The Counsel

Case Studies

Due Process and Banking Recovery Laws

by Our Correspondents

Of fundamental important to the Banking Sector are a number of Petitions filed by numerous customers / debtors before the High Courts seeking the striking down of Sections 9 and 10 of the Financial Institutions (Recovery of Finances) Ordinance, 2001 on the basis that the requirement of a customer to seek leave to defend from the banking court in terms of the above provisions is violative of the Constitution and in particular the recently inserted Article 10A of the Constitution. The following is therefore a brief summary of the main contentions raised by the customers and the banks in these Petitions.

The right to a fair trial and due process have recently been inserted as part of Constitution (Eighteenth Amendment) Act, 2010 (“2010 Act”). Soon after the introduction of the 2010 Act, a flood of writ petitions numbering in hundreds (“Petitions”) were filed before the Lahore High Court and the High Court of Sindh challenging, amongst others, the restriction and limitations faced by a customer in defending a banking suit provided in Sections 9 and 10 (“Impugned Sections”) of the Financial Institutions (Recovery of Finances) Ordinance, 2001 (“Recovery Ordinance”).

The Petitioners main contention in the above Petitions is that the requirement / limitation of the abovementioned Impugned Sections of the Recovery Ordinance are contrary to the rights to fair trial and due process and are therefore ultra vires the Constitution as well as fundamental rights of the petitioners.

It was further contended by the Petitioners that the Impugned Sections derogate from the Petitioner’s fundamental right to fair trial as they prevent a person from defending allegations made against them (in this case by a financial institution) as a matter of right and accordingly in violation of Article 10-A of the Constitution. The Petitioners have submitted that the requirement of first obtaining ‘a leave to defend’ from the banking court as a preliminary matter violates Article 10-A which provides that:

“Right to fair trial – For the determination of his civil rights and obligations or in any criminal charge against him a person shall be entitled to a fair trial and due process”.

Accordingly, it is contended by the Petitioners that since the relationship between a customer and a financial institution under the Recovery Ordinance is – by its very nature – one that involves rights and obligations of a civil nature, adjudication upon these rights and obligations can only be made after a fair trial and due process.

Likewise, the petitioners have elaborated that a “trial” has been defined in various judicial pronouncements as a formal judicial examination of evidence and determination of legal claims in adversarial proceedings. Therefore, the Impugned Sections prevent the possibility of a “trial”, as – according to the petitioners – persons who have allegedly defaulted on their financial obligations are not guaranteed the right to adduce evidence in their defense as in cases where leave is refused, Section 10(6) of the Recovery Ordinance warrants a decree to be passed without any trial, as stated above.

The Banking Companies on the other hand have opposed the above mentioned contentions and have argued inter alia that the Impugned Sections of the Recovery Ordinance do not run against Article 10-A. It is the position of the Banking Companies that the test under which a statute may be set aside on account of being in contravention of the Constitution has not been satisfied. More specifically, the Respondent Banks’ have contended that term ‘trial’ does not per se require the recording of evidence but the Court may, on the basis of the documents filed by the parties, determine that there is no legal or factual issue that requires the recording of evidence. Moreover, the Recovery Ordinance is a special law enacted to deal with cases where the Defendants are in default of their obligations to repay their outstandings, which are causing losses to the Banks and thereby the national exchequer.

The Respondents have also pointed out that even in the Civil Procedure Code, 1908 (“CPC”), in Order 37 thereof (which has not been specifically challenged in the Petitions), a Defendant has to seek / obtain leave to defend. Additionally, under Order 7 Rule 11 CPC, a Plaint (cause) can be summary rejected, without the recording of evidence, if it is, inter alia, found by the Court that on a perusal of same no cause of action has been made out.

It is also pertinent to note, in this context, that, as also mentioned by the Respondents, Article 4 of the Constitution, already affords every citizen of Pakistan, inter alia, the right to be treated in accordance with law and that no action detrimental to his property can be taken other than in accordance with law. Hence, the concept of Courts acting in accordance with law / the norms of natural justice was already envisaged in the Constitution prior to the insertion of Article 10A.

Initially an interim relief was granted by the Lahore High Court in these matters in the terms that “… The learned Banking Court may decide the leave application but shall not pass any decree against the petitioner until the next date of hearing …” However, on the next date of hearing, the interim relief was altered to the effect that:

“… before deciding any application for leave to defend, the learned Banking Court shall adopt pre-trial methods contemplated by the CPC to ascertain the merit and substance of defences taken in an application for leave. In doing so, an opportunity may be allowed to a defendant to demonstrate and substantiate the defences taken in his application by adducing genuine and relevant documentary material on record. Likewise, in a case where an application for leave is dismissed, a learned Banking court shall nevertheless assess the merits of a plaintiff’s claim in order to exclude illegal and unlawful accretions made therein for arriving at the decretal liability of a defendant/customer. The FIO 2001 does not prohibit either of the said safeguards. The interim order already granted in this matter stands modified in the above terms until the next date of hearing.”

The above-mentioned writ petitions are currently pending before a Division Bench of the Lahore High Court headed by Justice Umar Ata Bandial. Similar Petitions have been filed before the High Court of Sindh before a Division Bench headed by the Hon’ble Chief Justice. However, to date no injunction order has been granted in favour of the Petitioners and the matters are proceedings simultaneously to the Lahore Petitions. Hence, these Petitions on this issue are currently being heard both by the Lahore High Court and High Court of Sindh and the outcome is awaited. However, it is pertinent to note that whatever the outcome, the side that losses will (given the stakes involved and the far reaching impact) seek Leave to Appeal to the Supreme Court, where this issues will be finally put to rest and decided, especially if the High Courts defer. The decision of this issue will not only affect the relationship between the Banks and their customers but the economy of Pakistan as a whole.

The author, Ahmed Uzair, is a Barrister and an Associate at Cornelius, Lane, Mufti at Lahore.

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