1. ' In 1987, defendant No,1 obtained various finance facilities from the plaintiff and for this purpose executed several agreements. To secure payment of the finance, defendant No,1 also executed inter alia, Demand Promissory Note, Agreement of Finance and Letter of Pledge. To further secure payment of the finance defendants Nos.2 to 4 executed Letter of Guarantee in favour of the plaintiff. Defendant No,1 did not pay back the loan in accordance with the agreement and consequently on 27-11-1995 plaintiff filed the present Suit in the Banking Tribunal No,1 at Karachi for recovery of Rs,238,588,952 and for sale of the pledged goods. The defendants filed their written statement wherein they took several preliminary objections challenging the jurisdiction of the Court and maintainability of the suit, disputed the claim on merits and the statement of account filed by the plaintiff. After promulgation of the Banking Companies (Recovery of Loans, Advances, Credits and Finances) Act, 1997, the suit was transferred to this Court as the plaintiff's claim was in excess of Rs,30 million. The suit was then placed in Court for consideration of the written statement which was treated as an application for leave to defend the suit under section 10 of the Banking Companies Act, 1997. The plaintiff's counsel was directed to file a summary of accounts giving the details of the principal amount due, mark-up charged thereon, liquidated damages, any other miscellaneous charges or any other amount debited in the account of defendant No,1. On 25-1- 1999 Mr. Farooqui filed a Statement of Account giving the details of the amount admitted by the defendants consequently, on 25-1-1999 an interim decree under section 11 of the Banking Companies Act, 1997 was passed in the sum of Rs,127,254,219 jointly and severally against the defendants without any mark-up and plaintiff counsel was directed to provide the present rate of mark-up being charged by the plaintiff-bank for similar finance so that the same may be awarded on the decretal amount.
2. ' After admission of liability of Rs,127,254,219 by the defendants the principal dispute which remained to be decided was with regard to the F.A.F. Facility provided by the plaintiff to the defendants, the rate of markup and the period for which the plaintiff is entitled to charge the same.
3. At the time of arguments Mr. Farooqui submitted that by oversight he had included a sum of Rs,31.111 million in the total admitted by him which according to him the plaintiff was not entitled to recover as no actual disbursement of the amount had been made by the Bank. It is true that Mr. Farooqui has been challenging the right of the plaintiff to recover Rs,31.111 million under the F.A.F.
4. Facility and the mark-up due on the same. Mr. A.R. Akhtar agrees that according to the documents on record it is so. Therefore, the said dispute will be considered and decided presently. In support of his argument Mr. Farooqui referred to the agreement of finance, dated 10-4-1993 according to which the customer had agreed to sell to the bank movable property for a sum of Rs,31.111 million and simultaneously confirmed having purchased the same at a price of Rs,51.962 million. To secure payment of the aforesaid amount defendant No,1 on the same date executed a Promissory Note in the sum of Rs,51,962,000, a facility letter and a letter of hypothecation. Mr. Farooqui submitted that as no amount was disbursed in relation to the said agreement and the documents signed therewith it was in fact mark-up which was due in respect of several other facilities. In support of his arguments he relied upon PLD 1998 Kar. 203 and 1998 SCM R 816. In reply to the aforesaid arguments Mr. A.R. Akhtar submitted that the plaintiff's claim was, inter alia, based upon sanction advice, dated 26-8-1991. Promissory note and agreement of Finance all of which indicate that defendant No,1 had agreed to pay to the plaintiff the Purchase Price of Rs,51,962 million. He further submitted that after having signed the agreement the plaintiff cannot retract and refuse enforcement of the Agreement. He, however, submitted that in the summary of account, plaintiff- bank had claimed only the principal amount of Rs,31.311 million without any mark-up thereon which the bank could have otherwise claimed under the law.
5. ' Both counsel agreed that agreement of finance, dated 10-4-1993 was executed in respect of Rs,31.111 million which was due from defendant No,1 to the plaintiff in respect of several facilities and by virtue of the said agreement defendant No,1 was required to pay back the purchase price of Rs,51,962,000 stated therein. The said agreement does not, however, specify the date of payment of this amount but according to the Sanction Advice it is 31-7-1996. There is no cavil that under the non-interest banking system of finance, banks are not permitted to charge mark-up on mark-up.
6. However, the law also does not prohibit the bank from entering into a new agreement on different terms and agree with the customer to pay the outstanding on a different date. The bank could have filed a suit for recovery of the outstanding amount on 10-4-1993 but in order to accommodate defendant No,1 it agreed to extend the time for payment if defendant No,1 agreed to enter into a fresh Agreement of Finance treating the outstanding amount of mark-up as a fresh facility given to defendant No,1 which was to be paid under the terms of the New Agreement between the parties executed pursuant to the Sanction Advice, dated 26-8-1991 according to which the amount was to be paid by 31-7-1996. Section 62 of the Contract Act, 1872, clearly provides that if the parties to a contract agree to substitute a new contract for the old one or to rescind or alter it, the original contract need not be performed. The original contract between the parties required defendant No,1 to pay the amount on or before a specified date which defendant No,1 did not do and instead requested the plaintiff to substitute the old contract with a new one in which it agreed to pay the outstanding amount by 31-7-1996. There is nothing in the Contract Act or in any other law which prohibits the parties or the bank from varying or altering the terms of the original contract or executing a new contract to substitute the old one. The agreement, dated 10-4- 1993. In respect of Rs,31.111 million was a novation of the old contract the consideration of which was the agreement of the bank to extend time for payment of the outstanding liabilities of defendant No,1, I am supported in this view by a judgment of this Court in the case of Banque Indosuez v.
7. Banking Tribunal 1994 CLC 2272, wherein a learned Division Bench in similar circumstances, held that a new agreement executed by a customer after introduction of non-interest based banking wherein no amount had been disbursed by the bank to the customer was valid in law.
8. ' The case of National Bank of Pakistan v. Punjab Building Company, PLD 1998 SC 302 cited by Mr. Farooqui is not applicable to the facts of this case. It also does not anywhere declare that the parties cannot substitute a new contract in place of the old one. The case of United Bank Limited v.
9. Chaudhary Ghulam Hussain 1998 CLC 816 cited by Mr. Farooqui also does not throw any light on the question in issue in this suit.
10. In view of the above discussion, I have no alternative but to hold that the agreement of finance, dated 10-4-1993 in respect of F.A.F. Facility provided by the plaintiff to defendant No,1 is valid, .Legal and binding upon the parties.
11. ' Mr. A.R. Akhtar submitted that the present rate of mark-up for similar finance is 20 per cent. Per annum which is not disputed by Mr. Farooqui, learned counsel for the defendants. Accordingly, final judgment is passed against the defendant jointly and severally is passed as follows:--
(i) Judgment and decree in the sum of Rs,96,137,219 together with mark-up at the rate of 20 per cent. Per annum from the date of institution of suit till date of payment plus a sum of Rs,31,111,000 with mark-up at the rate of 20 per cent. Per annum from 1-8-1996 till the date of payment.
(ii) Decree for sale of the pledged/hypothecated property of defendant NO.1; and (iii)Costs of the suit.
12. ' While going through the documents placed on the file by both parties it appears that Plaintiff- Bank has filed only three Sanction Advices, namely, sanction advice for Rs,30 million, dated 1-10- 1987, sanction advice fOr Rs,30 million, dated 23-4-1990 and sanction advice for Rs,31.11 million, dated 26-8-1991 when more than three facilities were provided by the Bank to the customer. All the three facilities were primarily provided, inter alia, on the basis of demand promissory note, pledge, hypothecation and personal guarantees of the Directors. The sanction advices contain the signature of the Officer, Manager, Vice-President/Assistant Vice-President and Executive Vice- President/Senior Vice- President of the Bank.
13. ' It also appears from the copy of Bank Memo., dated 2-7-1991 filed by the defendants that plaintiff bank had provided through its various branches finance facilities to nine organizations of Islamuddin Shaikh Group of Companies consisting of (1) Star Oil Mills vt.) Ltd., (2) Star Solvent Extraction and Soap (Pvt.) Ltd., (3) Junejo Flour and General Mills (Pvt.) Ltd., (4) Star Industries, (5)
14. Ajma Corporation Ltd., (6) Sarmast Cooking Oils (Pvt.) Ltd., (7) Faruki Flour Mills Ltd., (8) Kiran Enterprises (Pvt.) Ltd. And (9) Sarfraz Traders. According to the contents of the memo. The branches allowed certain finances on the verbal instructions of the ex-Provincial Chief without completing documentation formalities. The bank las apparently filed suits for recovery against all of them. The facilities to all the nine firms according to the memorandum, dated 2-7-1991 were approved by Shaikh Mohiuddin Jeelani, Area Manager, Mian Saeed; Assistant Vice-President and Area Manager, Zawwar Hussain Jafri, A.V.P. And Area Manager, Hafiz Abdul, V.P. And Area Manager, Manzoor Khalid, S.V.P. And R.G M., Riaz Hasan, S.V.P. And R G.M., Hamdani, S.V.P. And R.G.M. And Aley Ali, E:V.P. And R.G.M.. The group in spite of having defaulted was provided renewals of all existing limits allegedly to save the hank from loss, Had this not been done, it appears the bank may not have had to file suits against all the aforesaid nine organizations.
15. It is pertinent to mention here that every officer of a company is entrusted with the property belonging to the company and if he fails to exercise such degree of care as a reasonable person might be expected to take of his property in the circumstances and the company in consequence of such failure suffers loss he would be liable to the company for such loss arising from his negligence. Similarly, a bank officer who is entrusted with the money of the bank and who is responsible for recommending, approving or advancing credit facilities to customers is required to exercise due care and caution before sanctioning or providing any loan or facility to the customer and obtain sufficient security so that the bank may not suffer any loss if the customer fails to pay back the loan. To forestall any negligence or laps on the part of the banks the State Bank of Pakistan (S.B.P.) has issued under the provisions of the Banking Companies Ordinance, 1962 guidelines to all banks to regulate the business of banking in Pakistan in the form of Prudential Regulations. Regulations III and XVIII, which are relevant read as follows:-- "Regulation III: Limit on Bank's exposure against unsecured advances.--- No bank shall provide financing facility in any form of a sum exceeding Rs, 1,00,000 (Rupees one hundred thousand only) to any one individual or person without obtaining realisable securities of the value not below the outstanding amount. Financing facilities granted without securities including those granted against personal guarantees shall be deemed as ' clean' for the purpose of credit regulations. Provided further that- --
(a) at the time of granting a clean facility, banks shall obtain a written declaration to the effect that the borrower in his own name or in the name of his family members, has not availed of such facilities from other banks so as to exceed the prescribed limit of Rs,1,00,000 in aggregate;
(b) no clean facility shall be granted to frustrate the objective of credit restrictions in force for the time being.
(c) the purpose for which a clean facility is sanctioned shall be expressly stated in the sanction letter.
16. ' Clean facilities granted to finance the export of commodities eligible under export finance scheme shall be exempt from the per party limit on clean facilities.
17. ' The aggregate exposure of a bank against all its clean facilities shall not, at any point of time, exceed the amount of the bank's capital and general reserves (free of losses).
18. ' Any violation'or circumvention of the above Regulation shall render the bank liable for penalties under the Banking Companies Ordinance, 1962.
19. ' Advances given to employees of a bank in accordance with their entitlement, shall be exempt from the application of the Regulation II"
20. "Regulation XVIII: Minimum conditions for grant of finance facilities.--- Each bank is mandated to institute such system or procedure or take such steps as it deemed fit to ensure that defaulters are not accommodated. Every bank is, therefore, required to obtain information about the total outstanding liabilities to banks and financial institutions (from Credit Information Department of the State Bank) of any applicant seeking financial accommodation involving the sum of Rs,0.5 million or more before approving any lending. In case of those who are reportedly in default no fresh accommodation whether fund based or otherwise would be allowed unless rescheduling or restructuring of outstanding liabilities is done to the satisfaction of lending banks by the respective borrowers. If in exceptional circumstances, a bank decides to provide such financing to any person, firm or company who is reportedly a defaulter as per information supplied by the Credit Information Department or any other Banks/D.F.Is. It shall place on record circumstances or reasons necessitating grant of any accommodation in such cases. The State Bank may, if necessary, undertake special inspection of such exceptions."
21. Consequently, if an officer of the bank who is responsible for disbursement of loans acts negligently or omits to take the reasonable degree of care in extending a loan or, credit facilities as required by the Prudential Regulations and under normal international banking practice and consequently the bank suffers loss, the bank would be justified in suing such an officer for recovery of the loss suffered by it. It is apparent from the copies of the credit approval that the Guidelines provided in the Prudential Regulations and banking practice were not followed by the relevant officers of the bank. When an officer of the bank acts negligently or does not exercise the degree of care and caution expected of a prudent banker, he would be guilty of criminal breach of trust.
22. Section 408 of the Pakistan Penal Code defines Criminal Breach of Trust as follows:-- "408. Criminal breach of trust by clerk or servant.--- Whoever, being a clerk or servant or employed as a clerk, or servant, and being in any manner entrusted in such capacity with property, or with any dominion over property, commits criminal breach of trust in respect of that property, shall be punished with imprisonment of either description for a term which may extend to seven years, and shall also be liable to fine."
23. ' In the present case, the officers of the plaintiff-Bank were entrusted with the property of the bank which included the subscription of the shareholders and the monies deposited by customers and depositors of the bank. They were, required to advance loans and credit facilities to borrowers as prudent bankers in light of the Guidelines provided in the Prudential Regulations and standard banking practice. By failing to do so, they acted with wilful dishonesty and prima facie are guilty of criminal breach of trust under section 408 of P.P.C. Which is punishable by imprisonment of either description for a term which may extend to ten years and shall also be liable to fine. This section is included in the First Schedule of the Offences in Respect of Banks (Special Courts) Ordinance, 1984 for which an employee of a bank can be prosecuted in the Special Court established for this purpose. The relevant officers of plaintiff-bank should take refused to approve the facility without obtaining tangible and/or reliable security, inter alia, in the form of a mortgage or counter- guarantee from another bank. As a consequence of their negligence, the bank has suffered a loss of over Rs,127.254 million. It cannot be denied that all persons who put their signatures on such documents would be jointly and severally guilty of criminal act or acts "and the Bank would be justified in commencing criminal action against them as well as civil action for recovery of financial loss suffered by it. In the presence of these facts, the bank should have held an enquiry against officers responsible for the loss and commenced proceedings against them which does not appear to have been done. It would, therefore, be appropriate if an enquiry against these officers is initiated and appropriate civil and criminal action taken against them, if so required.
24. ' Office is directed to send a certified copy of this order to the President of plaintiff-bank at its Head Office address for information with direction to trace all the responsible persons and take appropriate civil and criminal action against them. The President of plaintiff-bank shall submit a report on the action taken by 31-3-2000.
25. ' A copy of this Order shall also be sent to Mr. R.A. Chughtai, Deputy Governor, State Bank of Pakistan to ensure that appropriate action is taken in this case as well as in other cases involving similar misconduct by the officers of all nationalized banks. In addition, he shall issue appropriate Instructions/Warning to all bank officers of the risk and personal liability involved arising from such improper, negligent or imprudent conduct and submit a report of the action taken in this behalf..
26. ' To come up in Court for consideration of the report of the plaintiff-bank on 31-3-2000.