AHMAD NADEEM ARSHAD, J.---This Regular First Appeal (R.F.A.) under section 22 of the Financial Institutions (Recovery of Finances) Ordinance, 2001. (Ordinance) is directed against judgment and decree dated 11.01.2019 passed by the learned Judge Banking Court-II, Multan (Banking Court) on the basis of which a suit for recovery; of Rs.1,36,53,694/- filed by Silk Bank Limited (respondent) against Vital Chemicals Corporation and two others (appellants) was decreed to the extent of Rs.1,13,93,727.54 with costs and cost of fund.
2. Facts in brevity are that appellants had applied for the sanction of renewal of finance facilities vide an application dated 08.05.2007 (P-2), which was acceded to by the respondent vide approval letter dated 28.04.2007 as under:- I LCF(s)[1] Rs.7.500M II PIMC (Sub limit of LCS[2]Rs.15.000M IIILCF+ In land (U-180 days)Rs.10,000M
3. Appellants again requested for the renewal of the existing financial facilities vide a letter dated 26.06.2008 (P-3) which was allowed and the facility was renewed through facilities advising letter dated 19.08.2008 (P-4). The appellants failed to liquidate their liabilities within stipulated time which compelled the respondent to file the suit for recovery, of outstanding amount of Rs.1,36,53,694/7 as on 31.05.2008. On appearance the appellants filed a petition for leave to appear and defend the suit (PLA) in the shape of written statement where they did not deny the availing of finance facilities rather admitted it in para No.5 of PLA by explaining the purpose of those finances. The respondent also filed its replication.
4. The learned Banking Court allowed PLA and framed necessary issues. After recording the evidence, pro and contra, and providing an opportunity of hearing to learned counsel for the parties, the learned Banking Court decreed the suit to the tune of Rs.1,13,93,727.54 with the cost of suit and cost of funds from the date of default till its realization vide impugned judgment and decree.
5. We have heard learned counsel for the parties at full length and perused the record with their able assistance and we have also gone through the case laws referred to.
6. As discussed supra, the appellants did not deny availing the finance facilities. Their main grievance is with regard to overcharging and excessive mark-up in violation of the agreements executed in this regard. The learned Banking Court framed issue No.2 in this context and placed its onus upon the respondent, which is as under:- "If issue No.1 is decided in affirmative, whether plaintiff is entitled for recovery, of Rs.1,36,53,694/- as on 31.05.2009 from defendants? OPP
7. Facilities advising letter dated 19.08.2008 (P-3) reflects that the financial assistance extended to appellants is 'Running Finance[3] facility' which is duly signed by the appellants. Although on perusal of agreements for financing dated 08.08.2007 (P-'6), and dated 20.08.2008 (P-22), with regard to this finance facility, it appears that a buyback price of Rs.93,75,000/- with reference to buy price of Rs.75.00.000/- is mentioned and the other relevant documents also followed this agreement, but the basic document which sanctioned the finance facility is 'Facilities Advising Letter' dated August, 19, 2008 (P-4) addressed to Messrs Vital Chemical Corporation and it described the finance facility as 'Running Finance'. It also mentioned the rate of mark-up/charges defined in clause 5 as under: - "06 months Kibo[4] Avg. Ask rate + 5% p. a. Reset: Pricing to be reset on bi-annually basis"
8. 'Running Finance facility' is the form of lending, where the customer is allowed to borrow money from a financial institution up to a certain limit either at once or as and when it is required. If it is availed and withdrawn at different intervals and paid back on various occasions, then mark-up levied thereon is worked out on daily product basis. The bank charges mark-up only to the amount availed by the consumer instead of buyback price. The formula to work out the mark up on 'daily product basis', in respect of Running Finances, according to recognized Banking practice is:- "Balance outstanding +Number of days+ rate 365 days in a calendar year"
9. The respondent about 'Running Finance Facility' produced Promissory Note dated 05.08.2007 (P- 5), Promissory Note dated 20.08.2008 (P-21), agreement for financing dated 08.08.2007 (P-7), agreement for financing dated 20.08.2008 (P-22), letter of Hypothecation dated 05.08.2007 (P-7), letter of Hypothecation dated 20.08.2008 (P-24) and letter of guarantee (P-8). The respondent produced statement of account (P-38) which showed an amount of Rs.74,47,247/- as outstanding against appellants on 29.11.2008. Next entry in that statement indicates that on 05.12.2008 it was shifted to SAM[5]. Statement of account prepared by SAM (P-44) and statement of account of.
Mark-up (P-39), reveals an amount of Rs.2,57,280/- outstanding against mark-up on 31.12.2008 and said amount was transferred to SAM on 16.01.2009. The statement of SAM produced is Ex. P-45.
10. It is prayed from the above referred documents that a sum of Rs.74,48,247/- was outstanding as a principal amount with reference to 'Running Finance' and an amount of Rs.2,57,280/- as mark-up.
Learned Banking Court did not award mark-up amount to the respondent.
11. The facility of FIM[6] is a banking facility which financial institution allows its customers' for financing their import and local business. The customer when opens the LC[7], the bank on behalf of its customers gives an unconditional guarantee to the exporter that if the documents drawn under the letter of credit were in conformity with the terms of the letter of credit, the bank will pay the amount to the exporter without referring the demand to importer (LC opener). The bank after negotiating the documents creates a demand against the customer. The documents drawn under the LC are titled to goods. If the importer pays the amount of documents to the bank, the bank delivers the same to the importer and the importer on the basis thereof gets the delivery of imported goods from Port. After payments of the price of documents to bank, the FIM facility stands adjusted and transaction is over. But if the importer fails to pay the price of documents, the documents remain with the bank and the FIM facility in the books of the bank remains unadjusted and recoverable from the importer. The bank in this case had claimed that it allowed FIM facility to appellants and they opened two letters of credit but failed to liquidate that LC(s).
12. To prove FIM-1, the respondent produced Promissory Note dated 08.08.2007 (P-9), Promissory Note dated 20.08.2008 (P-25), agreement for financing dated 05.08.2007 (P-10), agreement for financing dated 20.08.2008 (P-26), letter of pledge dated 08.08.2007 (P-11), letter of pledge dated 20.08.2008 (P-27), continuing guarantee dated 08.08.2007 (P-12) and continuing guarantee dated 20.08.2008 (P-28). It appears on survey of these documents that 10 million was approved for that facility and its buyback price was settled as Rs.12,500,000/-Statement of account with regard to principal and mark-up was produced as Ex.P-40 which shows that an amount of Rs.110400/- was outstanding against the principal and Rs.14,056/- against mark-up. These amounts were also transferred to SAM and SAM's department statements of accounts were produced as Ex.P-46 regarding the principal amount and about the mark-up Ex.P-4 (these documents also verified the claim of respondent). The respondent also produced statement of account about FIM-2 (P-40) and statement of accounts of SAM department relating to the principal (P-48) which reveals an outstanding amount of Rs.14,35,200/-. About mark-up (P-49) it reflects an outstanding Mark-up Rs.1,24,517.59 as on 16.01.2009. The respondent with regard to LC(s) multi transaction produced Promissory Note dated 08.08.2007 (P-I3), Promissory Note dated 20.08.2008 (P-29), agreement for financing dated 08.08.2007 (P-14), agreement for financing dated 20.08.2008 (P-30), agreement for financing dated 08.08.2007 (P-15) and letter of continuing guarantee (P-16).
13. The respondent about LC(U) produced an agreement for financing dated 08.07.2007 (P-17), trust receipt dated 08.08.2007 (P-18), and continuing guarantee (P-19). To support the documents respondent also produced statement of account of PDA as Exh.P-41 which consisted of principal and Mark-up and after transfer of amount to SAM department produced statement of account with regard to PDA[8] outstanding as Exh.P-50 with regard to principal which showed an outstanding amount of Rs.23,99,880/- and with regard to Mark-up as Exh.P-51 which showed an amount of Rs.3,11,065/-. The respondent also produced a letter dated 14.04.2008 (P-53) which shows outstanding PDA as Rs.23,99,880/-The learned Banking Court keeping in view all the documents and statements of accounts calculated outstanding liability Rs.1,26,13,789.83, and after deducting the mark-up amount of Rs.12,20,062.92 in the light of statements of PW-1 and PW-2 declared the outstanding liability against the appellants as Rs.1,13,93,727.54. All the outstanding mark-up was deducted from the outstanding principal amount therefore, objections of appellants with regard to overcharging and excessive charging lost its significance.
14. Learned counsel appearing on behalf of the appellants failed to rebut it through any documentary evidence. Similarly, they also failed to point out any illegality and irregularity with regard to statements of accounts and charging of overcharging and excessive Mark-up or any Mark-up after the expiry period. Therefore, the findings of learned Banking Court upon issue No.1, are correct and upheld.
15. The appellants took a stance in their PLA that the pledged stock of appellants was lying under the lock, key, and control of Bank and on 10.05.2008 when they were in Lahore, in their absence, certain officials of the Agricultural Department visited the Godown and forcibly took into possession the stock and also got registered a criminal case vide FIR. No. 188 under section 21(A) of the Agricultural Pesticides Ordinance 1971 as amended in 1997 on 10.05.2008 and since the stocks were lying under the custody of concerned police and respondent-bank has not taken any step towards the restoration of those stocks and that the respondent is not in a position to give back to the appellants that pledge stocks, therefore they are entitled to receive the value of pledge stocks Rs.11.300M as set-off. The respondent in response to that objection took a stance that the appellants have the license to sale purchase and import of pesticides under the Agriculture Pesticides Ordinance and the Agricultural Department under the Pesticide Ordinance has the authority to inspect the stock of any importer or distributor and if found adulterated or expired then takes the possession of that stocks and it was the duty of appellants to get it cleared from the concerned authorities but they failed to do so. The learned Banking Court keeping in view the divergent stance of the parties framed issue No.3 in the following manner: - "Whether defendants are entitled for recovery of pledge stocks from plaintiff on payment of suit amount? OPD"
16. Its onus was placed upon the appellants. None of the appellants appeared in the witness box.
Appellant No.2 namely Razi Ahmad appointed Waseem Ahmad Zia as his special attorney who produced his affidavit (DA). Although, special power of attorney is available on file, but it was not tendered in evidence. Dw-1 in his affidavit (DA) narrated the same story as described in. PLA and deposed that some officials of Agricultural Department came there to check the godown and forcibly took the possession of stock and also lodged FIR against Vital Chemicals and produced copy of FIR as Mark-A. During the course of cross-examination, he admitted that Agricultural Department took the stock due to incomplete documents. He further deposed that he did not know what documents were incomplete?
17. Learned counsel for appellants argued that the finance facility availed by the appellants was secured by way of pledge stocks; that the pledge stocks were under the lock, key and control of the respondent-bank which were duly handed over to the respondent-bank and the respondent-bank holding control over pledge stocks by appointing its Muqaddam'[9] for the safety of such pledge stocks; that it is a settled law that the bank cannot recover its financial facility until and unless the bank returns the pledged stock in the same quantity, quality and condition to the customer; that the respondent failed to take care of stocks as a man of ordinary prudence, take care of his goods; that as the pledge stocks are not available and the respondent is not in a position to return the pledge stocks to the appellants, therefore the respondent is bound to adjust the value of the pledged stocks.
18. Before proceeding further, it is better to understand the terminology of the bailment. When one person, in the light of a contract, delivers goods to another for some purpose with an understanding that when the purpose is accomplished he shall return the goods or otherwise dispose of according to the direction of the person delivering it, is called bailment as defined by Section 148 of the Contract Act, 1872 which reads as under: - "Bailment', "bailor" and "bailee" defined.---A "bailment" is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose if accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. The person delivering the goods is called the "bailor". The person to whom they are delivered is called "bailee".
19. A bailee is a person to whom goods are deposited under a contract for a certain purpose and he is bound to return the goods so deposited when the purpose is accomplished. When the deposit of goods is for the purpose of security for payment of a debt or performance of a promise then such deposit is called pledge as defined under section 172 of the Act (ibid) which reads as under: - "Pledge", "Pawnor" and "Pawnee" defined.---The bailment of goods as security for payment of debt or performance of a promise is called pledge." The bailor is in this case called the "Pawnor,"
The bailee is called the "Pawnee"
20. The slight difference between bailment and pledge is that in the case of bailment the deposit of goods is for a certain purpose, to be returned after the purpose is accomplished but in the case of pledge, the goods are deposited as a security to be kept till the payment of debt is effected or a promise for which the goods were pledged is performed. In other words, the pledge is a kind of bailment and security.
21. Section 151 of the Act provides that where the goods are bailed to the bailee he is bound to take as much care of the goods as a man of ordinary prudence, would under similar circumstances take of his own goods. Section 151 of the Act ibid is as under: - "Care to be taken by bailee.---In all cases of bailment the bailee is bound to take as much care of the goods bailed to him as a mun of ordinary prudence would, under similar circumstances take of his own goods of the same bulk quality and value as the goods bailed"
22. Section 152 of the Act deals with the situation where the bailee is not responsible for the loss, destruction, or deterioration of the. thing bailed. It provides that the bailee is responsible for the loss, destruction, or deterioration of the things bailed, if: - a) There is no special contract to the contrary; or b) The bailee has not taken the amount of care as described in section 151.
23. For reference section 152 is reproduced as under: - "Bailee when not liable for loss, etc. of thing bailed.---The bailee, in the absence of any special contract, is not responsible for the loss, destruction, or deterioration of the thing bailed, if he has taken the amount of care of it as described in section 151"
24. The Honourable Supreme Court of Pakistan while interpreting the 'Pledge' described another definition which has been developed in mercantile practice, where the goods are not actually delivered to the pledgee and only constructive possession of the pledged goods is handed over to the pledgee. In this form of pledge the pledgor wears two hats, one that of a pledgor and the other that of a person authorized by the pledgee to hold the pledged goods in trust for the pledgee with the freedom to deal with them in the ordinary course of business. The august Supreme Court of Pakistan[10] was pleased to hold as under: - "Under the Contract/Act, a pledge is ordinarily construed to mean delivery of an article to the pledgee by the pledgor as security for a debt or for carrying out some engagement that has been committed by the pledgor with the pledgee. An article owned by the pledgor is physically delivered to be kept by the pledgee as security until the commitment of the pledgor with the pledgee is honoured. However, in mercantile practice another form of pledge has also developed.
Under 'this form, the actual delivery of goods is not entrusted to the pledgee as only constructive possession of the pledge goods is hand over. In this manner, the pledgor is allowed to utilize the pledged goods in his ordinary course of business. Examples of such form of pledge are pledge of raw material and stock-in-trade of an industrial or commercial enterprise which need to be consumed on regular basis in the ordinary course of business. On account of such use continuous change takes place in the inventory. The inventory is to be replenished by the pledgor. Hence, entire current inventory stands covered under the contract of pledge on which the pledgee can exercise his right to takeover in the event of breach of the contract by the pledgor."
25. To foist the responsibility and impose liability as a, bailee, there should be a contract of bailment either express or implied between the parties. For availing the finance facility, the parties agreed and a contract was executed in this regard, which was produced by the respondent. For the security of payment and re-payment of finances and all dues, the appellants pledge their goods and in this regard letter of pledge was executed which not only define the terms and conditions of the bailment but also described the responsibility and liability of the bailee. Letters of pledge were produced as Exh.P-11 and Exh.P-20 and clause 4 of it, is as under: - "I/We shall hold you your nominees and agents harmless and indemnified against all loss or injury, damage or deterioration that may be caused to the pledged goods as a consequence or result, however, remote, of any cause whatever, including fire, storm, tempest, earthquake, rains floods, riots, civil commotion, rebellion insurrection and acts of God or the enemies of the State, strikes, lockouts political or labour disturbances, theft, misappropriation or embezzlement, notwithstanding the fact of your possession of the same or otherwise and if the pledged goods shall at any time suffer any reduction or diminution in their market value as a consequence or result of any such cause as aforesaid, 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"
26. In that paragraph of this document, the appellants committed that they will hold the respondent harmless and indemnified against all loss, injury, damage, or deterioration that may be caused to the pledged goods as a consequence of fire, storm, tempest, earthquake, rains, floods, riots, civil commotion, theft, misappropriation or embezzlement.
27. The terms agreed between the parties regarding the pledge of stocks clearly show their intention to the duty of care to be exercised by the pledgee. The Hon'ble Supreme Court of Pakistan in the case mentioned supra while dealing with terms of the letter of pledge held as under: - "Furthermore, paragraph 4 of the letter of pledge also provides that in case any loss or damage or deterioration in the value of goods is 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 respondent No.1 Bank and actual possession of the pledged goods was with 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.! Bank cannot be held accountable"
28. The copy of FIR placed on file (Mark-A) shows that Agricultural Department upon checking stocks lying in the godown found the said stock without proper registration certificate and proper detail, which was taken into custody by the department and also lodged FIR No.188 under sections 21-A/23-A of the Agricultural Pesticides Ordinance, 1971 amended in 1997 on 10.05.2008. From the perusal of FIR, it appears that stocks were in the possession of appellants from where it was taken into custody by the Agricultural Department. Now it was the duty of appellants to provide necessary details with relevant documents to the Agricultural Department in order to get back the custody of stocks. But the appellants failed to perform their duties therefore they cannot get the benefit of their own wrongs. Learned Banking Court keeping in view the facts and circumstances of the case and evidence available on the file decided the issue against the appellants. Learned counsel appearing on behalf of appellants failed to point out any illegality, irregularity, mis-reading and non-reading of evidence while rendering its findings by the learned Banking Court therefore the findings on issue No.3 are maintained.
29. The objection of the appellants that the respondent could not recover its financial facility until the respondent returns the stocks and as the pledge stocks are not available and the respondent is not in a position to return the stocks, therefore, cannot file suit for recovery.
30. Admittedly, the respondent is not in a position to return the stocks. Now the question arises that whetherin that situation the right to sue and recover the debt remains alive or not to the respondent, to adopt the recourse of filing the recovery suit. The answer lies under section 176 of the Contract Act, 1872 which provided that the Pawnee/pledgee has the right either to bring a suit upon the debt or to sell the pledged stock upon giving reasonable notice of sale. Both these rights are concurrent. For ease Section 176 of Act (ibid) is reproduced as under: - "Pawnee's right where Pawnor makes defauL.--If the Pawnor makes default in payment of the debt, or performances, 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"
31. From bare reading, it appears that the keywords 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. The principle underlying section 176 has been settled as far back as settled in full Bench Judgment[11] 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 all 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 he pledged property and adjusting its price towards the payment of the debt. He has, however, to keep the property pledged intact so that he may be able to hand over the security to the pledger on payment of the debt by him"
32. In another precedent[12] it was held as under: - "Section 176 of the Contract Act empowers the plaintiff-Bank to file its suit without selling the pledged rice and to treat the pledge as collateral security only. Clearly, this option has been exercised by the plaintiff-Bank. The matter relating to any shortfall in the pledged stock of rice and the responsibility therefore can be determined in execution proceedings at the time the collateral security is required to be accounted for and brought to sale. The rights and obligations of the plaintiff-Bank as pledgee and those of the defendant-Company under sections 157 and 152 of the Contract Act, which were referred to by learned counsel for the defendant-Company, can also be determined at the time of realization of the collateral security."
33. Epitome of the above discussion is that while passing the impugned judgment and decree neither any mark-up excessive or beyond the period of expiry has been allowed nor any illegality has been committed, therefore, the instant appeal is without any merits, the same c is hereby dismissed with no order as to the costs.
1. Local Currency Finance
2. Letter of Credit-Sight
3. RF
4. Karachi Interbank Offer Rate
5. Special Assets Management
6. Finance against imported merchandise
7. Letter of Credit
8. Personal Deposit Account
9. Chowkidar provided by Muqadam Company
10. Messrs World Trans Logistics and others v. Silk Bank Limited and others 2016 SCMR 800 [11]A.M. Burg v. Central Exchange Bank Ltd PLD 1966 (W.P) Lahore 1
12. Habib Bank Limited v. Orient Rice Mills Ltd. and others 2004 CLD 1289