THE FINANCIAL INSTITUTIONS (RECOVERY OF FINANCES) ORDINANCE, 2001

In case loan workout effort through negotiation, restructuring, rescheduling, and other methods are not workable then option of filing a recovery suit may be exercised by banks/ financial institutions as a last resort. The law governing recovery of finances is governed by the financial institutions (recovery of finance) Ordinance, 2001, important aspects of this ordinance are covered in the following paragraphs.

Contents

Definitions: Sec 2

Duty of a customer: Sec 3

Establishment of Banking Court under Sec 5

Powers of Banking Courts outlined in sec 7

Suit for recovery of written off finances: Sec 8

Procedure of Banking Courts: Sec 9

Leave to defend unique concept: Sec 10

Sale of mortgaged property: Sec 15

Attachment before judgment, injunction and appointment of Receivers: Sec 16

Provisions relating to certain offences: Sec 20 Application of fines and costs: Sec 21

Appeal: Sec 22

Restriction on transfer of assets & properties: Sec 23

Indemnity: Sec 28

Definitions:

b)Banking Courtmeans:

(i) In respect of a case in which the claim does not exceed fifty million rupees or for the trial of offences under this Ordinance, the Court established under section 5; and

(ii)  In respect of any other case, the High Court.

(c) ”customer” means a person to whom finance has been extended by a financial institution and includes a person on whose behalf a guarantee or letter of credit has been issued by a financial institution as well as a surety or an indemnifier;

Duty of a customer: Sec 3

(1) It shall be the duty of a customer to fulfill his obligations to the financial institution.

(2) Where the customer defaults in the discharge of his obligation, he shall be liable to pay, for the period from the date of his default till realization of the cost of funds of the financial institution as certified by the State Bank of Pakistan from time to time, apart from such other civil and criminal liabilities that he may incur under the contract or rules or any other law for the time being in force.

(3) For purposes of this section a judgment against a customer under this Ordinance shall mean that he is in default of his duty under sub-section (1), and the ensuing decree shall provide for payment of the cost of funds as determined under sub-section (2).

Establishment of Banking Court: Sec 5

(1) The Federal Government may, by notification in the Official Gazette, establish as many Banking Courts as it considers necessary to exercise jurisdiction under this Ordinance and appoint a Judge for each of such Courts and where it establishes more Banking Courts than one, it shall specify in the notification the territorial limits within which each of the Banking Courts shall exercise its jurisdiction.

(2) Where more Banking Courts than one have been established to exercise jurisdiction in the same territorial limits, the Federal Government shall define the territorial limits of each such Court.

(3) Where more Banking Courts than one have been established in the same or different territorial limits, the High Court may, if it considers it expedient to do so in the interest of justice or for the convenience of the parties or of the witnesses, transfer any case from one Banking Court to another.

(4) A Judge of a Banking Court shall be appointed by the Federal Government after consultation with the Chief Justice of the High Court of the Province in which the Banking Court is established and no person shall be appointed a Judge of a Banking Court unless he has been a Judge of a High Court or is or has been a District Judge.

(5) A Banking Court shall hold its sitting at such places within its territorial jurisdiction as may be determined by the Federal Government.

(6) A Judge of Banking Court, not being a District Judge, shall be appointed for a term of three years from the date on which he enters upon his office.

(7) The salary, allowances and other terms and conditions of service of a person appointed as a Judge of Banking Court shall be such as the Federal Government may determine.

(8) The Banking Court may, if it so requires, be assisted in technical aspects of banking transactions involved in any case by an amicus curiae who has at least ten years experience of banking at a senior management level in a financial institution of repute or the State Bank of Pakistan and has the following qualifications, namely:-

  1. i. A degree in Commerce and Accounts or in Economics; or
  2. ii. A degree in Business Administration; or
  3. iii. Has completed a course in banking from the Institute of Bankers, Pakistan.

Remuneration of the amicus curiae, and the party or parties by whom it will be payable, will be determined by the Banking Court, keeping in view the circumstances of each case.

Suit for recovery of written off finances: Sec 8

(1) Subject to sub-section (2), and notwithstanding anything contained in the Limitation Act, 1908 (IX of 1908) or any other law, a financial institution may, within three years from the date of coming into force of this Ordinance, file a suit for the recovery of any amount written off, released or adjusted under any agreement, contract, or consent, including  a compromise or withdrawal of any suit or legal proceedings or adjustment of a decree between a financial institution and a customer on any day on or after the first day of January, 1990 and before the coming into force of this Ordinance, if it can establish that the amount was written off, released or adjusted for political reasons or considerations other than bona fide business considerations.

(2)   No suit under sub section (1) shall be filed unless its filing has been approved by:

(a) The Board of Directors, in the case of a financial institution incorporated within Pakistan,

(b) Or the chief executive (by whatever name called or designated) of the financial institution in Pakistan, in the case of a financial institution incorporated outside Pakistan.

Leave to defend: Sec 10

  1. In any case in which the summons has been served on the defendant as provided for in sub-section (5) of section 9, the defendant shall not be entitled to defend the suit unless he obtains leave from the Banking Court as hereinafter provided to defend the same and, in default of his doing so, the allegations of fact in the plaint shall be deemed to be admitted and the Banking Court may pass a decree in favour of the plaintiff on the basis thereof or such other material as the Banking Court may require in the interests of justice.
  2. The defendant shall file the application for leave to defend within thirty days of the date of first service by any one of the modes laid down in sub-section (5) of section 9:-

(2) Provided that where service has been validly affected only through publication in the newspapers, the Banking Court may extend the time for filing an application for leave to defend if satisfied that the defendant did not have knowledge thereof.

(3) The application for leave to defend shall be in the form of a written statement, and shall contain a summary of the substantial questions of law as well as fact in respect of which, in the opinion of the defendant, evidence needs to be recorded. .

(4) In the case of a suit for recovery instituted by a financial institution the application for leave to defend shall also specifically state the following :

(a). The amount of finance availed by the defendant from the financial institution; the amounts paid by the defendant to the financial institution and the dates of payments;

(b). The amount of finance and other amounts relating to the finance payable by the defendant to the financial institution up to the date of institution of the suit;

(c). The amount if any which the defendant disputes as payable to the financial institution and facts in support thereof:

The application for leave to defend shall be accompanied by all the relevant documents.

(5) An application for leave to defend which does not comply with the requirements of sub-sections (3), (4) where applicable and (5) shall be rejected, unless the defendant discloses therein sufficient cause for his inability to comply with any such requirement. Questions of law or fact raised by him.

(6) The plaintiff shall be given an opportunity of filing a reply to the application for leave to defend, in the form of a replication.

(7) Subject to section 11, the Banking Court shall grant the defendant leave to defend the suit if on consideration of the contents of the plaint, the application for leave to defend and the reply thereto it is of the view that substantial questions of law or fact have been raised in respect of which evidence needs to be recorded.

(8) In granting leave under sub-section (8), the Banking Court may impose such conditions as it may deem appropriate in the circumstances of the case, including conditions as to deposit of cash or furnishing of security.

(9) Where the application for leave to defend is accepted, the Banking Court shall treat the application as a written statement, and in its order granting leave shall frame issues relating to the substantial questions of law or fact, and, subject to fulfillment of any conditions attached to grant of leave, fix a date for recording of evidence thereon and disposal of the suit.

(10) Where the application for leave to defend is rejected or where a defendant fails to fulfill the conditions attached to the grant of leave to defend, the Banking Court shall forthwith proceed to pass judgment and decree in favor of the plaintiff against the defendant.

(11) Where an application for leave to defend has been filed before the coming into force of this Ordinance, the defendant shall be allowed a period of twenty-one days from the date of coming into force of this Ordinance, or from the date of first hearing thereafter, whichever is later, for filing an amended application for leave to defend in accordance with the provisions of this Ordinance.

Disposal of suit: Sec 13

(1) A suit in which leave to defend has been granted to the defendant shall be disposed of within ninety days from the day on which leave was granted, and in case proceedings continue beyond the said period the defendant may be required to furnish security in such amount as the Banking Court deems fit, and on the failure of the defendant to furnish such security, the Banking Court shall pass an interim or final decree in such amount as it may deem appropriate.

(2) The requirement of furnishing security under sub-section (1) shall be dispensed with if, in the opinion of the Banking Court, the delay is not attributable to the conduct of the defendant.

(3) Suits before a Banking Court shall come up for regular hearing as expeditiously as possible and except in extraordinary circumstances and for reasons to be recorded, a Banking Court shall not allow adjournments for more than seven days.

(4) Where leave to defend is granted and evidence is to be recorded, the parties may file affidavits in respect of the examination-in-chief of any witness who is not to be summoned through the Banking Court, and where such affidavits are filed, the Banking Court shall give notice thereof to the other contesting parties and on the date fixed for recording evidence, shall, subject to such modification as may be required for purposes of production and exhibiting of documents, or otherwise in accordance with law, treat the affidavit as examination-in-chief and allow the contesting parties an opportunity for cross-examination on the basis thereof.

Final Decree: Sec 17

(1) The final decree passed by a Banking Court shall provide for payment from the date of default of the amounts found to be payable on account of the default in fulfillment of the obligation, and for costs including, in the case of a suit filed by a financial institution cost of funds determined under section 3.

(2) The Banking Court may, at the time of passing a final decree, also pass an order of the nature contemplated by sub-section (1) of section 16 to the extent of the decrial amount.  

Provisions relating to certain offences: Sec 20

(1) Whoever:

(a). dishonestly commits a breach of the terms of a letter of hypothecation, trust receipt or any other instrument or document executed by him whereby possession of the assets or properties offered as security for the re-payment of finance or fulfillment of any obligation are not with the financial institution but are retained by or entrusted to him for the purposes of dealing with the same in the ordinary course of business subject to the terms of the letter of hypothecation or trust receipt or other instrument or document or for the purpose of effecting their sale and depositing the sale proceeds with the financial institution; or

(b). makes fraudulent mis-representation or commits a breach of an obligation or representation made to a financial institution on the basis of which the financial institution has granted a finance; or

(c). subsequent to the creation of a mortgage in favor of a financial institution, dishonestly alienates or parts with the possession of the mortgaged property whether by creation of a lease or otherwise contrary to the terms thereof, without the written permission of the financial institution; or

(d). subsequent to the passing of a decree under section 10 or 11, sells, transfers or otherwise alienates, or parts with possession of his assets or properties acquired after the grant of finance by the financial institution, including assets or properties acquired benami in the name of an ostensible owner shall, without prejudice to any other action which may be taken against him under this Ordinance  or any other law for the time being in force, be punishable with imprisonment of either description for a term which may extend to three years and shall also be liable to a fine which may extend to the value of the property or security  as decreed or the market value whichever is higher and shall be ordered by the Banking Court trying the offence to deliver up or refund to the financial institution, within a time to be fixed by the Banking Court, the property or the value of the property or security.

Explanation:

(1) Dishonesty may be presumed where a customer has not deposited the sale proceeds of the property with the financial institution in violation of the terms of the agreement between the financial institution and the customer.

(2) Whoever knowingly makes a statement which is false in material respects in an application for finance and obtains a finance on the basis thereof, or applies the amount of the finance towards a purpose other than that for which the finance was obtained by him, or furnishes a false statement of stocks in violation of the terms of the agreement with the financial institution or falsely denies his signatures on any banking document before the Banking Court, shall be guilty of an offence punishable with imprisonment of either description for a term which may extend to three years, or with fine, or with both.

(3) Whoever resists or obstructs, either by himself or on behalf of the judgment debtor, through the use of force, the execution of a decree, shall be punishable with imprisonment, which may extend to one year, or with fine, or with both.

(4) Whoever dishonestly issues a cheque towards re-payment of a finance or fulfillment of an obligation which is dishonored on presentation, shall be punishable with imprisonment which may extend to one year, or with fine or with both, unless he can establish, for which the burden of proof shall rest on him, that he had made arrangements with his bank to ensure that the cheque would be honored and that the bank was at fault in not honoring the cheque.

(5) Where the person guilty of an offence under this Ordinance is a company or other body corporate, the chief executive by whatever name called, and any director or officer involved shall be deemed to be guilty of the offence and shall be liable to be prosecuted against and punished accordingly.

(6) All offences under this Ordinance shall be bailable, non-cognizable and compoundable.

Application of fines and costs: Sec 21

(1) A Banking Court may direct that the whole or part of any fine or costs imposed under this Ordinance shall be applied in or towards:

a) Payment of costs of all or any proceedings under this Ordinance; and

b) Payment of compensation to an aggrieved party. 

(2) An order under sub-section (1) shall be deemed to be a decree passed under this Ordinance for purposes of execution.

Appeal: Sec 22

(1) Subject to sub-section (2), any person aggrieved by any judgment, decree, sentence, or final order passed by a Banking Court may, within thirty days of such judgment, decree, sentence or final order prefer an appeal to the High Court.

(2) The appellant shall give notice of the filing of the appeal in accordance with the provisions of Order XLIII Rule 3 of the Code of Civil Procedure (Act V of 1908) to the respondent who may appear before the Banking Court to contest admission of the appeal on the date fixed for hearing.

(3) The High Court shall at the stage of admission of the appeal, or at any time thereafter either suo moto or on the application of the decree holder, decide by means of a reasoned order whether the appeal is to be admitted in part or in whole depending on the facts and circumstances of the case, and as to the security to be furnished by the appellant:

(4) An appeal under sub-section (1) shall be heard by a bench of not less than two Judges of the High Court and, in case the appeal is admitted, it shall be decided within 90 days from the date of admission.

(5) An appeal may be preferred under this section from a decree passed ex-parte.

(6) No appeal, review or revision shall lie against an order accepting or rejecting an application for leave to defend, or any interlocutory order of the Banking Court which does not dispose of the entire case before the Banking Court other than an order passed under sub-section (11) of section 15 or sub-section (7) of section 19.

(7) Any order of stay of execution of a decree passed under sub-section (2) shall automatically lapse on the expiry of six months from the date of the order whereupon the amount deposited in Court shall be paid over to the decree-holder or the decree-holder may enforce the security furnished by the judgment-debtor.

Through this law, the banks and financial institutions can approach the banking courts for recovery of the finances/ facilities from the defaulters.

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