Recovery of bank finance in Pakistan is governed by the Financial Institutions (Recovery of Finances) Ordinance, 2001, and it is deliberately faster and harsher than ordinary civil litigation. Borrowers who approach it as a normal suit lose it on procedure before the merits are ever reached.
The critical difference: leave to defend
In an ordinary civil suit, a defendant files a written statement as of right. In a banking suit under section 9 of the Ordinance, the defendant must file an application for leave to defend within thirty days of service of the summons.
Two consequences follow, and both are severe:
- If no application is filed within the period, the plaintiff financial institution is entitled to a decree. The court does not try the case.
- If the application is filed but is refused, the same result follows.
The Ordinance also requires the application for leave to defend to be substantive. Section 10 requires the defendant to state, among other things, the amount of finance availed, the amounts paid and the dates, and the amount still payable - supported by a statement of account. An application that merely denies liability in general terms, without those particulars, is liable to be rejected.
This is where most borrowers lose. The thirty days pass while they negotiate with the branch, or an application is filed that does not comply with section 10.
What counts as a substantial question
Leave is granted where the application raises a substantial question of law or fact which requires evidence. Matters that have supported leave include:
- Disputed calculation of mark-up, or charging beyond what the finance agreement permits
- Payments made and not credited, supported by receipts or bank records
- Denial that the finance was disbursed, or that it was disbursed in the amount claimed
- A genuine dispute about execution of the documents, including forgery of a guarantee
- Amounts claimed as cost of funds or penalties beyond the agreement
What does not support leave: an inability to pay, a request for time, a general denial, or a complaint about the bank's conduct that does not go to the amount owed.
The property is usually already charged
Most bank finance is secured, and the security is ordinarily a mortgage over immovable property, created by deposit of title deeds or by registered mortgage, with the charge recorded.
The Ordinance provides a route for the financial institution to sell mortgaged property in satisfaction of the decree, and in certain circumstances to proceed against the security without the full course of ordinary execution. Any borrower whose property is charged should proceed on the assumption that the property is genuinely at risk and on a shorter timeline than in ordinary litigation.
Guarantors
A guarantee under Pakistani banking practice is ordinarily drawn as a continuing guarantee, and the guarantor is made a defendant in the same suit. A guarantor's liability is generally co-extensive with the borrower's, and the bank is not obliged to exhaust its remedies against the borrower first.
Guarantors are frequently family members who signed without reading, and their defences are narrow: that the signature is not theirs, that the guarantee was discharged by a variation of the principal contract made without their consent, or that the guarantee by its terms does not cover the facility sued upon. Anyone asked to guarantee should treat it as taking on the whole debt personally, because that is what it is.
Settlement and restructuring
Most of these matters end in settlement rather than judgment, and the Ordinance contemplates it. Practical points:
- Negotiate while filing the leave application, not instead of it. The thirty days do not pause for negotiation, and a bank's verbal assurance does not extend them.
- Get any settlement recorded and filed in court, so that it is enforceable and so that the suit is disposed of on its terms.
- Ensure the settlement addresses release of the security and removal of the charge, and obtain the discharge documents. A settled debt with the mortgage still recorded causes problems for years.
- Obtain a no-objection certificate and confirm the position is updated with the credit bureau.
If you are the one owed money by a bank
The Ordinance permits a customer to sue a financial institution in the Banking Court as well - it is not exclusively a lender's forum. For service failures and disputed charges, however, the Banking Mohtasib is faster and free, and is generally the better first step.
The practical sequence for a borrower
- On service of summons, note the thirty-day date and instruct counsel immediately.
- Assemble the finance agreement, the statement of account, and every payment record.
- Prepare your own reconciliation of what was drawn, what was paid and what remains - section 10 requires it and it is also how disputes in the mark-up are found.
- File the leave to defend application with those particulars, whatever the state of negotiations.
- Negotiate in parallel, and record any settlement in court.
This article describes the general procedure under the Financial Institutions (Recovery of Finances) Ordinance, 2001. It is not advice on any specific case, and the thirty-day period is unforgiving. Consult an advocate as soon as you are served.