ORDER SHEET

HIGH COURT OF SINDH, KARACHI

      

Suit No.B-32 of 2003  

 


   Date                            Order with signature of Judge

 

1.  For hearing of CMA No.6811/2003.

2.  For hearing of CMA No.6812/2003.

 

 

Plaintiff           :       Bankers Equity Limited and others.

 

 

Defendants     :       Muzaffar Hussain and others.

 

 

Dated of hearing:    18.09.2012.

 

 

Mr. A.H. Mirza, Advocate for the plaintiffs.

 

Mr. Naim-ur-Rehman, Advocate for defendant No.4.

 

Mr. Usman Hadi, Advocate for defendant No.5.

 

 

Muhammad Ali Mazhar,J.:- The plaintiffs have filed this banking suit under Section 9 of the Financial Institutions (Recovery of Finances) Ordinance, 2001 for the recovery of Rs.1130,509,133/-

 

2. The leave to defend application filed by defendant No.2  (CMA No.6810/2003) was allowed by the learned single Judge vide order dated 12.10.2011. Now, leave to defendant applications moved by defendants No.4 and 5 are pending for hearing. So far as the leave to defend application (CMA No.6809/2003) filed by defendant No.1 is concerned, the counsel for the plaintiffs submitted that the defendant No.1 has expired and suit against him is  abated, hence vide order dated 18.09.2012, the suit against the defendant No.1 was abated.

 

3. In paragraph 13 of the plaint, it is averred that in consideration of agreement to grant financial facilities to M/s. Dannemann Fabrics Ltd., the defendants No.1 to 8, sponsor directors of the said company executed and delivered their personal continuing guarantees dated 23.08.1992 for LMM finance, LT-TFC  and counter guarantees against suppliers and sponsor directors undertaking dated 23.08.1992. It is further stated that the defendants No.1 to 8 also executed their personal guarantees as security exchange risk of State Bank of Pakistan. In paragraph 22 of the plaint, the plaintiff has described the cause of action, which was initially accrued in the year 1990 when the aforesaid company availed the financial facility then cause of action stated to be arisen on 23.08.1992, 28.07.1993 and 17.12.1993 when the defendants No.1 to 8 executed their guarantees. It is further stated that further cause of action arose on 16.10.2002 when the demand was raised by the plaintiffs through their Advocate, which is continuing cause of action to them.

 

4. The defendants No.4 and 5 have filed their leave to defend applications under Section 10 of the Financial Institutions (Recovery of Finances) Ordinance, 2001.

 

5. Mr. Naim-ur-Rehman, learned counsel for the defendant No.4 argued that it is an admitted fact that in paragraph 22, the plaintiffs have mentioned the dates when personal guarantees were executed by the directors but the suit has been filed in the month of June, 2003 which is time barred. He further argued that the cause of action was lastly accrued when winding up petition J.M.162/96 was filed and the company was wound up and the Official Liquidator was appointed. He further argued that in terms of financing agreements, certain movable and immovable assets were pledged with the plaintiffs but the plaintiffs were negligent in taking action against the pledged/hypothecated goods, which cannot be realized through guarantors. In terms of guarantee, the answering defendant only agreed to discharge liability when principal debtor failed to do so. He further argued that the answering defendant never availed any finance and the company which availed the finance was already wound up. It was further averred that the amount claimed represents markup upon markup. The statement of accounts is also not reflecting the proper figure and the rebate payable on prompt payment. The statement of accounts reflects penalties also which are not admissible and it also reflects the delayed markup of huge amount, which is not allowable. The learned counsel pointed out the questions of law raised in the leave to defend application, which are related to the point of limitation, effect of negligence on the part of plaintiffs and various grounds mentioned in the leave to defendant application under paragraph 2 (a) and (i) to (ix) and argued that the points raised require evidence. So far as  point of limitation is concerned, the learned single Judge of this court has already allowed leave to defend application of the defendant No.2, hence he argued that the defendant No.4 be treated alike and his application be also allowed as no just and proper decision of the suit is possible unless evidence is allowed to be adduced.

 

6. Mr.Usman Hadi, the learned counsel for the defendant No.5 argued that defendant No.5 ceased to be a director of the company since 28.06.1994 and he conveyed letter to the plaintiff No.1 for revoking of his liabilities and obligations. He further argued that the defunct company has already been wound up and its assets have been sold and adjusted against its liabilities to the plaintiffs and since the assets sold and adjusted, the relationship of the principal debtor is altered and defendant No.5 stood discharged of his liability as surety. He further argued that the plaintiff No.1 is estopped from claiming the amount under the alleged guarantee in view of the acceptance of revocation by defendant No.5 of his liabilities to the defunct company. It was further argued that the plaintiff No.1 has no right or authority to sue in view of the fact that the company has been wound up as such it is not a banking company in terms of Ordinance of 2001. It was further submitted that the defendant No.5 was merely a nominee director of the defunct company, which was wound up on 11.09.1998. The defendant No.5 resigned from the Board of Directors on 28.06.1994 and informed the plaintiffs vide his letter dated 07.07.1994 and on his resignation he revoked all personal guarantees given to the plaintiff No.1. He further argued that the name of the defendant No.5 was placed on Exit Control List but the plaintiffs informed CIB that the defendant No.5 was not a director of the defunct company, then the name of defendant No.5 was removed from ECL. The learned counsel finally argued that keeping in view the status of the defendant No.5 and the points raised in the leave to defend application, the matter requires evidence as after tendering the resignation much earlier, proper information to the plaintiffs and revocation of guarantee, the defendant No.5 is not liable to pay any amount to the plaintiffs.

 

7. Mr. A.H. Mirza, learned counsel for the plaintiffs argued that so far as the question of limitation is concerned, the cause of action finally accrued on 16.10.2002 when the demand was made by the plaintiffs through their counsel. He further argued that the period of limitation in case of guarantee starts to run from the date of demand and since the demand was made on 16.10.2002 therefore the suit is within time. He denied the contention that the plaintiffs have committed any negligence in the recovery of amount rather he very forcefully stated that it has nothing to do with the question of recovery of this amount through guarantors, who cannot escape from their liabilities which is con-extensive with that of principal debtor as provided under Section 128 of the Contract Act. He further argued that on liquidation of M/s. Dannemann Fabrics Ltd., the principal debtor does not discharge the defendants to wriggle out from their guarantee, which is independent and co-extensive with that of principal debtor. He argued that the claim of the plaintiffs is based on the documents of guarantees executed by defendants. So far as the ground raised by the defendant No.5 is concerned, learned counsel for the plaintiff argued that being nominee director of former M/s. Dannemann Fabrics Ltd. or holder of minimum shares or being not involved in the management does not absolve the defendant No.5 from his obligations in respect of the guarantees dated 23.08.1992 and 17.02.1993. The said guarantees are still valid and binding. He further argued that the revocation of the liability was illegal because the documents of guarantees were executed for consideration received by M/s. Dannemann Fabrics Ltd., hence the revocation does not operate in respect of finance already availed. To cover up the question of limitation, he reiterated that if the date of demand is taken into consideration, the suit is within time. He further argued that winding up of the company does not absolve its directors from their liabilities. The learned counsel finally argued that no case for leave to defend was made out by the defendants No.4 and 5, therefore their applications are liable to be dismissed and suit be decreed against them.

 

8. After hearing the arguments of the learned counsel, I have reached to the conclusion that in both leave to defend applications, the defendants No.4 and 5 vigorously attacked the suit on the ground of limitation and leave to defend application filed by defendant No.2 in which almost similar ground of limitation was raised was allowed unconditionally by the learned single Judge of this Court on 12.10.2011. So on the ground of limitation, in my view, the defendants No.4 and 5 are also entitled for the same treatment and their applications are also to be allowed on this score. Even the language of para 1 of the leave to defend application filed by defendant No.2 is same as the preliminary objection taken by the defendant No.4 in his leave to defend application. Besides above, the defendant No.4 has also challenged the statement of accounts that it represents markup upon markup. It was further stated that huge amounts are mentioned against penalties, which are not admissible according to the defendants. The defendant No.5 has taken different position though the plea of limitation was taken by him also but he has categorically stated that he was a nominee director and resigned from the Board of Directors in the year 1994 and he revoked all guarantees. Though the plaintiffs in their replication did not deny his resignation from the Board of Directors or the revocation but it was asserted that despite revocation he is bound to honour his guarantee as the company availed the finances and the guarantee was against the value received.  The defendant No.5 has also taken the position that after winding up order of M/s. Dannemann Fabrics Ltd., the assets were sold and realized and he also pointed out some negligence on the part of the plaintiffs to file their claim. Though under Section 128 of the Contract Act the liability of the surety is co-extensive with that of principal debtor unless it is otherwise provided by the contract. This section is directed to defining the liability of a surety upon the terms of contract of guarantee but it does not affect the application of the statute of limitation. The right of action against surety would generally arise at the same time as right of action against the principal debtor. All  these complicated questions  require evidence.

 

9. The learned counsel for the plaintiff referred to PLD 1982  Karachi 577 (National Bank of Pakistan  v. F.S.Aitzazuddin and 02 others), in which while discussing Sections 126 and 128 of the Contract Act. Learned Single Judge of this court held that liability of surety arises immediately on failure of principal debtor and unless otherwise provided in contract creditor cannot be compelled to first exhaust his remedy against principal debtor before initiating any action against surety. Even in cases where liabilities of both parties arise from same transaction or same document liabilities are distinct. The fact that the creditor has not sued or joined the principal debtor can hardly be a defence in a suit against the surety. Case of liability of surety is based on a letter of guarantee is distinct from liability of principal debtor.    In another judgment reported in 1981 CLC 89 (United Bank Ltd. v. Haji Bawa Company Ltd. & 3 others), it was held that contract of guarantee to be strictly construed as to point of time when liability of guarantor arises. Question depends on terms of contract of guarantee by which guarantor bound himself for repayment of loan advanced to principal borrower. In the same judgment Article 65 of the Limitation Act was discussed and it was further held that period of limitation prescribed by statute cannot be curtailed or enlarged unless so provided or warranted by any provisions of Limitation Act itself. In 1996 CLC 79 (National Bank of Pakistan v. General Tractor and Machinery Co. Ltd.) Section 128 was under discussion along with Article 57 of Limitation Act in which it was held that the period of limitation in case of guarantee would begin to run from the date of demand for payment and in the absence of any prior demand, filing of suit would amount to  demand for payment. The Learned counsel for the defendant Nos.4 and 5 referred to PLD 1975 Karachi 671 (National Commercial Bank Ltd. Karachi v. Mohammad Tufail and another), in which also section 128 of Contract Act was discussed in detail, but the learned single judge of this court took divergent view and held that it would not, therefore, be necessary to elaborate the issue regarding limitation though on the authority of Sreenath Roy and others v. Peary Mohan  Mookerjee (AIR 1917 Cal. 154) , the three years period  of limitation will run from the date of execution of a guarantee irrespective of the date of the subsequent demand for repayment. In another judgment, reported in

2004 CLD 631 (National Bank of Pakistan v. M/s.Shoaib Corporation and others), it was held that the terms of original contract of finance facility between the plaintiff and defendant were altered and in such circumstances by virtue of section 133 of the Contract Act, the liability of defendant stood  discharged.

 

10. At this stage, one cannot overlook or ignore the wisdom and applicability of Article 10-A of the Constitution of the Islamic Republic of Pakistan 1973. In the judgment of divisional bench of this Court reported in 2011 CLD 790 in the case of Messrs.’ Shaz Packages versus Messrs.’ Bank Alfalah Limited. (authored by me). It was held that after 18th amendment, right of fair trial has become a fundamental right under Article 10-A of the Constitution of Islamic Republic of Pakistan, which envisages that for the determination of civil rights and obligations or in any criminal charge, the person shall be entitled to fair trial and due process, therefore after insertion of this fundamental right under the Constitution of Pakistan, more responsibility cast upon the banking court to decide the leave to defend application with due care and caution and pass a speaking order on all questions of law and facts raised. In this case, the point of limitation is a mix question of law and fact. In my view, both the defendants in their leave to defend application have raised substantial question of law and facts which require evidence.

 

11. For the foregoing reasons, leave to defend applications are allowed unconditionally and will be treated as written statements of defendants No.4 and 5.

 

Karachi:

Dated.6.11.2012                                              Judge