ORDER SHEET

Judgment Sheet

IN THE HIGH COURT OF SINDH AT KARACHI

First Appeal No. 28 of 2018

Before :

Mr. Justice Nadeem Akhtar

Justice Mrs. Kausar Sultana Hussain

Appellants : MCR (Pvt.) Ltd. and MCR International (Pvt.) Ltd.,

through Qazi Umair Ali Advocate.

Respondent No.1 : Soneri Bank Limited, through

Malik Khushhal Khan Advocate.

Respondent No.2 : Muhammad Noman Saigal, called absent.

Dates of hearing : 25.10.2018, 08.11.2018 and 09.11.2018.

J U D G M E N T

NADEEM AKHTAR, J. – Through this appeal under Section 22 of the Financial Institutions (Recovery of Finances) Ordinance, 2001, (‘the Ordinance’) the appellants have impugned order dated 07.03.2018 passed by learned Banking Court No.IV at Karachi in Execution No.20/2015 arising out of Suit No.26/2012, whereby the application filed by them under Section 19(7) of the Ordinance read with Rules 95 and 96 of Order XXI CPC, was dismissed.

2. The main questions involved in this appeal are (A) whether the application / claim filed by the appellants under Section 19(7)(a) of the Ordinance could be rejected by the learned Banking Court without any investigation ; and, (B) whether the presumption contained in the explanation to Sub-Section (7) of Section 15 of the Ordinance, as amended by Financial Institutions (Recovery of Finances) (Amendment) Act XXXVIII of 2016, that lease of the mortgaged property shall be presumed to be not bona fide, could be applied by the Banking Court merely on the ground that it was created subsequent to the mortgage, without application of mind and without making the determination provided for in the said explanation and/or giving findings in relation thereto that it must appear to the Banking Court that the lease was created so as to adversely affect the value of mortgaged property or to prejudice the rights and remedies of the financial institution.

3. Relevant facts of the case are that the above Suit was filed by respondent No.1 against respondent No.2 under Section 9 of the Ordinance for recovery of Rs.7,560,047.48, which was decreed with costs in the sum of Rs.5,679,975.41 with cost of funds thereon from the date of institution of the Suit till realization. It may be observed here that grant of cost of funds from the date of filing of the Suit is not permissible under the Ordinance and the same ought to have been granted from the date of default. A decree for sale of the immovable property mortgaged by respondent No.2 was also passed in the above Suit. In its Execution Application No.20/2015, respondent No.1 filed an application for sealing of the mortgaged property viz. 1/7^th undivided shares in Plot No.158, being Office Nos. SA-69 and SA-71, measuring 2,000 sq. ft. and 1,834 sq. ft., respectively, both situated on the 7^th Floor of the project known as ‘Shahnaz Arcade’ situated in Block No.3, Bahadurabad, Karachi. The above application was allowed by the learned Banking Court by directing the Nazir to take over possession of the mortgaged property and to hand over the same to respondent No.1. However, possession could not be taken over by the Nazir as the mortgaged property was in possession of the appellants as lessees of respondent No.2 / mortgagor. The above orders in respect of the mortgaged property were challenged by the appellants before this Court in Constitutional Petition No.D-5949/2017 which was disposed of with the consent of the parties vide order dated 22.01.2018 by directing the appellants to file an application under Section 19(7) of the Ordinance before the learned Banking Court. It was further ordered by this Court in the above petition that the appellants’ said application should be decided within four weeks, they may not be evicted from the mortgaged property till final disposal of their said application and respondent No.1 may continue with the auction proceedings without evicting them. Thereafter, the appellants filed an application before the learned Banking Court under Section 19(7) of the Ordinance read with Rules 95 and 96 of Order XXI CPC, which has been dismissed through the impugned order.

4. It is an admitted position that lease in respect of the mortgaged property was created in favour of the appellants subsequent to the mortgage in respect thereof in favour of respondent No.1. The main grievance of the appellants is that their objections / claim have not been heard, investigated and/or decided in a proper manner by the learned Banking Court. On the other hand, it was argued with vehemence on behalf of respondent No.1 that the impugned order is fully justified in view of the above admitted position. We have heard learned counsel for the parties at length and with their able assistance have also examined the material available on record. Perusal of the impugned order shows that the application filed by the appellants was dismissed by the learned Banking Court mainly on the grounds that the lease created subsequent to the mortgage was not binding upon respondent No.1 ; it was barred under Section 23 of the Ordinance ; the compromise between the appellants and a third party did not affect the claim of respondent No.1 against respondent No.2 ; and, existence of a lease in favour of the appellants did not constitute a “claim” within the meaning of Section 19(7)(a) of the Ordinance and as such it did not require any investigation. In addition to the above, it was also held in the impugned order that grant of time to the appellants to remain in possession of the mortgaged property till completion of auction proceedings would amount to review of order dated 07.08.2017 whereby Nazir was directed to take over possession of the mortgaged property and to hand over the same to respondent No.1.

5. The application on which the impugned order was passed was filed by the appellants under Section 19(7) of the Ordinance read with Rules 95 and 96 of Order XXI CPC. Under Sub-Section (5) of Section 19 of the Ordinance, the provisions of Sub-Sections (5), (6), (7), (8), (9), (10), (11) and (12) of Section 15 of the Ordinance shall apply mutatis mutandis to sale of mortgaged, pledged or hypothecated property by a financial institution in exercise of powers conferred to it by Sub-Section (3) of Section 19 of the Ordinance, whereby the financial institution may sell the mortgaged, pledged or hypothecated property or cause the same to be sold with or without intervention of the Banking Court either by public auction or by inviting sealed tenders and appropriate the sale proceeds towards total or partial satisfaction of the decree. For the purposes of this appeal, Sub-Section (7) of Section 15 of the Ordinance is relevant, therefore, the same as well as Sub-Section (7) of Section 19 of the Ordinance, under which the application in question was filed by the appellants, are reproduced here for the sake of convenience and ready reference :

Sub-Section (7) of Section 15 of the Ordinance :

“(7) Where the mortgagor or his agent or servant or any person put in possession by the mortgagor or on account of the mortgagor does not voluntarily give possession of the mortgaged property sought to be sold or sought to be purchased or purchased by the financial institution, the Banking Court on application of the financial institution or purchaser shall put the financial institution or purchaser, as the case may be, in possession of the mortgaged property in any manner deemed fit by it :

Provided that the Banking Court may not order eviction of a person who is in occupation of the mortgaged property or any part thereof under a bona fide lease, except on expiry of the period of the lease, or on payment of such compensation as may be agreed between the parties or as may be determined by the Banking Court to be reasonable.

Explanation. – Where the lease is created after the date of the mortgage and it appears to the Banking Court that the lease was created so as to adversely affect the value of the mortgaged property or to prejudice the rights and remedies of the financial institution, it shall be presumed that the lease is not bonafide, unless proved otherwise.”

Sub-Section (7) of Section 19 of the Ordinance :

“(7) Notwithstanding anything contained in the Code of Civil Procedure, 1908 (Act V of 1908), or any other law for the time being in force –

(a) the Banking Court shall follow the summary procedure for purpose of investigation of claims and objections in respect of attachment or sale of any property, whether or not mortgaged, pledged or hypothecated, and shall complete such investigation within 30 days of filing of the claims or objections;

(b) if the claims or objections are found by the Banking Court to be mala-fide or filed merely to delay the sale of the property, it shall impose a penalty up to twenty per cent or the sale price of the property.

(c) the Banking Court may, in its discretion, proceed with the sale of the mortgaged or pledged or hypothecated property if, in its opinion, the interest of justice so require :

Provided that the Financial Institution gives a written undertaking that in the event the objections are found to be valid, or are sustained, it shall in addition to compensating the aggrieved party by the payment of such amount as may be adjudged by the Banking Court also pay a penalty up to twenty per cent of the sale proceeds and such amounts shall be recoverable from the Financial Institution in the same manner as in execution of decrees passed hereunder.”

6. In view of the word “shall” used in the above-quoted Section 19(7)(a) of the Ordinance, it is mandatory for the Banking Court to investigate every claim and objection in respect of attachment or sale of any property, whether or not mortgaged / pledged / hypothecated, in a summary manner and to complete the investigation within 30 days of filing of such claim and objection. Our above view is supported by Clauses (b) and (c) of Section 19(7) ibid as they provide remedies in the shape of compensation respectively to financial institution in case the claim or objections are found to be malafide and to the aggrieved party if the same are found to be valid or sustainable. As noted above, it was held by the learned Banking Court while dismissing the appellants’ application that existence of a lease in their favour did not constitute a “claim” within the meaning of Section 19(7)(a) of the Ordinance and as such it did not require any investigation. In our humble opinion, such finding could not be given by the learned Banking Court without complying with the mandatory requirement of Section 19(7)(a) ibid, that is, without first investigating the claim and objections filed by the appellants.

7. The other ground on which the appellants’ application was dismissed was that the lease was created subsequent to the mortgage and as such it was not binding upon respondent No.1. It appears that this finding was given by the learned Banking Court in view of the explanation to Section 15(7) of the Ordinance. Therefore, it is necessary to examine the entire Sub-Section (7) of Section 15 ibid. A bare perusal of Sub-Section (7) of Section 15 ibid as well as the proviso and explanation thereto would show the intention of the law makers that if a person is in occupation of the mortgaged property under a bonafide lease, his eviction may not be ordered by the Banking Court till the expiration of period of the lease or on payment of such compensation as may be agreed between the parties or as may be determined by the Banking Court to be reasonable. This also shows that if any claim or objections are preferred by a lessee of the mortgaged property, the same cannot be rejected by the Banking Court straightaway without first determining whether his lease is bonafide or not. The criteria for determining whether the lease is bonafide or not is contained in the explanation to this Sub-Section which provides that where the lease is created after the date of the mortgage and it appears to the Banking Court that the lease was created so as to adversely affect the value of the mortgaged property or to prejudice the rights and remedies of the financial institution, it shall be presumed that the lease is not bona fide, unless proved otherwise. It is clear from the language used in this explanation that creation of lease after the date of mortgage is not the sole criteria for determining that the lease is not bonafide ; and, in order to make such determination strictly in terms of the said explanation, it must also appear to the Banking Court that the lease was created so as to adversely affect the value of the mortgaged property or to prejudice the rights and remedies of the financial institution. Once such determination is made by the Banking Court strictly in the above terms through a speaking order, only then the Banking Court will be in a position to decide whether the lease was bonafide or not. If the determination is not made by the Banking Court as provided for in the explanation to Sub-Section (7) of Section 15 of the Ordinance through a speaking order, the presumption contained in the said explanation regarding the lease not being bonafide cannot be applied.

8. It may be noted that the words “unless proved otherwise” used in the explanation to Sub-Section (7) of Section 15 of the Ordinance support the above view expressed by us that a proper determination must be made by the Banking Court by providing fair and reasonable opportunity to the lessee, or any person claiming under him, to prove that the lease in his favour is bonafide and the presumption contained in the said explanation is inapplicable in his case. Needless to say that the above exercise cannot be undertaken or completed by the Banking Court without investigating the claim and objections made on the basis of a lease, which investigation is mandatory under Section 19(7)(a) of the Ordinance as already held by us above.

9. Coming back to the present case, we have seen that the claim and objections filed by the appellant were dismissed by the learned Banking Court without any investigation, and without making any determination and/or giving any findings whatsoever that the lease of the mortgaged property was created so as to adversely affect the value thereof or to prejudice the rights and remedies of respondent No.1. In the above circumstances, the impugned order cannot be allowed to remain in the field.

10. In view of the above discussion, the impugned order is hereby set aside and the application / claim and objections filed by the appellants are remanded to the learned Banking Court to decide the same in a summary manner strictly in accordance with law through a speaking order within a period of thirty (30) days from the date of first hearing after receipt of this judgment. The appeal is allowed in the above terms with no order as to costs and the pending stay application stands disposed of accordingly.

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