FEATURES OF FINANCIAL INSTITUTIONS

(RECOVERY OF FINANCE) ORDINANCE, 2001

BY

QAISER JAVED MIAN

Attorney-at-Law

Presently, the recovery of all kinds of loans, finances whether

interest based or markup based, lease financing, credit cards, letters of
credit, long term and short term finance certificates etc., 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 law 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 for the recovery up to
Rs.5 Crores. However, if the suit amount i.e. the amount claimed in
the suit is more than five crores than 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

Banking Courts have 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 provisions of the law.

PROCEDURE OF THE BANKING COURT:

a) PLAINT:
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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 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 Account:

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 by 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;
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 the banking court being under special law is
different from the procedure of the normal civil courts which strictly
follows the civil procedure code.

d) Procedure of Service Of Defendant:

Upon receiving the suit/plaint by the Banking 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
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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 is in the form of a show cause 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 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 for
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 favour 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 is 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 and 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 of 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
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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 and 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, manufactures 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 Banking Court, may it be a
single judge of the High Court acting as 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 two judges and
shall be called a Regular First Appeal (RFA). Against a decision of the
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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
debtors, 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/CUSTOMER’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 a Company, latest certified copy of the balance sheet to

be obtained from the SECP.

9. In case of 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 dealing on
behalf of the borrower along with an authority letter of the borrower
duly signed by authorized person, sealed (stamped in case of
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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. Up-to-date 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)

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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.