FEATURES OF FINANCIAL INSTITUTIONS (RECOVERY OF FINANCE) ORDINANCE 2001

By:
QAISER JAVED MIAN
Attorney-at-Law

Presently, the recovery of all kinds of loan, finances whether markup based, lease financing credit cards, letters of credit, long term and short term finance certificates, letters of credit, in other words all kinds of consumer financing, house building finances, investment financing, lease financing, development financing etc are covered under this law. Please note that the law under discussion is a Special Law as distinguished from general law. It is an established principle of law that a special prevails over the general law on any point specifically dealt with in the Special Law.

ESTABLISHMENT OF BANKING COURTS

(a) Pecuniary Jurisdiction:

The pecuniary jurisdiction of all the Banking Courts situated at Divisional Headquarter is to try the suits/cases upto the value of Rs. 5 Crores. However if the suit amount i.e. the amount claimed in the suit is more than five crores then a judge of the high court of that Province, upon the direction of the Chief Justice of the relevant High Court, shall act as a banking court in his original capacity as a banking court, it will be his original jurisdiction and not the jurisdiction of the High Court nor would it be the High Court's original civil jurisdiction. It is also important to note that a financial institution can file a suit against a customer/borrower while a customer/borrower can also file a suit against the financial institution for any breach of terms and conditions of the agreement(s) executed by them.

(b) Powers of The Banking Court:

Under Section 7 of the Financial Institution Ordinance 2001, the powers of the Banking Courts has all the powers of a civil court which a District Judge/Court possesses under the Civil Procedure Code and at the same time also has all the powers of a criminal court which a Sessions Court possesses under the Criminal Procedure Code. A Banking Court can call any related party as a witness to appear personally before the Court and it also has the powers to punish any one who commits contempt of the court or any other offence under the provision of the law.

PROCEDURE OF THE BANKING COURT

(a) PLAINT

Section 9 of the financial Institution Ordinance 2001 specifies the procedure of the Banking Courts. Assuming that a Financial Institution files a suit/plaint in the Banking Court for the recovery of the outstanding loan/finance after the default of the customer, the plaint must contain certain specified particulars, such as the total amount of the loan/finance, the amount(s) paid back, the outstanding amount etc. the plaint must be signed by a duly authorized person/officer/manager of the Bank having valid power of attorney from the Financial Institution to sign the plaint. As to the valid power of attorney, the following judgments of the Superior Courts may be resorted to:-

2004 CLD 587

CM. TENTILES VS. I.C.P.

(b) STATEMENT OF ACCOUNTS

The plaint must be supported and accompanied by a "Statement of Account" which should be duly certified as per Section 3 of the Bankers Books, Evidence Act. Without the valid statement of account, a suit of the Financial Institution is liable to be dismissed. It is to be noted that a legal presumption of correctness and truth lies with the duly verified statement of account, however this presumption can be rebutted by the defendant by introducing strong evidence against and be proving that the entries contained in the statement of the account are incorrect. For example defendant can prove that the dates and amount of the disbursement of loan/finance are incorrect. The defendant can also produce receipts/documents that the amounts repaid are not reflected in the statement of the account. As to the correctness and admissibility of the statement of account the following judgments of the superior Courts may be resorted to:

2004 CLD 937, 2004 CLD 1338; 2004 CLD 587, 2004 CLD 712 and 2004 CLD 838, 2004 CLD 716, 535

(c) SPECIAL LAW

The banking law under discussion is a special law; therefore, the provisions of this law will prevail over any other law on the same point. However, where the banking law is silent on any point the general law, may it be civil or criminal, will be applicable. Therefore the procedure of he banking court being under special law is different from the procedure of the normal civil courts which strictly follow the civil procedure code.

(d) Procedure of service of defendant:

Upon receiving the suit/plaint by the Baking Court if the court is satisfied that there are no legal infirmities in the plaint/suit, the court shall order notices to be issued to the defendant(s) by four modes of the service:--

(i) Notice through court bailiff/server

(ii) Notice through registered letter

(iii) Notice through courier service

(iv) Notice through proclamation in two newspapers one in English and one in Urdu.

The notice will be in the form of a show-case notice. It is different from the notice of a Civil Court which simply informs the defendant that such and such case has been filed against you and on the next date of hearing you should come in person or through lawyer to defend yourself by filing firstly a written statement. In case of Banking Court, the notice is in the form of a show-cause notice stating to defendant(s) as to why judgment and decree should not be passed against you, presuming that the suit is correct because it is supported by a certified statement of account. The case law on valid service is cited as follows:--

PLD 1990 SC. 497; 2004 CLD 1555, 771, 1227, 112 and 2004 CLD 393

(e) PETITION FOR LEAVE TO APPEAR & DEFEND

Upon the receipt of first notice through any of the four modes of service, the defendant(s) must file within Thirty days as provided in Section 10 of the Financial Institution Ordinance 2001 a petition of leave to appear and defend the suit (PLA). If the PLA is not filed within thirty days from the date of first service, the suit shall be decreed forthwith summarily in favor of the plaintiff legally presuming that all the contents of the plaint are true and correct. However in case of genuine delay having plausible reasons, the court may condone the delay in filing of the PLA. Time to be computed from the date of first service:

SEE 2004 CLD 1227, 1999 SCMR 2353

Section 10 of the Financial Institution Ordinance 2001 provides for the necessary particulars which must be included in a PLA failing which the PLA may be rejected. The necessary ingredients are for example the amount of loan/finance availed, the dates of disbursement(s), the amount(s) paid back, and the total amount which in view of the defendant(s) is due to outstanding (if any). The PLA must raise "Substantial questions of law and /or fact".

DISHONOURING OF A CHEQUE

There are various laws which deal with the dishonouring of cheque under Sect. 20(4) of the Financial Institution (Recovery of Finance) Ordinance 2001, it is a pre requisite of the bounced cheque that it must have been given towards repayment of finance etc. and the punishment for this offence is imprisonment which may extend to one year or with fine or both and this offence is bailable. If the cheque is given for payment of any installment of loan/finance and is dishonoured no F.I.R. can be registered. The matter is exclusively within the jurisdiction of the Banking Court. However, if the cheque is given and taken between private persons without involving a Financial Institution as a personal deal and the cheque is dishonoured, the remedy lies under Section 489(f) of the Pakistan Penal Code and in this case the punishment is upto three years and the offence is cognizable and non-bailable. The aggrieved party will be entitled to register F.I.R. against the person who issued the cheque. In this category of private persons' dealing resulting in dishonouring of a cheque, a remedy also lies in filing a complaint/suit under Order 37 Rules 1 & 2 of the C.P.C. before the District Judge who under the provisions of the Negotiable Instruments Act will try the suit by issuing a ten days show-cause notice as to why decree should not be passed against the defendant i.e. the person who issued the cheque.

NATURE OF SECURITIES

The securities obtained by the Banks before the disbursement of the loans/finances are of the following kind.

1. Landed Property & structure thereon including houses, offices, plots etc outside the project by way of mortgage whether equitable, registered, deposit of title document or of another kind.

2. The project land, structure, machinery i.e. the factory by way of mortgage whether registered equitable, deposit of title document etc.

3. Pledging of shares of the directors/sponsors of the borrowing Co.

4. Hypothecation and/or floating charge over the goods/materials in its raw form, manufactured or semi-manufactured.

5. Personal Guarantees/Undertakings of the Sponsors/Directors involving and specifically stating their personal properties such as vehicles, cars, houses, lands, plots etc on which no charge is created in favour of the Bank.

DIFFICULTIES IN REALIZATION OF THE "DUE AMOUNTS"

1. Over-evaluation of the Securities at the time of granting loan (s)/finance (s).

2. Depreciation of the securities such as the machinery of a closed mill/factory for a long time.

3. Finding of a serious bidder/buyers who are hesitant because of possible future litigation and stay order(s) on the purchased or purchasable property/securities.

4. Possibility of defective title of the mortgagor/borrower(s) at the end of the day.

APPEAL

After the passing of the decree by a Banking Court, may it be a single judge of the High Court acting as a Banking Court against the defendant, the appeal must be filed by the Judgment Debtor in the High Court within 30 days of the passing of the Decree. This appeal shall be heard by a Division Bench of the High Court consisting of two judges and shall be called a Regular First Appeal (RFA). Against a decision of the Division Bench of the High Court, appeal lies to the Supreme Court. However, there is still another law with regard to Banking Crimes which deals with the employees/officers of the banks, the customers and the obetors, who have defrauded the bank. The seat of the Banking Crimes Court is at Lahore and its territorial jurisdiction is the whole of Punjab.

CHECK LIST OF LOAN DOCUMENTS

PART ONE

BORROWER'S/CUTOMSER'S DOCUMENTS:

1. In case of a partnership being a borrower, the bank should obtain a certified/attested copy of a duly executed legal Partnership Deed, preferably a registered deed on a stamp paper.

2. In case of a sole proprietorship, an affidavit and undertaking to the effect that it is a sole proprietorship solely owned by Mr. "x".

3. In case of a company certified copies of the memorandum and articles of association duly signed and "sealed" by the company secretary and/or the Chairman of the Board of Directors.

4. A resolution of the Board of Directors to avail credit facility from the Bank. The resolution must be duly signed and "sealed" by the Company Secretary and/or the Chairman of the Board.

5. A Resolution of the Board of Directors delegating the special powers whether directly or through a General Power of Attorney given to the Chief Executive of the Bank in favour of Bank manager and/or any other officer(s) duly and specifically authorizing him to 'institute" the suit and give/sign vakalatnama in favour of the Counsel/Advocate and sign the plaint/petition for leave to defend/written statement and all that is necessary for the "case", which may be against the Bank or in favour of the Bank.

6. Attested/certified copy of the latest Form XXIX to be obtained from the SECP and to be provided to the lending Bank.

7. Personal guaranties/undertakings of the directors/ sponsors/shareholders/partners/proprietor/third party guarantors/sureties/indemnifiers/which, Guarantees/ undertakings must contain a list/schedule of the personal movable and immovable properties of the aforesaid persons even properties may not be under lien or charge of the lending Bank.

8. In case of Company, latest certified copy of the balance sheet to be obtained from the SECP.

9. In case of a Company, a certified copy of the certificate of Incorporation and the Certificate of the Commencement of Business issued by the SECP.

10. Three specimen signatures of the authorized persons(s) dealing on behalf of the borrower alongwith an authority letter of the borrower duly signed by authorized person, sealed (stamped in case of partnership/sole proprietorship) accompanied with copies of N.I.Cs & passports (if available/possible).

11. Reference from the previous bankers if so desired.

12. Clearance from the State Bank Defaulters list.

13. All the documents of the borrowing company should contain embossed seal.

PART TWO:

FINANCE DOCUMENTS:

1. Loan application with a feasibility study.

2. Sanction letter

3. Loan Agreement(s)

4. Irrevocable General Power of Attorney in favour of the Bank.

5. Uptodate and complete statement of account from the date of first disbursement and/or from the date of opening the account (as the case may be) containing all the debit and credit entries with the final balance duly certified/verified in accordance with the provisions of the Bankers Books Evidence Act which certificate should be given at the foot of the statement and should be signed by two authorized officers.

PART THREE:

SECURITIES:

1. Duly verified title document of the property accompanied with the certificate of a lawyer.

2. Registered Mortgage Deed accompanied with the certificate of a lawyer.

3. Hypothecation agreement in the case of stock etc. or other moveable assets/goods present and future assets.

4. Pledging of shares agreement.

5. Pledging of any bonds, investment certificates, PTCs, TFCs and/or other such financial instruments.

6. Floating Charge Agreement.

7. Continuation/subsisting charge agreement.

8. Agreement of General lien of the Bank on any other accounts and securities with the Bank.

9. Non-Encumbrance certificate (NEC)

10. Registration of the creation of charge on all moveable and immovable properties under Companies Ordinance 1984 with the SECP.

11. Equitable Mortgage Deed.

Note: Mere mutation/Intiqal in the Revenue Record is not per se a title document unless it is a mutation of inheritance.

CONCLUSION

The main concern of the Financial Institutions is the recovery of their outstanding dues. The law under discussion has sufficient and effective provisions for the recovery of the dues. If there are any bad debts that is due to their own doings, as the Financial Institutions have unscrupulously disbursed finances to undesirable and incompetent people without obtaining sufficient securities.