2012 PLP 1670 (CLD)

FAISAL ARAB, J.

The Banking Court No.1, at Karachi passed decree in Banking Suit No.3 of 2006, filed by the respondent against the appellants, to the extent of Rs.26,727,249.06 together with cost of funds recoverable from the date of the decree till realization of the decretal amount. This decree has been impugned in this appeal.

2. The appellants had obtained a running finance facility of Rs.5,000,000.00 on markup basis having a buyback price of Rs.5,948,750.00; a demand finance facility of Rs.12,000,000.00 also based on markup with a buyback price of Rs.16,339,700.00. The appellants were also liable to make payment against documents in a sum of Rs.1,661,000.00, which amount the respondent bank had paid on appellants' behalf. This last facility was not based on markup. The total liability inclusive of markup payable under the first and second facility comes to Rs.23,929,450.00. Before filing of the suit, the appellants had repaid a sum of Rs.11,722,708.00 from time to time leaving a balance of Rs.12,206,742.00. This amount of Rs.12,206,742.00 was deposited by the appellants with the Nazir of this Court during pendency of the appeal.

3. The counsel for the appellants, Mrs. Sofia Saeed Shah, argued that while passing the impugned decree, the Banking Court No.1, at Karachi calculated the cost of funds in excess of the appellants' liability. She next contended that under the agreements that were executed for availing running finance facility and demand finance facility a prompt payment bonus to the extent of Rs.1,177,500.00 was provided in the agreement, which amount in terms of the decisions of this Court reported in 2007 CLD 1655 and 1999 MLD 1888 ought to have been deducted from the overall liability of the appellants. The Banking Court granted cost of funds from the date of the decree till realization of the outstanding amount whereas section 3 of the Financial Institutions (Recovery of Finances) Ordinance, 2001 provides that cost of funds is to be awarded from the date of the default till the realization of the amount. She contended that markup that has been charged in excess may be reduced and decree passed by the Banking Court may be ordered to be modified to such extent.

4. The counsel for the respondent bank Mr. Aziz-ur-Rehman, on the other hand, argued that the counsel for the appellants has himself admitted before this Court on 16-12-2009 that the undisputed amount was only Rs.12,206,742.00 and, therefore, the appellants cannot turn around and seek reduction of this amount on account of prompt payment bonus since the admitted amount of Rs.12,206,742.00 was deposited pursuant to the order of this Court dated 16-12-2009 and the only objection which the appellants can urge before this Court is the calculation of cost of funds if at all it was incorrectly calculated. He further argued that insofar as the prompt payment bonus is concerned, it should be regarded as a concession that is granted only in the event the financial obligation is discharged on or before the due date, therefore, buyback price which is inclusive of prompt payment bonus cannot be regarded as penal in nature. In support of this contention, he relied upon the case from Indian jurisdiction in the case of Filzholmes v. the Bank of Upper India Ltd. reported in AIR 1923 Lahore 548 in which it was held that higher rate of interest payable under an agreement of finance with provision to reduce the same in the event of punctual repayment of loan is not to be regarded as penal in nature within the meaning of section 74 of the Contract Act. He also referred to sections 3 and 34 of the Financial Institutions (Recovery of Finances) Ordinance, 2001 and section 34B in support of his contention that under the present dispensation of law i.e. Financial Institutions (Recovery of Finances) Ordinance, 2001, whatever is the obligation created by the parties under an agreement is binding on the contracting parties and the judgments relied upon by the counsel for the appellants were delivered under the previous dispensation of law i.e. Banking Companies (Recovery of Finances) Act, 1997.

5. It is an admitted position that the finances availed under the first two facilities were based on markup i.e. under the principles of Islamic modes of financing. Certain goods are purchased by the financier at a certain price for the person who had asked the financier to provide the finance for the goods. Then the goods are sold by the financier to the said person at a price higher than the price at which goods were bought by the financier, which higher price is described as buyback price. Nothing is to be paid to the financier over and above this buyback price for any reason whatsoever. Any excess amount claimed over and above the buyback price would convert the transaction into interest based transaction, which since 1984 has been prohibited under Islamic modes of financing introduced under BCD Circulars 13 and 34 of the State Bank of Pakistan. These prohibitions continue till date under the present dispensation of banking laws. Any term in the agreement, which is contrary to Islamic mode of financing, is of no legal effect. In the judgments, relied upon by the counsel for the appellants, it has been held that as there has to be only one buyback price, the amount that is determined to be payable as prompt payment bonus within the stipulated time is to be regarded as actual buyback price. Anything above this buyback price would enter the transaction into the realm of interest based financing. Once the financier agrees to a lesser amount for settlement of his claim then he cannot charge any amount over and above this lesser amount. The accounts have to be settled at such lesser amount under the Islamic mode of financing. Thus, any amount that is charged in excess of this amount i.e. after deducting prompt bonus would certainly bring the transaction within the ambit of interest, which would, convert a permissible transaction under Banking laws into a non-permissible interest based transaction. The judgment from Indian jurisdiction, relied upon by the counsel for the respondent, relates to interest based transaction and being an interest based transaction two rates of interest, dealing with the different situations of a transaction, were termed as lawful and not penal in nature. Hence, the said judgment reported in AIR 1923 Lahore 548 is of no help to the respondent's case, which is to be decided under the principle of Islamic modes of financing introduced by the State Bank of Pakistan in 1984.

6. We have however noted that the point of prompt payment bonus was not raised by the appellants in the leave to defend application before the Banking Court nor such ground was taken in the memo of appeal. There being no challenge to the decree on such ground, the findings of the Banking Court attained finality and cannot be disturbed by the appellate Court in absence of any challenge.

7. As to the calculation of cost of funds, the counsel for the respondent was asked as to when repayments of Rs.11,722,708.00 were made and he without providing specific dates, stated that recovery of Rs.11,722,708.00 may be treated on dates within the time provided under the markup agreements. When any amount is repaid within the due date then it means that to such extent there was no default. Hence, the default is to be treated only to the extent of the balance outstanding amount of Rs.12,206,742.00 that was admittedly not repaid within the contractual period but was deposited subsequently. Hence, the cost of funds is to be calculated only on the defaulted sum i.e. Rs.12,206,742.00 at the rates applicable from time to time from the date of commission of default till the defaulted sum was deposited in the Banking Court. The judgment and decree passed by the Banking Court is, therefore, modified to the above extent. If any amount that has been paid towards cost of funds, the same shall also be adjusted upon recalculation of the liability of cost of funds in terms of this order. The Banking Court shall then recover the balance outstanding amount due and payable from the appellants.

8. The appeal stands disposed of in the above terms. MWA/T-4/K Order accordingly.