LEGAL ASPECTS OF MODARABAS IN PAKISTAN

LEGAL ASPECTS OF MODARABAS IN PAKISTAN LEGAL ASPECTS OF MODARABAS IN PAKISTAN BY Mr. Saalim Salam Ansari, Advocate, Karachi "Modaraba" is a mode of non-interest financing system based on investment and talent according to which one party participates with skill(s) and other party participated with finance, the party who participated with skill called as "Manager" or "Aamil" while the other person who invests through finance called the "Sponsor" or "Rab-ul-Mall", in Modaraba one person participates with skill(s) and other participates with finance, in fact it is to be called as Marriage of "brain" and "finance". According to this financing system one person who cannot participate by investing the money and has no finance and only can use skill through finance of "Rab-ul-Maal". The main point which is involved in the "Modaraba" mode of financing is that both of the parties will share the profit but in case of fiscal loss, the "Manager" or "Aamil" will not suffer with financial losses, but "financer" or "Rab-ul-Maal" is under obligation to suffer financial losses as he loses finance, which he used in the Modaraba arrangement. The concept of Modaraba was available in Pre-Islamic era and it was not prohibited after the Dawn of Islam. This mode is entirely based on a non-interest system of finance and in Modaraba's fiscal arrangement in which ideal Modaraba is the instrument and/or product in interest free economic system in which there is no exploitation of skill(s) and talent(s) due to non-availability of funds and finances. The Modaraba is a fiction of Law and Economics, which is to be called as marriage of brain and finance. In Pakistan in the year 1980 when the Modaraba Ordinance was promulgated about 70 to 100 Modarabas were floated through stock exchanges but in fact they worked on the interest based system. The Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980, which allowed to float the Modaraba(s) through stock exchange(s) and public subscription(s) had collected the money in the name of Modarabas certificates. Unfortunately most of those Modarabas had failed due to reason(s). In fact it is not failure of Modaraba System but the failure of our present system based on corruption which in any case is interest based and in any case it is not the failure of the "Modaraba financing System". A Division Bench of Sindh High Court comprising Mr. Justice Mamoon Kazi and Mr. Justice Abdul Latif U. Qureshi has defined the Modaraba in a reported judgment (1996 MLD 1273 Karachi) in the case of Murtaza Flour Mills (Pvt.) Ltd. v. Federation of Pakistan that the term Modaraba as defined in section 4 of Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980 can be included in term "company"---Even if Modaraba could not qualify as company as defined in Banking Companies Ordinance, 1962, yet no restriction has been imposed in regard to its inclusion in the Schedule of Banking Tribunals Ordinance, 1984---Mere fact that Modaraba can sue or be sued through Modaraba Company, would not lead to inference that claim relating thereto could have been filed before Tribunal to be constituted under Modaraba Companies and Modaraba (Floatation and Control) Ordinance, 1980 and not before the Tribunal constituted under Banking Tribunals Ordinance, 1984---Banking Tribunal, thus, has jurisdiction to try suits pending against customers filed by Modaraba Companies, therefore, a particular word or expression has not been defined in a statute, resort may be had to it's ordinary meaning. [Reliance; Interpretation of Statutes by N.S. Bindra, 7th Edition, P-317; Black's Law Dictionary, 6th Edition, and Ballentine's Law Dictionary, 3rd Edition, P-232] In the instant judgment it is further defined that section 2 of the said Ordinance defines "Modaraba" to mean as "a business in which a person participates with his money and another with his efforts or skill or both his efforts and skill and include Unit Trusts and Mutual Funds. by whatever name called". "Modaraba Company", according to section 2(c) means "a company engaged in the business of floating and managing Modaraba." Clause (d) of section 2 also defines "Modaraba Fund" to mean as "a fund raised through floatation of Modaraba." Section 5 of the said Ordinance provides that a company shall be eligible for registration as a Modaraba Company in case it fulfils the conditions laid down in clauses (a) to (f) of the said conditions. Reference to the said conditions is not necessary not being germane to the questions requiring determination in this case. Section 7 of the Ordinance of 1980 lays down that Modaraba may be of two descriptions, viz., Multipurpose Modaraba, that is to say, a Modaraba having more than one specific purpose or objective, and Specific purpose of Modaraba, that is to say, a Modaraba having one specific purpose of objective. According to subsection (2) of section 7; a Modaraba may be either for a fixed period or for an indefinite period. Section 8 requires a Modaraba Company to apply to the Registrar for permission to float Modaraba section 12 of the Ordinance of 1980 provides that:‑ "12-‑ (1) A Modaraba shall sue and be sued in its own name through the Modaraba Company. (2) The assets and liabilities of each Modaraba shall be separate and distinct from those of another Modaraba as also from those of the Modaraba Company". Section 24 of the said Ordinance (the Modaraba Ordinance), provides for constitution of Tribunals for the purpose of the said Ordinance. Section 25 of the said Ordinance refers to the powers of a Tribunal which may be established under the said Ordinance and provides as follows: "25--- ??????????? (1) A Tribunal shall: (a) In the exercise of its civil jurisdiction, have in respect of a claim filed by a holder of Modaraba Certificates against the Modaraba Company or by Modaraba Company against any other party with whom it has entered into business transactions relating to Modaraba Fund, or in respect of an application by the Registrar for the winding up of a Modaraba Company, all the powers vested in a Civil Court under the Code of Civil Procedure, 1908. (b) In the exercise of its criminal' jurisdiction, try the offences punishable under this Ordinance and shall, for that purpose, have the same powers as are vested in the Court of a Sessions Judge under the Code of Criminal Procedure, 1898. (c) Exercise and perform such other powers and functions as are, or may be conferred upon or assigned to it by or under this Ordinance. (2)------------? (3) No Court other than the Tribunal shall have or exercise any jurisdiction with' respect to any matter to which the jurisdiction of the Tribunal extends under this Ordinance. Reference may also be made to section 26 of the said Ordinance (The Modaraba Ordinance), which provides for procedure to be followed by such Tribunal established under the said Ordinance. The said section provides as follows:--"26--‑ (1) Matters before the Tribunal shall come up for regular hearing as expeditiously as possible and, except in extraordinary circumstances and on grounds to be recorded, the Tribunal shall hear the cases from day to day. (2) In the exercise of it's civil jurisdiction, the Tribunal shall, in all suits before it, including suits for recovery of money, follow the summary procedure provided for in Order XXXVII of the First Schedule to the Code of Civil Procedure, 1908." "42. The provisions of this Ordinance shall have effect notwithstanding anything contained in the Companies Act, 1913 or any other law for the time being in force." The Division Bench of Sindh High Court had further elaborated that "no doubt, the definition of "Modaraba" in section 2(a) of the Ordinance, 1980 (the said clause is now (ab) after amendment) indicates that Modaraba only means a business or scheme in which one person participates with his money and other with his efforts or skill or both his efforts and skill and the same does not fall within the definition of the word "company" as defined either in the Banking Companies Ordinance, 1962 or the Companies Ordinance, 1984 but as it indicated by the above Dictionary meanings of the term "company" an establishment to qualify as a company may not conform to the definition of the said term as given in the said Ordinances." "The expression "Modaraba Fund" has also been defined in the said Ordinance to mean as "a fund raised through floatation of Modaraba." Section 12 of the Ordinance of 1980, reference to which was also made earlier in this judgment, further indicates that a Modaraba shall sue and be sued in its own name through the Modaraba Company. Subsection (2) of the said section further provides that the assets and liabilities of each Modaraba shall be separate and distinct from those of another Modaraba as also from those of the Modaraba Company. The aforesaid provisions, therefore, indicate that "Modaraba" is a business in the nature of partnership and "Modaraba Company" is a company which may be engaged in the business of floating and managing Modaraba. A fund which may be raised through floatation of Modaraba has been defined in "Modaraba Fund" by the said Ordinance. Although there appear to be no restrictions on any company floating or managing more than one Modaraba but as is indicated by section 12, each Modaraba would be a separate legal entity which may sue or be sued in its own name although, through the Modaraba Company. Section 25 of the said Ordinance indicates that a Tribunal constituted under the said Ordinance has been vested with jurisdiction to determine a claim filed by a holder of Modaraba Certificates against the Modaraba Company or by a Modaraba Company against any other party with whom it has entered into business transactions relating to Modaraba Fund or in respect of matters relating to winding up of a Modaraba Company but the provisions of section 25 nowhere indicate that further power has been conferred on a Tribunal to try any claim that may be instituted by a Modaraba against any other party, may be the transaction relates to Modaraba Fund. No doubt, subsection (3) of section 25 further indicates that the Tribunal so established shall exercise exclusive jurisdiction in the matters as indicated by subsection (1) thereof by placing restriction upon the exercise of such power by any other Court or Tribunal and subsection (2) of section 26 further indicates that the Tribunal has been vested with jurisdiction to try suits, including suits for recovery of money but since, as has .been pointed out earlier, the exclusive jurisdiction vested in the Tribunal only relates to matters specified in subsection (1) of section 25. Although the said subsection indicates that the Tribunal has been vested with power to try claims' instituted by a Modaraba Company in relation to Modaraba Fund, but such claims cannot include claim filed by Modaraba as in the present case, since a Modaraba is a separate legal entity as indicated by section 12 of the Ordinance of 1980, as it can sue and be sued in its own name. The mere fact that a Modaraba can sue or be sued through the Modaraba Company does not lead to an inference that the claims instituted in the present case against petitioners could have been filed before a Tribunal to be constituted under the Ordinance of 1980. If such was the legislative intent, the same would have been clearly expressed in the said Ordinance. On the other hand, the Legislative in its own wisdom by enlarging the definition of "banking company" in section 2(a) of the Banking Tribunals Ordinance of 1984 and vesting the Federal Government with power under section 13 of the said Ordinance clearly intended to confer powers on the Tribunal constituted under such special enactment to try all cases relating to finance between the establishments included in the said Schedule and a customer, we are consequently, of the view that the Banking Tribunal has jurisdiction to try the suits pending against the petitioners. We, therefore, find no force in this petition." Inclusion of "Modarabas" and/or "Modaraba Companies" in the Schedule of Banking Tribunals Ordinance, 1984 (Now replaced by the Financial Institutions (Recovery of Finances) Ordinance, 2001), vests Banking Tribunals (Now Banking Courts) with exclusive jurisdiction to try claims filed by Banking Companies against customers---Specified procedure has been prescribed for resolution of such claims and appeals filed against any order, decree or sentence passed by the Banking Tribunal (Now Banking Courts). Perusal of the above has shown that one Modaraba Management Company can float many Modarabas like Messrs. Prudential Modaraba Management Co. (Pvt.) Ltd; had floated 1st, 2nd and 3rd Prudential Modarabas as "Modaraba" has been created by virtue of fiction of law as well as it has been declared a legal person and controversy were dissolved in the cited reported judgment of Sindh High Court passed by Mr. Justice Mamoon Kazi and Mr. Justice Abdul Latif U. Qureshi in the case of Murtaza Flour Mills Ltd. v. Federation of Pakistan reported as 1996 MLD 1273 (D.B.) according to which five (5) writ petitions were disposed off. It is also provided in section 30 of Ordinance that any person aggrieved by any order, judgment decree or sentence of the Modaraba Tribunal, may, within thirty days of such order, judgment decree or sentence, prefer an appeal to the High Court within whose jurisdiction the order, judgment, decree or sentence is passed. It was further provided that no appeal shall lie from an interlocutory order which does not dispose of the entire case before the Modaraba Tribunal. "Modarabas" are governed by the Securities and Exchange Commission of Pakistan (SECP) and not under the direct supervision of State Bank of Pakistan and/or in view of the above, the proviso of sections 25 and 33-B of the Banking Companies Ordinance, 1962, will apply and/or the directives/circulars of State Bank of Pakistan are also applicable to the Modarabas. That by virtue of the Financial Institutions (Recovery of Finances) Ordinance, 2001, the definition of "Financial Institutions" and "finance" have been defined and the "Modaraba" has been declared as Financial Institution, the Financial Institutions (Recovery of Finances), Ordinance of 2001 is an Ordinance to repeal, and, with certain modifications, re-enact, the Banking Companies (Recovery of Loans, Advances, Credits and Finances) Act XV of 1997 and promulgated on 30th August, 2001 and in the definition 2(a) and 2(d) the "financial institutions" and "finance" defined as: (a) "Financial institution" means and includes:--‑ (i) Any company whether incorporated within or outside Pakistan which transacts the business of banking or any associated or ancillary business in Pakistan through its branches within or outside Pakistan and includes a Government savings bank, but excludes the State Bank of Pakistan. (ii) A modarba or modarba management company, leasing company, investment bank, venture capital company, financing company, unit trust or mutual fund of any kind and credit or investment institution, corporation or company; and (iii) Any company authorized by law to carry on any similar business, as the Federal Government may by Notification in the official Gazette, specify. (d) "Finance" includes:--‑ (i) An accommodation or facility provided on the basis of participation in profit and loss, mark-up or mark-down in price, hire-purchase, equity support, lease, rent-sharing, licensing charge or fee of any kind, purchase and sale of any property including commodities, patents, designs, trade marks and copy-rights, bills of exchange promissory notes or other instruments with or without buy-back arrangement by a seller, participation term certificate, musharika, morabaha, musawama, istisnah or modaraba certificate, term finance certificate. The offences defined in sections 4, 10, 13, 14, 16 or 17 of Modaraba Ordinance, 1980 shall be punishable with imprisonment of either description for a term which may extend to three (3) years and with fine which may extend to five hundred thousand rupees, therefore, the contravention referred to in subsection (1) has caused loss to the Modaraba or any other person, a further fine to the extent of the loss shall be imposed. That under section 25 subsection (1) clause (b) of Modaraba Ordinance, 1980 has provided that criminal proceedings be initiated under Code of Criminal Procedure, 1898, and it's having the same power and are vested in the Sessions Court and/or it has to follow Cr.P.C. while exercising criminal jurisdiction under section 31 of Modaraba Ordinance, 1980 regarding punishment(s) which runs as:‑ Section 31---Punishment. (1) Whoever contravenes the provisions of sections 4, 10, 13, 14, 16 or 17 shall be punishable with imprisonment of either description for a term which may extend to three years and with fine which may extend to five hundred thousand rupees. Where the contravention ' referred to in subsec?tion (1) has caused loss to the modaraba or any other person, a further fine to the extent of the loss shall be imposed. That under section 30 of Modaraba Ordinance, 1980, an appeal against Modaraba Tribunal was provided under subsection (1); which runs as; Section 30 (1):---Any person aggrieved by any order, judgment, decree or sentence of the Tribunal may, within thirty days of such order, judgment, decree or sentence, prefer an appeal to the High Court within whose jurisdiction the order, judgment, decree or sentence is passed: Provided that no appeal shall lie from an interlocutory order which does not dispose of the entire case before the Tribunal. Although the "Modarabas" are governed by the Securities and Exchange Commission of Pakistan (SECP) and not under the direct supervision of State Bank of Pakistan but in view of the above, the provisions of sections 25 and 33-B of the Banking Companies Ordinance, 1962, will apply and/or the directives/circulars of State Bank of Pakistan are also applicable to the Modarabas. The SBP's BPD's Circular No.29 of 2002 and/or subsequent State Bank's circulars are also applicable to the leasing companies and Modaraba(s) as under section 2(d) of the Financial Institutions (Recovery of Finances) Ordinance, 2001 the "lease", "modaraba", "Hire and Purchase" and "modaraba certificates" fall within the definition of "finance" and under section 2(a), the "leasing companies" and/or "modarabas" are covered within the definition of "financial institution(s)". It is needless to say that Financial Institutions (Recovery of Finances) Ordinance, 2001 was enforced in replacement of Banking Companies (Recovery of Loans), Advances, Credits and Finances) Act XV of 1997 in which "Leasing Companies", "Modaraba(s)" as well as "Investment Bank(s)" were also covered under the definition of the "Banking Company". Sections 25 and 33-B of Banking Companies Ordinance, 1962 have covered the word "finances" pertains to the "financial institutions" who granted the loans and/or advances and in view of reported judgments, 2004 CLD 257 (Tristar's case) and 2002 CLD 542 (Messrs Azmat Textile's case); PLD 1997 SC 315 (Hashwani Hotel's Case); PLD 1999 SC 1026 (Shaukat Ali Mian's case); 2002 CLC 166 (Dadabhoy Cement Industries Ltd. v. NDFC) upheld by the apex Court of Pakistan in PLD 2002 SC 500. It is held that sections 25 and 33-B of the Banking Companies Ordinance, 1962 are applicable on all the Banking Companies who are involved in respect of grant of advance(s) and/or loan(s), even these are applicable on CIRC,. who as per section 19 of CIRC Ordinance, 2000 is not a banking company, but has adopted the scheme of SBP's BPD's Circular No. 29 of 2002. In a CIRC's case (UBL v. Bawany Spinning Mills (Pvt.) Limited), Mr. Justice Maqbool Baqar of Sindh High Court has held that "spirit behind the Circular-29 will be adopted for all the practical purposes". Further in the case reported as 2005 CLD 422, 2005 CLD 114, 2005 CLD 169 (D.B.) (upheld by Supreme Court of Pakistan in 2004 SCMR 1956) it is held that SBP's Circular -29 of 2002 is applicable in CIRC cases. In view of the above, it is necessary and/or practical that a subsequent circular is advised to be issued which shall clarify that the SBP's scheme is applicable to "Modarabas", "Leasing Companies" and "Investment Banks' as the "Myth behind the incentive circular(s) is applicable to Modaraba(s), Leasing Companies and Investment Banks" as a clarification to that extent be also issued by SECP which declares that "spirit of the said SBP's circular(s) may be followed by the "Modaraba(s)", "Leasing Companies" and "Investment Bank(s)" to the extent of "case to case basis". SBP's Incentive Scheme announced vide SBP's Circular-29 of 2002 is a very useful and workable scheme in which incentive(s) for loan's write-off has been given by adopting the practical approach and by introducing the scheme based on theory "Buy your own securities on Forced Sale Value". The benefit of the scheme will be that a reasonable and/or sizeable amount will be recovered as under the scheme more than 45,000 borrowers had applied and more than 1000 complaints have been filed before SBP's Committee. Further not only the bad debts will be cleared as well as the burden of suits/cases and appeals on the Banking Courts and superior Courts will be relieved, due to the instant out of Court settlement's scheme. The failure of Modaraba Sector in Pakistan is not the failure of the principle(s) and/or system of Modaraba(s), which is a non-interest system, it is the failure of our present system, based on corruption and/or interest as the Modem Western World is adopting the system of Non-interest Modaraba System, while in Pakistan, we indulge ourselves in debate whether the Modaraba, Musharika and other mode of non-interest financing, banking and Interest Free Economy is feasible and/or practical or not. It is the need of the time that reforms in Modaraba System be made and/or Legal Structure of Modaraba(s) be modified by modification of Modaraba Ordinance, 1980 as well as strict supervisory jurisdiction of SECP and State Bank of Pakistan be regulated as the future pertains to Modaraba(s). By encouraging Modarabas Sector and Modaraba System, our society and economy can progress and talent(s) as well as skill(s) can be utilized for Economic Progress.