Lack Of Foreclosure Laws In Pakistan – Paralyzed Banking Sector
The trust and confidence in a bank-and-customer relationship has deteriorated to an acute level, and why not, banks are ill-equipped to protect their own interests. No matter how brilliant and professionally sound the borrower’s plan is, the tentativeness on part of the bank is always there.
Foreclosure laws empower the bank to take possession of the house upon borrower’s default. A non-judicial foreclosure empowers the bank to sell the property without intervention of the court. A judicial foreclosure requires the bank to sell the property with intervention of the court.
Typically, in home financing, the customer approaches the bank to provide a finance facility, where the bank contributes in the purchase of a house selected by the customer and the latter pays monthly rent to the bank. Upon successful completion of all payments due under the agreement, the ownership of the house is transferred in the name of the customer.
According to a 2014 study of a well-known UK financial website namely www.thisismoney.co.uk, a list of 25 entrepreneurs has been provided “who started with small sums but built business empires”. The list mentions the name of Sir Philip Green on the top – he started with a startup capital of £20,000 and now owns Burton, Dorothy Perkins, Evans, Topman etc. He has an estimated fortune of £3.88 billion. The third position was secured by Sir Richard Branson who began with a startup capital of £500 and now owns an estimated fortune of £2.39 billion through Virgin Records. The list goes on to mention Sir Anwar Pervez and his family on the seventh slot – he was a son of a poor farmer in Pakistan. He started with a start-up capital of £2,200 and now owns an estimated fortune of £1.31 billion. He built Bestway Cash and Carry. The study can be viewed at: http://www.thisismoney.co.uk/money/smallbusiness/article-2809685/Top-25-self-entrepreneurs-started-small-sums-money.html.
Is the Financial Institutions (Recovery of Finances) Ordinance, 2001 (FIO 2001) an adequate banking law to produce a Sir Philip Green or Sir Anwar Pervez in Pakistan?
In our recent jurisprudence, the superior courts have shown reluctance in accepting the powers of the bank to secure its own interests without the intervention of an independent adjudicatory body. Section 15 of the FIO 2001 provided this remedy to the bank to sell the property without intervention of the court.
In the case of Umar Rathore v. FoP, 2009 CLD [Lahore], the full bench of the Honourable Lahore High Court struck down section 15 of the FIO 2001 for giving the bank powers to auction the property without intervention of the court.
In appeal, the Honourable Supreme Court of Pakistan in the case of National of Pakistan v. Saf Textile Mills, PLD 2014 SC 283 upheld the judgment of the Honourable Lahore High Court mentioned above, by holding that the power of the bank to be a judge in its own cause constituted “exploitative behavior”, which was violative of the customer’s/borrower’s constitutional right to due process of law. The bank must file a recovery suit in the banking court where there is a breach of obligation in relation to a finance facility.
More recently, in Summit Bank v. Qasim and Co, 2015 SCMR 134 it was held by the Honourable Supreme Court of Pakistan that the bank has no right to set-off against the customer to adjust outstanding liability because it is only for a competent judicial forum to determine the amount claimed; the legal course of action for the bank is to file a recovery suit under the FIO 2001.
With this background, if the customer commits a breach of obligation in relation to a finance facility, the bank will have to approach the competent forum to enter into the possession of the property and to recover the defaulted amount amongst other relief, given the circumstances of each case. In Dawood Islamic Bank v. Admore Gas, 2012 CLD 263 [Sindh], the suit for recovery was filed by the bank in banking court under section 9 of the FIO 2001 for the customer’s failure to make timely Ijara rental payments. The suit was decreed in favour of the bank. In United Bank Ltd. v. Muhammad Akram, PLD 2009 Lahore 504, the bank instituted criminal proceedings against the customer for breach of a home finance facility. The criminal petition was dismissed in the following terms:
“…it reveals that respondent No. 1 entered into an agreement for home finance facility with the petitioner bank… non-compliance of terms and conditions of the loan facility does not constitute any criminal offence under the law. It is necessary to mention here that the remedy under the law in the given circumstances available to the petitioner is of civil nature by adopting to file a recovery suit against the respondents”.
The situation is different in car financing, where courts have taken a lenient and pragmatic view by entitling banks to enter into possession upon default. Reference is made to the case of Shaukat Ali v. State Bank of Pakistan, 2007 CLD 1352 [Lahore] where it was held that:
“…As far as filing of suit before the banking court is concerned, it would take years and years and the car, which has been taken into custody by the respondents, would be damaged. It is made clear that in case in future any default is made in payment of installments by the petitioner, the bank has a right to confiscate the car”.
After the declaration of section 15 of the FIO 2001 as unconstitutional by the apex court, the present FIO 2001 seems to be lacking the same force of a complete law. The only remedy of obtaining possession is available under section 16(c) of the FIO 2001, which entitles the bank to file an application before the banking court for the attachment of property to enter into the possession of the property till the judgment and decree is passed by the banking court in its recovery suit. In Sajjad Gondal v. Orix Leasing, 2011 CLD 1711 the customer defaulted in making rental payments under the lease agreement in relation to machinery and the bank claimed possession of the same.
The culture of adjournments and strikes adversely affects the rights of the litigants and this prevents a bank from being fully confident in granting a home finance facility. Due to inherent defects and delays in the judicial system, Pakistan is in need of a special foreclosure law which not only provides a fast track remedy to the banks through the adoption of summary procedure, but also complies with the provisions of the Constitution of Pakistan.
The first and foremost constitutional bar is the doctrine of separation of powers as enunciated in the Constitution of Pakistan, whereby judicial powers can only be exercised by the courts or tribunals established under the Constitution. In the case of Mehram Ali v. Federation of Pakistan, PLD 1998 SC 1445, it was held that judicial powers can only be exercised by “courts” which can only be set up in terms of Articles 175 and 203 of the Constitution. In Reference No. 2 of 2005 by the President of Pakistan, PLD 2005 SC 873 (Hisba Bill case), it was held that Article 175(3) does not allow a mohtasib to be an investigator, prosecutor and also exercise judicial powers. In Yousaf Ayub Khan v. Government through Chief Secretary, PLD 2016 Peshawar 57, the paras 5(e), 7, 19(2) and Schedule III of the Shariah Nizam-e-Adl Regulation, 2009 were struck down for conferring “unrestricted and unfettered power in the executive to administer criminal justice, when regular courts, consisting of civil judges/judicial magistrates… had (already) been established in the area to adjudicate civil and criminal disputes”. In the case of Government of Sindh v. Sharaf Faridi, PLD 1994 SC 105, it was held that “the supervision and control over the judiciary vested in the High Court under Article 203 of Constitution, keeping in view Article 175, is exclusive in nature and any notification empowering any executive functionary to have control over the subordinate judiciary will be violation of above Article 203 of the Constitution. Besides it would militate against the concept of operation of powers and independence of judiciary.”
Now the question is whether the sale of a house by the bank upon breach of contract by the customer constitutes an exercise of judicial power. The answer is in the affirmative. In Riaz ul Haq v. Federation of Pakistan, PLD 2013 SC 501, it was held that “the determining factor is the nature of the dispute to be resolved by the tribunal. If the tribunal has to determine a dispute relating to a right or liability, recognised by the Constitution or law and is under an obligation to discover the relevant facts, in the presence of the parties, in the light of the evidence produced by them, it acts judicially. Besides, whenever judicial power is vested in a forum, be it called a court or tribunal, for all legal intents and purposes it is a court”.
Given the recent judicial pronouncements in the context of banking and constitutional limitations, it is almost impossible for the banks to determine the defaults and make recoveries on its own motion; the same may constitute the exercise of judicial power in violation of the principle of independence of judiciary and due process of law.
There is a need for the enactment of a special banking law consisting of an independent impartial tribunal operating under summary procedure for foreclosure disputes. In order to evict the defaulter from the premises, the bank may approach the same tribunal to commence proceedings against the defaulter. The tribunal may decide the matter after providing the opportunity to the parties with the right of hearing.
The situation is different in other countries where banks are statutorily entitled to deal with the property without intervention of the court. One of my favourite lawyers, Mr. Salman Akram Raja placed reliance on foreclosure laws of other countries in defending the legality of section 15 in the Saf Textile case. The relevance of the same is little because in the presence of the Sharaf Faridi case, Mehram Ali case, Riaz ul Haq case, Saf Textile case and the Summit Bank case, the bank cannot exercise judicial powers by determining the breach of contract and liability of default.
The banking court established under the FIO 2001 is not a fast-track remedy. I propose the enactment of a special banking foreclosure law – based on the judicial foreclosure model – which provides a fast track remedy for the banks to restore confidence between them and the customers. However, the same law would also be inadequate if the costs and ex parte proceedings without the option of restoration through an application do not form part of the expeditious disposal mechanism.
The views expressed in this article are those of the author and do not necessarily represent the views of CourtingTheLaw.com or any other organization with which he might be associated.