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IN THE HIGH COURT OF SINDH AT KARACHI

Spl. H.C.A. No.359 OF 2001

[Federationof Pakistan v. MCB & others]

PRESENT:

Mr. Justice Arshad Hussain Khan

Mr. Justice Amjad Ali Sahito

Appellant : Through Mr. Khalique Ahmed, Deputy Attorney

General.

Respondent No.1 : Through Mr. Aamir Raza, Advocate.

Respondents 2 to 4 : Nemo

Date of hearing : 28.10.2026

Date of Judgment : 03.11.2026

JUDGMENT

ARSHAD HUSSAIN KHAN J; Through the instant Appeal, filed under Section 22 of the Financial Institutions (Recovery of Finances) Ordinance, 2001, the Appellant, Federation of Pakistan, has assailed the judgment and decree dated 21.09.2001, passed by the learned Single Judge of this Court, exercising banking jurisdiction, in Suit No.218 of 1999, whereby the suit instituted by Respondent No.1, Muslim Commercial Bank Limited, was decreed for Rs.24,187,515/- along with future markup at the rate of 12.5% per annum, without compounding, besides sale of the mortgaged property and costs. The liability of the Appellant, being guarantor, was restricted to Rs.10,000,000/- with markup thereon at the rate of 12.5% per annum from the date of institution of the suit until realization.

2. Concisely, the facts giving rise to the instant Appeal are that Respondent No.1 instituted the aforesaid suit for recovery of Rs.132,472,037/- against Respondents Nos.2 to 4 and others, including the present Appellant, on the basis of a finance agreement dated 26.10.1980, whereby a financial facility of Rs.20,000,000/- was extended to Respondent No.2, M/s. Tarbela Cotton & Spinning Mills (Pvt.) Limited, for its industrial project. The repayment was secured through various documents, including mortgage and guarantees furnished by Pakistan Industrial Development Corporation (PIDC) and the Federal Government. Subsequently, pursuant to an agreement dated 15.07.1986, PIDC disinvested its shareholding in the said industrial unit and transferred its management and possession to the purchaser. Clause 4 of the said agreement contemplated the discharge of PIDC and the Federal Government from outstanding loan liabilities upon takeover of the Mills and completion of the requisite formalities with the financial institutions. Upon default in repayment, Respondent No.1 instituted the recovery proceedings. The Appellant contested the suit principally on the ground that its liability as guarantor had ceased in consequence of the subsequent agreement. However, by order dated 08.08.2001, its application for leave to defend was dismissed, and thereafter the impugned judgment and decree were passed.

3. Learned Deputy Attorney General, appearing on behalf of the Appellant, while assailing the impugned judgment and decree, contends that the learned Single Judge failed to appreciate the legal effect of the agreement dated 15.07.1986, particularly Clause 4 thereof, whereby PIDC and the Federal Government were to stand absolved from the outstanding liabilities of the industrial unit upon its takeover by the purchaser. He submits that the subsequent arrangement materially altered the original contractual obligations and gave rise to a bona fide dispute regarding the continued liability of the Appellant as guarantor, attracting Sections 133, 134 and 135 of the Contract Act, 1872. According to learned counsel, the guarantee furnished by the Appellant was limited to Rs.10,000,000/- and remained valid only up to 30.06.1987; therefore, the award of future markup from the date of institution of the suit, without determining the nature and extent of the guaranteed liability, was legally unsustainable. He further submits that the learned Single Judge overlooked the compromise proceedings initiated through CMA No.149 of 2001 and the subsequent settlement reached between the Bank and the principal judgment debtors, as reflected in the order dated 17.10.2016 passed in execution proceedings before the Peshawar High Court. It is contended that the settlement and release of the principal debtors materially affected the Appellant's liability as surety. Learned counsel, therefore, prays that the impugned judgment and decree, to the extent of the Appellant, be set aside.

4. Conversely, learned counsel for Respondent No.1 supports the impugned judgment and decree and submits that the Appellant had furnished a valid guarantee securing repayment of the financial facility, and its liability could not be extinguished merely on account of the subsequent disinvestment arrangement between PIDC and the purchaser. He contends that the agreement dated 15.07.1986 did not establish an unconditional discharge of the Appellant from its obligations towards the Bank, particularly when the requisite formalities for release of the guarantees had not been completed. In support of his submissions, learned counsel relies upon the judgment of the Hon'ble Supreme Court in Industrial Development Bank of Pakistan v. Hyderabad Beverage Company (Pvt.) Limited and others [2016 SCMR 451], wherein the principles governing the discharge of a surety under Section 133 of the Contract Act, 1872, were examined. He accordingly prays for dismissal of the Appeal.

5. Before proceeding further, it may be observed that despite the pendency of the instant Appeal since 2001, none has been appearing on behalf of Respondents Nos.2 to 4 for a considerable period. Keeping in view the age of the matter, the opportunities already available to the said Respondents and the material placed on record, we do not consider it appropriate to defer the proceedings any further merely on account of their continued nonappearance. Accordingly, we have proceeded to examine and decide the Appeal with the assistance of learned counsel present and on the basis of the available record, without granting any further opportunity to the absent Respondents.

6. We have heard learned counsel for the appearing parties and carefully examined the material available on record in the light of the applicable statutory provisions and the judicial precedent cited at the Bar. The foremost question arising for determination is whether the learned Single Judge was justified in fastening liability upon the Appellant as guarantor without adequately examining the effect of the subsequent disinvestment agreement dated 15.07.1986 and the related contractual arrangements upon the Appellant's obligations under the original guarantee.

7. It is not disputed that the original finance agreement was executed on 26.10.1980 and that the Appellant had furnished a guarantee, which, according to the impugned judgment, was limited to Rs.10,000,000/- and valid up to 30.06.1987. The material controversy, however, concerns the effect of Clause 4 of the subsequent agreement dated 15.07.1986. A plain reading of the said clause indicates that the parties contemplated the discharge of PIDC and the Federal Government from outstanding loan liabilities upon takeover of the industrial unit by the purchaser. At the same time, the clause also envisaged completion of legal and other formalities with the concerned financial institutions for return of the securities and guarantees. The question whether such arrangement constituted an effective discharge of the Appellant, or merely contemplated its prospective release subject to fulfillment of specified conditions, required determination with reference to the terms of the guarantee, the subsequent agreement and the conduct of the concerned parties. The mere execution of the disinvestment agreement, without examination of these matters, would neither automatically extinguish nor conclusively preserve the liability of the Appellant.

8. The governing legal position is reflected in Sections 128, 133, 134 and 135 of the Contract Act, 1872. While the liability of a surety is ordinarily co-extensive with that of the principal debtor, any material variation in the contractual terms without the surety's consent may attract Section 133, whereas release of the principal debtor or a binding composition between the creditor and principal debtor may have consequences under Sections 134 and 135, subject to the terms of the guarantee and the surety's consent. In Industrial Development Bank of Pakistan (Supra), the Hon'ble Supreme Court held that a guarantor who had expressly consented in advance to rescheduling, concessions or variations could not subsequently claim discharge merely on account of such arrangements. It was further held that an ineffective or unconsummated settlement would not, by itself, absolve the guarantor of liability. The said judgment, therefore, does not lay down an absolute rule that every subsequent arrangement preserves the liability of a guarantor; rather, its applicability depends upon the terms of the guarantee, the nature of the subsequent arrangement and the existence or otherwise of the surety's consent.

9. Applying the aforesaid principles to the present case, we find that the learned Single Judge, while dismissing the Appellant's application for leave to defend and subsequently passing the impugned decree, did not adequately determine whether the agreement dated 15.07.1986 had been acted upon in a manner legally affecting the Appellant's guarantee, whether the Bank had consented to any substitution or discharge of the original obligations, and whether the terms of the guarantee permitted continuation of the Appellant's liability notwithstanding the subsequent arrangements. These were material questions directly bearing upon the Appellant's defence and could not be resolved merely by treating the existence of the original guarantee as conclusive.

10. There is another aspect of the matter. By order dated 09.08.2001, the learned Single Judge allowed the application for leave to defend filed by Defendant No.5, observing that the effect of the proposed compromise between the Bank and the concerned Defendants required determination through evidence. CMA No.149 of 2001 was expressly kept pending. Notwithstanding the same, the impugned judgment proceeded on the premise that only the quantum of liability remained to be determined. The subsequent decree also appears to include Defendant No.4, although the suit against the said Defendant had earlier been withdrawn. These circumstances disclose material inconsistencies in the proceedings, particularly when the contractual arrangements relied upon by the Appellant were closely connected with the proposed compromise and the respective liabilities of the principal debtor and guarantors.

11. The subsequent development relied upon by learned counsel for the Appellant, namely the order dated 17.10.2016 passed in the execution proceedings before the Peshawar High Court, also requires consideration to the extent permissible in law. According to the said order, the Bank acknowledged an amicable settlement with certain judgment debtors, while execution against the Federal Government was to be pursued separately. However, the mere recording of such settlement does not, without examination of its terms, establish that the entire decretal liability stood satisfied or that the Appellant was necessarily discharged. Equally, its legal consequences cannot be disregarded if the settlement resulted in release of the principal debtor or otherwise affected the rights and remedies of the Appellant as surety. The nature, extent and effect of such settlement, including payments received and any outstanding liability, would therefore require appropriate determination.

12. As regards the award of future markup against the Appellant, the learned Single Judge acknowledged that the guarantee was limited to Rs.10,000,000/- and valid up to 30.06.1987, but nevertheless awarded markup at the rate of 12.5% per annum from the date of institution of the suit until realization. Although expiry of a guarantee does not necessarily extinguish liabilities already accrued during its subsistence, the extent of such liability and the entitlement to subsequent markup must be determined in accordance with the express terms of the guarantee and the governing law. In the absence of such examination, the direction for payment of future markup against the Appellant cannot be sustained merely on the basis of the original finance agreement between the Bank and the principal borrower.

13. In view of the foregoing discussion, we are of the considered opinion that the defence raised by the Appellant involved substantial and bona fide questions requiring adjudication and that the learned Single Judge was not justified in conclusively determining the Appellant's liability without addressing the material contractual documents and their legal effect. However, since the principal liability of the borrower and the rights of other parties are not independently under challenge in the present Appeal, it would be appropriate to confine interference to the decree passed against the Appellant.

14. Consequently, the instant Appeal is allowed. The impugned judgment and decree dated 21.09.2001, to the extent of the Appellant, Federation of Pakistan, are set aside, along with the order dated 08.08.2001 insofar as it declined leave to defend to the Appellant. The Appellant's application for leave to defend shall stand allowed, and the matter is remanded to the learned Single Judge, exercising Banking Jurisdiction, for determination of the Appellant's liability in accordance with law, after providing an opportunity to the concerned parties to address the relevant contractual and factual questions. The scope of remand shall remain confined to the existence, continuation and extent of the Appellant's liability under the guarantee, the effect of the agreement dated 15.07.1986, the subsequent compromise or settlement, and the entitlement, if any, to markup against the Appellant. The impugned judgment and decree against the remaining Defendants shall remain undisturbed, subject to any lawful adjustment or satisfaction already recorded. The learned Single Judge shall decide the remanded controversy expeditiously, preferably within six months from receipt of the record, without being influenced by any observations herein touching upon the ultimate merits of the parties' respective claims. There shall be no order as to costs.

JUDGE

Naveed PA