Defining the Limits of Banking Courts' Interim Powers

The Supreme Court of Pakistan’s judgment in Gulistan Textile Mills Ltd. vs. Soneri Bank Ltd. (PLD 2018 SC 322) provides crucial clarification on the scope of a Banking Court's powers under the Financial Institutions (Recovery of Finances) Ordinance, 2001. The case is particularly important for understanding how Banking Courts can intervene during the pendency of recovery suits, especially concerning the sale of goods held as security.

Background: Soneri Bank Ltd. initiated a recovery suit under Section 9 of the Financial Institutions (Recovery of Finances) Ordinance, 2001, against Gulistan Textile Mills Ltd., seeking to enforce its financial rights by selling goods allegedly pledged as security. The Mill contested the Bank’s application, arguing that the goods were hypothecated, not pledged, and therefore could not be sold before the final judgment.

Key Issues:

Scope of Banking Court’s Authority Under Section 16: The primary issue revolved around whether Section 16 of the Ordinance empowers Banking Courts to order the interim sale of goods. The Court analyzed the provisions of Section 16, concluding that the Banking Court's powers are limited to preventing the transfer, alienation, or wastage of property through attachment, restraint, or appointment of a receiver. The sale of goods is not included within these powers, which are explicitly preserved for post-judgment proceedings under Section 19 of the Ordinance.

Distinction Between Pledge and Hypothecation: The Supreme Court considered the nature of the security interest - whether the goods were pledged or hypothecated. A pledge under the Contract Act, 1872, allows the lender to sell the goods in case of default, whereas hypothecation does not automatically grant such a right. The Mill pointed to an admission in the Bank’s pleadings that the goods were hypothecated, not pledged. The Court refrained from a detailed factual determination on this issue, focusing instead on the procedural propriety under the Ordinance.

Application of Res Judicata to Interlocutory Applications: The Mill argued that the Bank’s second application for the sale of goods was barred by the principle of res judicata, as a previous application had been dismissed. The Court clarified that res judicata applies to applications only when a prior decision has been made on the merits. Since the earlier dismissal was due to prematurity, res judicata did not apply to bar the second application.

Case Laws: The Court referenced Lanvin Traders vs. Presiding Officer, Banking Court No. 2 (2013 SCMR 1419), which dealt with the limitations on the Banking Court's powers concerning the sale of secured goods. The judgment also cited Hashir Ahmad v. Kamaluddin (1981 SCMR 1180), though it distinguished it as a leave-refusing order, hence not a binding precedent. Further, the principles of res judicata discussed in Arjun Singh v. Mohindra Kumar (AIR 1964 SC 993) were invoked to explain when and how this doctrine applies to interlocutory applications.

Court’s Conclusion: The Supreme Court set aside the Banking Court’s order for the interim sale of goods, ruling that such a sale could only occur after a decree under Section 19 of the Ordinance. The Court emphasized that the Banking Court overstepped its jurisdiction, highlighting the importance of adhering strictly to the legislative framework designed to protect the rights of both financial institutions and borrowers.

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