' This is a petition under section 39 read with section 40 of the Industrial Development Bank of Pakistan Ordinance, 1961.
2. The petitioner Industrial Development Bank of Pakistan (hereinafter referred to as the I. D. B. P.) had sanctioned two local currency loans of Rs, 75,000 and Rs, 1,50,000 on 14.12-1962 and 20-7-1963 respectively to Messrs Marine Enterprises for constructing 3 fishing trawlers and fitting them with Engines. The said loans were subsequently amalgamated. Due to non-payment of dues on the due date;, the amount of loan with interest increased to Rs, 2,36,939.06 as on 1-11-1969. Respondent No, 1 which is a partnership firm, respondents Nos. 2 and 3 being its partners, thereupon entered into an arrangement with the aforesaid borrower Messrs Marine Enterprises for purchase of the said trawlers and entered into an Agreement of Sale dated 10-10-1969. Consequent upon this the first three respondents requested the petitioner for transfer of the loan from the name of the aforesaid borrower to them.
3. The petitioner agreed to transfer the loan to the aforesaid respondents on the terms and conditions incorporated in the Credit Agreement which was duly executed by the two partners respondents Nos. 2 and 3. According to the stipulated terms agreed to between the parties the amount of loan was Rs, 2,36,939.06, the outstanding dues against the former borrower. The rate of interest was to be 3k above the Bank rate subject to a minimum of 7} per annum. Besides additional interest by way of liquidated damages at 2% per annum was agreed to be payable by the new borrowers in instalments. The repayment Schedule provided for the payment of Rs, 6,000 rer month commencing 3 months after the transfer of loan. For security it was stipulated that the 3 trawlers, namely "Sea Hawks", "Rocket II", and "Rocket were to be hypothecated/mortgaged and in addition equitable mortgage of Plot No, 4/5, Survey Sheet No, 8, Serai quarters, of Hassinali Effandi Road, Karachi belonging to respondent No, 2 was to be created as well as personal guarantee of partners. The aforesaid respondents accordingly executed the following documents on 1-1i-1969
(1) Demand Promissory Note for a sum of Rs, 2,36,939.06.
(2) Letter of Guarantee.
(3) Deed of Covenant.
(4) Agreement to create mortgage.
(5) Agreement of Hypothecation.
4. Out of the 3 fishing trawlers referred to above, one of the trawlers viz. "Sea Hawks" was sunk in the sea near Ketav Bunder on 29-9-1969 in respect of which a claim was lodged with the Pakistan Insurance Corporation and it was settled between the parties that the amount of insurance claim as and when settled will be credited to loan account of the said respondents. The claim has not so far been settled.
5. In terms of the conditions of the Credit Agreement the said respondents deposited a sum of Rs, 20,000 on 3-11-1969. Subsequently repayment schedule was altered and respondents were required to make payment to the petitioner every 3 months so that the first instalment of Rs, 12,000 was payable on 31.3-1970 and thereafter 10 instalments were payable from 30-6-1970 to 31-12-1972 at the rate of Rs, 18,000 quarterly and the last instalment of Rs, 6,939.06 on 31-3-1973.
6. It is alleged by the petitioner that from the very beginning the respondents committed breach after breach of the agreement and failed to fulfil their obligations in regard to the payment of instalments of the loan. On the persistent requests of the petitioner, the respondents deposited a sum of Rs, 10,000 which was credited in their account on 11.8-1970 and was adjusted towards their dues. But after August, 1970 the respondents did not pay any instalment with the result that the amount of overdue instalments as on 29-9-1970 stood at Rs, 35,966.98. Consequently legal notice demanding the payment of dues was served upon the respondents with no response from them. In this situation, it is contended by the petitioner, there was no option but to recall the entire outstanding loan by notice dated 19-4-1971 under section 38 of the I. D. B. P. Ordinance, 1961 which amounted to Rs, 2,38,154.88 as on 31-3-1971.
7. It was also alleged that respondents 1 to 3 have misused the trawlers Rocket II and Rocket III with the result that the said trawlers are in the custody of the Collector of Customs pro forma respondent No, 4.
8. Upon these aIlegations the petitioner claimed to have become entitled to require immediate payment of the entire outstanding loan dues amounting to Rs, 2,93,779.76. This petition was therefore, filed on 4-4-1973 for the following reliefs :- (a)An order for the sale of the mortgaged property consisting of 3 storeyed building on Plot No, 4/5, Serai Quarters, Karachi.
(b)The Management of trawlers, namely Rocket II and III be transferred to the petitioner to be run by it for the purpose of recovering outstanding loan amount.
(c) In the alternative an order for attachment and sale of the mortgaged property as mentioned above and the hypothecated trawlers for the recovery of loan amount and cost of these proceedings with interest.
9. Out of the first three respondents only respondent No, 2 Mr. Muhammad Hussain Quresbi appeared and contested the petition and filed counter affidavit. Respondent No, 2 denied his liability although he admitted that a sum of Rs, 30,000 was paid to the petitioner. He Inter alto alleged that he and the other respondent were induced to enter into the agreement for the purchase of the trawlers by one Mr. Sherkoti who was then the Controller in the National Bank of Pakistan and his wife Mrs. Shirin was the proprietor of the Marine Enterprises. The transfer of the loan and the execution of the agreement with the petitioner, according to this respondent, were arranged by Mr. Sherkoti and the agreement was entered into subject to the condition that the petitioner Bank would get them 3 brand new Engines for the trawlers or advance further loan of at least Rs, 60,003 for replacement of the existing Engines. He however, categorically admitted that he submitted Title Deeds of his immovable property at Karachi to the petitioner and signed the documents, as well as made payment of Rs, 30,000 towards the repayment of the loan. It was alleged that for want of necessary repairs and replacement of Engines the trawlers were of no use and their condition deteriorated to such an extent that they were left idle at the Harbour "open to act of God at the risk of the Bank".
10. Respondent No, 4 the Collector of Customs was impkaded as according to the petitioner two of the trawlers were in his custody. In his counter affidavit however, respondent No, 4 has disclosed the facts leading to the confiscation of one of the trawlers Rocket II. It was stated that this trawler was found on the high seas on 30-4-1972 with 160 unauthorised passengers without obtaining port clearance under section 51 of the Customs Act, 1969 which is an offence punishable under section 15026) of the said Act. It was further alleged that the launch was being smuggled but it suddenly developed engine trouble and was eventually abandoned in the high sea one mile from Hawks Bay. As at the relevant time the trawler was in possession and control of the first respondent, a show-cause notice was issued to its partners viz. Respondents 2 and 3. But they declined to appear or file any reply thereto and consequently the Collector of Customs by his order dated 7-10-1972 (Annexure 6) held that a case of attempted smuggling of the trawler out of the country was established and ordered the confiscation of the said trawler under F ec t ion 156(8) of the Customs Act, 1969. He also imposed a personal penalty of Rs, 1,000 each against the two respondents. As a consequence of tills order of confiscation, it was pleaded, that the trawler in question stood vested in the Federal Government and the claim of the petitioner, was therefore not maintainable in respect of the same.
11. The following issues were framed :-
(1) Is the credit agreement Annexure A to the claim binding on the defendants? If so, against whom?
(2) Whether the defendant No, 2 has validly mortgaged the property as alleged, on Plot No, 4/5 Survey Sheet No, SB-8, Semi Quarters, Karachi ?
(3) Whether the plaintiff's suit against the defendant No, 4 is maintainable in view of the confiscation of the mortgaged trawler Rocket II for an offence under section 156 of the Customs Act, 1969 ? If so, what is the effect?
(4) What should the decree be?
'
12. The petitioner produced in its evidence two witnesses, Mohammad Alimuddin (Exh. 5), the Manager, I. D. B. P. And Mr. S. A. Hassan (Exh. 7), a Senior Staff Officer In the I. D. B. P. The first witness produced the various dccuments which were not admitted. He also produced the statement of account of Messrs Aamir Fishers (Exh. 5/7/1 to Exh. 5/7/4), Mr. S. A. Hassan was examined to prove the execution of the Credit Agreement (Mils. 4/9), the Agreement of Hypothecation (Exhs. 4/12), the Deed of Covenant (Exhs. 7/1) and the Letter of Guarantee (Exh. 7/2) by respondents Nos. 2 and 3. He stated that these two respondents signed the aforesaid documents in his presence. He denied the suggestion in the cross examination that Mr. Sherkoti had met him on the day when the credit Agreement was signed. The case was adjourned after the evidence was closed by the petitioner for the evidence of the respondents but respondents 1 to 3 and their counsel remained absent.
Consequently their side was closed on 8-9-1976, until the hearing of the final arguments, the respondents except respondent No, 4 did not appear and participate in the proceedings. Thus the evidence of the petitioner has gone in unrequited and the respondents Nos. 2 and 3 have also not entered the witness-box to deny the execution of the various documents.
13. In this state of the evidence it was rightly contended that the claim against the respondents Nos.
1 to 3 has been fully established. The Credit Agreement (Exhs. 4/9) has been proved to have been signed by the two respondents. In fact the signature on the credit agreement is not disputed. The only plea raised in the counter affidavit by respondent No, 2 was that the documents were signed at the instance of Mr. Sherkoti and that it was agreed that a further loan of Rs, 60,000 for replacement of fold Engines would be advanced. The credit agreement is accordingly binding on the first three respondents. Issue No, 1 is therefore answered in the affirmative.
14. As regards the issue No, 2 it was pointed out that the respondent No, 2 bad submitted an affidavit (Exh. 4/4) stating that he had purchased property bearing No, 4/5, Hassansli Effendi Road, Semi Quarters, Karachi through a Deed of Conveyance dated 9-101947 from the evacuee owner.
This sale was confirmed by the Deputy Custodian (Judicial) by his order dated 22.5-1956. It was then stated by the said respondent in the affidavit that the original Deed of Conveyance bad been lost or misplaced. A certified copy of the Conveyance Deed (Exh. 4/3) was deposited Besides the site plan (Exb. 4/1) was also deposited. The order of the Deputy Custodian is Exh.
4. All these documents are admitted and there can be no controversy about their genuineness. It was rightly contended on behalf of the petitioner that the deposit of these documents created a valid equitable mortgage against the property in question. The respondent No 2 in his counter- affidavit at para. 8 admitted that he had submitted to the petitioner-Bank the title documents and other related documents of his immovable property at Karachi. Th A respondent also admitted having made payments towards the repayment of the loan. All these facts therefore, establish that the loan was advanced to the first three respondents and equitable mortgage was created in th property of the respondent No,
2. Issue No, 2 is also therefore answered in the affirmative.
15. The only issue that remains to be considered relates to the maintainability of the claim in respect of the trawler Rocket II which was ordered to be confiscated by respondent No, 4 the Collector of Customs by his order dated 7-10-1972 (Exh. 6).
16. Mr. S. J. Alam who appears for the Collector of Customs, contends that upon the lawful order of confiscation passed in exercise of powers under the Customs Act, the property in the trawler stands vested in the Federal Government and consequently the trawler was no longer liable to be sold by virtue of the right of hypothecation, if any, held by the petitioner even though prior in time.
Mr. A. I. Chundrigar for the petitioner, contended in reply that it is well settled that the secured creditor's rights take priority over the Government debts, if the property is sought to be attached or sold for the recovery of such debts, in case the security is prior in time. He argued that the confiscation proceedings are essentially proceedings of a civil Moure for the recovery of Government dues and as such are subject to the normal rule of priority of right of toffee individual in respect of see 4 debts.
17. Before considering the contentions of the counsel, it would be advantageous to set out section 182 of the Customs Act which is as follows t "When any goods are confiscated under this Act they shall forthwith vest in the Federal Government, and the officer who orders confiscation shall take and hold possession of the confiscated goods."
18. There can be no quarrel against the proposition advanced by Mr. Chundrigar that when the public dues are sought to be recovered by coercive proceedings under the law against the property, the same shall not affect the prior right of secured creditors in such property. It has been held by the Dacca High Court that the attachment or sale in pursuance of sections 29 and 45 of the income-tax Act would not affect a mortgage which had been created prior to the attachment and sale. Similarly the same High Court held that under section 8 of Bengal Public Demands Recovery Act, 1913 the Government is entitled to get precedence over secured debt, but not over secured debt. See Federation of Pakistan v. Pioneer Bank Limited (I) and Pakistan v. Badrunnessa (2). In Ahmad Hail v. Parmanand (3) while examining the position under the Bombay Land Revenue Court the Sind Judicial Commissioner's Court held that the sale by Government of the land of the renter for recovery of Abkari revenue is a sale subject to any prior mortgage on a land. The rule laid down in these decisions was relied upon on behalf of the petitioner and it was contended that on the same analogy a confiscation order would be subject to prior rights of hypothecation in favour of the petitioner in the property.
19. I have given my anxious consideration to this submission but I am unable to agree that the principles enunciated in the aforesaid decisions can be extended to the case of confiscation of property under section 182 of the Customs Act, 1969. To my mind, there is an essential and fundamental distinction between the sale and attachment of the property ' of a defaulter for recovery of revenue debt or other Government debt, and a confiscation consequent upon seizure of property under the penal provisions of the Customs Act. The Income-tax Act as well as the Land Revenue Code are both fiscal statutes which among other things provide machinery for the recovery of the revenue demands thereunder by coercive process which includes the power to attach and sell the property of the defaulter. Under the Income-tax Act as held in the Pioneer Bank's case referred to above it is only when the demand is made under sections 29 and 45 of the Income-tax Act, it becomes a debt due to the Government. Consequently the debts prior to such a date would obviously take precedence over the Government debt of a subsequent time. The Customs Act is also a fiscal statute relating to the levy and collection of custom-duties and provides for
(1) PLD 1958 Dacca 535 (2) PLD 1962 Dacca 595
(3) AIR 1932 Sind 121 ' similar machinery for the recovery of Government dues as is provided for in the two statutes namely the Income-tax Act and Land Revenue Code. Section 202 of the Customs Act, 1969 lays down the mode of recovery of a penalty adjudged against any person or the payment payable by way of duty or under any bond or other instrument executed under the Act or the rules. The section authorises the deduction from any money owing to any such person with the Customs Authorities and by detention and sale of goods belonging to such person under the control of the Customs Authorities. Subsection (2) of this section further provides that if the dues cannot be recovered in the aforesaid manner, the appropriate officer may make a reference to the Collector of District who shall proceed to recover the amount as a public demand or an arrear of land revenue. I would agree that the rule laid down in the decisions cited at the bar would be attracted in case of proceedings taken under section 202 of the Customs Act for recovery of Government dues. But the attachment and sale of the property of the defaulter for the purposes of recovering the Government debt is distinct from the confiscation of property as a penalty for a wrongful act. The Customs Act, 1969 besides being a statute for levy and collection of Custom-duties also provides for prevention of smuggling. Chapter XVIII which is headed as 'Prevention of Smuggling-power of search, seizure; and arrest-adjudication of offences" makes elaborate provisions for empowering the Customs Authorities to search and seize the goods and documents liable to confiscation, for arrest of persons guilty of offences under the Act and allied matters. Section 180 lays down the procedure for passing an order of confiscation of any goods and section 182 provides for the effect of confiscation of goods. A careful analysis of the nature and scope of these powers shows that this Chapter does not deal with the recovery of revenue directly but was intended to confer upon the Customs Authorities' police powers for effective control of smuggling. Mr. A. K. Brobi in his treatise on the Constitution of Pakistan "Fundamental Law of Pakistan" at page 366 says-"All Regulations that are reasonably necessary to secure the health, safety, public order, comfort or general welfare of the community can be made by the State in pursuance of its police powers. 'Police powers' of a State in America is not susceptible of any precise definition but speaking very generally, all activities of the State which are calculated to promote public safety, health, morals, or to the suppression of what is evidently, disorderly and unruly conduct, come within its fold".
20. The object underlying the exercise of police powers is the prevention of illegal acts. In this particular case a confiscation order under Chapter XVIII is obviously not related to recovery of a Government debt. The Collector of Customs came to the binding in the adjudication order that the trawler in question was concerned in the act of attempted smuggling and was therefore, liable to confiscation under section 156 (8) of the Customs Act. Thus there was no question of a revenue demand or a Government debt on account of which the trawler in question was confiscated. In this view H of the matter the question of priority or precedence of the hypothecation rights claimed by the petitioner in the confiscated property does not arise. Section 182 of the Customs Act plainly provides that when any goods are confiscated they shall forthwith vest in the Federal Government and the Officer who orders confiscation shall take and hold possession of the confiscated goods. It therefore, follows that the title in the goods and the possession thereof vests in the Federal Government, and all rights in the goods vesting in any person would stand extinguished.
21. Apart from the above, under section 193 of the Customs Act the petitioner had a right of appeal to the Departmental Authorities where the petitioner could agitate for his rights. But as long as the order of confiscation is in the field, the petitioner cannot be allowed to avoid the effect of the order, especially when the order is not impeached on the ground of jurisdiction.
22, For the foregoing reasons, the finding to issue No, 3 is that the trawler Rocket II is not liable to be proceeded against for the recovery of the claim of the petitioner,
23. In the result, the petition is allowed as prayed against respondent No, 1 to except in relation to trawler "Rocket II", with costs.