets as you may require.
It has been noted that defendant No.1 in terms of the said clause sent stock reports to the plaintif f bank duly singed by its authorized representative. PW -1 tendered in evidence one such stock report as PW -1/26.
19. In the peculiar nature of the transactio n, the terms agreed between the parties regarding the security of pledge shall become of utmost importance to draw the necessary inferences regarding the intention of the parties in relation to the duty of care to be exercised by the pledgee. Clause 5 of the Letter of Pledge Exh.PW -1/7 reads as under: I/we agree that you shall not be responsible or liable in respect of the Pledged Assets nor for counting, measurement, quality , quantity etc. I/we shall hold you, your officers and agents harmless, indemnified and free from any and all responsibility for any losses , injury damages or deterioration/depreciation that may be caused to the Pledged Assets as a consequence or result, however , remote, of any cause, whatsoever , including fire, storm, tempest, earthquake, rains floods, riots, civil commotion, rebellion, insurrection and acts of God or the enemy action, Strikes, lockouts, political or labor disturbances, theft burglary misappropriation or embezzlement or any other cause whatsoever notwithstanding the fact of your possession of the same or otherwise and if the Pledged Assets shall of any such cause as aforesaid, or by virtue of shortage in the Pledged Assets or if any shortage is found or alleged whether during your possession or upon re-delivery , you shall not be liable or responsible for the same and I/we shall forthwith upon demand made by you, deposit with you further securities in the manner and to the extent of shortfall in the value of the same.
The stock report Exh.PW -1/26 was also tendered in evidence which was duly signed by the authorized representative of defendant No.1. This stock report too contained the following stipulations that are of importance:
3. That neither we shall lift or allow any body to lift the goods in any manner without the prior written permission/consent of Habib Metro Politian Bank.
4. The pledged/hypothecated are safe and sound in all respects and we are entirely responsible to prevent it under going any loss, damages and theft etc. These clauses coupled with clause 5 of the Letter of Pledge and the evidence led by the parties leave no room for doubt that the plaintif f bank through its Muqadam wielded limited control over the pledged goods. These stipulations also bring forth the intention of the parties that the Muqadam appointed by the plaintif f bank had no role or obligation over the security of the pledged stocks. The limited control over the premises where the pledged stocks are stored implies that the duty of Muqadam was only to the extent of house keeping of the same. In the circumstances, the degree of care required of the plaintif f bank would also be correspondingly diluted when viewed in the context of duty to secure the pledged stocks against the incidents of theft and misappropriation. The Hon'ble Supreme Court in the case of Messrs World Trans Logistics etc v. Silk Bank Limited etc 2016 SCMR 800 while dealing with identical facts and terms of letter of pledge held as under: Furthermore, paragraph 4 of the letter of pledge also provides that in case any loss or damages or deterioration in the value of goods in caused that shall be borne by the petitioner No.1 without any responsibility whatsoever on the respondent No.1 Bank. So it is apparent that only constructive possession was delivered to the respondent No.1 Bank and actual possession of the pledged goods was without petitioner No.1. Hence it was for the petitioner No.1 to take care of the goods as a man of ordinary prudence would take of his own goods and in case any loss, damage or deterioration is caused to the pledged goods, the respondent No.1 Bank cannot be held accountable.
20. Without going into the issue whether a party can contract out of the provisions of section 151 of the Contract Act, it is evident that in case of mis-appropriation or theft of pledged stocks which are stored in the premises of the customer , the duty of care required from the pledgee in terms of section 151 of the Contract Act will not apply in its strict sense particularly when the contrac t executed by the parties does not make the plaintif f bank responsible for the theft, burglary etc of the pledged goods.
21. In terms of section 151 of the Contract Act, 1872, it is the duty of the bailee to take care of the goods bailed to him. The standard of duty cast upon the bailee is to take such care of the bailed goods as a man of ordinary prudence would have taken under similar situation. The standard laid down by section 151 is uniform in nature as it encompasses all the contracts of bailmen t. It is settled law that pledge is a specie of bailment where the goods are given in possession of the pledgee as security for the repayment of the loan. In the present case, however , the possession of the plaintif f bank over the pledged stocks could at best be termed as constructive or notional in view of the fact that the godowns in which the stocks were stored were situated in the mill premises of defendant No.1.
The Muqadam was appointed simply for the purposes of stock keeping and nothing else. The mill premises were being guarded by persons employed by defendant No.1. The burglary that took place on 01.01.2012 was such that the unarmed guards appointed by the plaintif f bank' s Muqadam had no power to stop it particularly when the armed guards of defendant No.1 were themselves overpowered, tied up and locked in a room. The plaintif f bank was thus under no higher duty to take care of the pledged goods than defendant No.1 in whose premises the stocks were lying and where the incident of theft happ ened. The negligence in the facts and circumstances of the case appears to be that of defendant No.1 in protecting its premises. In the circumstances, it cann ot be held that the plaintif f bank was at fault or that the pledged stocks were lost on account of its negligence. It may pertinently be pointed out that the witnesses of defendant No.1 made no attempt to identify the duty of care the plaintif f bank was required to take of the pledged stocks or its failure to take the specified measures. In fact, DW-1 in his cross-examination categorically stated that the Muqadam was performing his duties efficiently . There is furthermore no allegation from defendant No.1 that the plaintif f bank misappropriated the pledged stocks as DW-1 and DW-2 did not mention anything in their affidavits to this effect. The witnesses of defendant No.1 also did not tender any evidence to demonstrate that 32000 bags other than the pledged stocks were also lying in the godowns in question.
22. In the circumstances, the defendants have failed to discharge the burden of these issues which are accordingly decided against them.
Issue No.2
23. A bailee can only be said to have lost his right to recover the amount of debt in case the goods bailed to him are lost due to his fault or negligence or where it can be proved that he did not take care of the goods as a man of ordinary prudence would have taken in case of his own goods in similar circumstances. In other words, the pledgee will not lose his right to recover money lent to the borrower in case of loss or theft of pledged goods unless it can demonstrated that the goods were lost on account of his negligence. In view of the findings on Issues No.1 and 3, there is no doubt in the mind of this Court that the plaintif f bank is entitled to recover the amount of the Cash Finance facility from the defendants notwithstanding the fact that it is not in a position to return the pledged stocks to defendant No.1 on account of their alleged theft. This issue is accordingly decided in favour of the plaintif f bank.
24. There is no dispute with regard to the liability under the Cash Finance facility which is admitted by the parties in sale agreement dated 1.04.2012 Exh.PW -1/25. It is also apparent that this Court while granting leave to defend to defendant No.1 repelled the argument that the entire liability under Cash Finance facility has been repaid. The leave to defend, as pointed out above, was granted on the limited issue with regard to the removal of the pledged stocks and the entitlement of the plaintif f bank to recover the amount of Cash Finance facility on account of its inability to return the pledged stocks. The ascertainment of liability was never in issue between the parties. The findings in regard to the apportionment of blame for loss of pledged goods have already been rendered above.
Defendants No.2 to 10 also issued their personal guarantee Exh.PW -1/9 to Exh.1 -18 in form of the plaintif f bank.
These defendants are also liable to the payment of liability under the cash finance facility-I.
25. In the circumstances, the suit is hereby decreed in favour of the plaintif f bank and against defendants No.1 to 10, jointly and severally , in the sum of Rs.222,609,486.15 together with costs of funds in terms of section 3 of the Ordinance.