Jurisdiction of Banking Court Over Cross-Border Transactions

In the case of Habib Bank Ltd. vs. WRSM Trading Company, LLC (PLD 2018 SC 795), the Supreme Court of Pakistan addressed critical legal issues regarding the jurisdiction of Pakistani Banking Courts over financial transactions conducted outside Pakistan and the application of interest-based transactions under Pakistani law. This case provides significant guidance on the interpretation of the Financial Institutions (Recovery of Finances) Ordinance, 2001 (FIO, 2001), particularly concerning cross-border financial dealings.

Background:

Habib Bank Limited (HBL) initiated a recovery suit before the Banking Court in Lahore for the recovery of a debt amounting to approximately AED 2 million, which had been availed by WRSM Trading Company, LLC, from HBL's Dubai branch. The respondents included the company's directors, who were guarantors for the loan. The Banking Court returned the plaint, concluding that it lacked jurisdiction since the transaction occurred outside Pakistan. The Lahore High Court upheld this decision, leading to HBL's appeal before the Supreme Court.

Key Issues:

Jurisdiction of Banking Courts Over Cross-Border Transactions: The Supreme Court examined whether a Pakistani Banking Court has jurisdiction to entertain a suit related to a financial transaction executed by a branch of a Pakistani bank located outside Pakistan. The core issue was whether HBL, as a financial institution incorporated in Pakistan, could invoke the jurisdiction of a Pakistani court for a transaction carried out by its branch in Dubai.

Definition of Financial Institution and Finance: The Court also delved into whether HBL's Dubai branch fell within the definition of a "financial institution" under Section 2(a) of the FIO, 2001, and whether the loan provided constituted "finance" under Section 2(d) of the Ordinance, particularly in the context of an interest-based transaction.

Applicability of Interest-Based Transactions: Another pivotal issue was whether the loan, being interest-based, violated Pakistani banking laws, specifically in light of the State Bank of Pakistan (SBP) Circulars that prohibited interest-based transactions after January 1, 1985. The Court assessed whether such a transaction, although executed outside Pakistan, could be deemed void under Section 23 of the Contract Act, 1872, for being against public policy.

Case Law: The judgment referenced Hussain Bakhsh vs. Settlement Commissioner (PLD 1970 SC 1), affirming that the jurisdiction of civil courts in Pakistan, including Banking Courts, can extend to cases involving entities or individuals residing within Pakistan. The Court also cited Mst. Yasmeen Nighat vs. National Bank of Pakistan (PLD 1988 SC 391), which reinforced that Banking Courts have exclusive jurisdiction over matters related to banking loans, highlighting the legislative intent to centralize such disputes within specialized courts.

Court’s Conclusion: The Supreme Court overturned the decisions of the lower courts, holding that HBL, as a Pakistani financial institution, could indeed file a suit in a Pakistani Banking Court, even for a transaction conducted by its foreign branch. The Court emphasized that the FIO, 2001, had a broad and inclusive definition of "financial institution" and "finance," which extended to transactions carried out by Pakistani banks abroad. Moreover, the Court dismissed the argument that interest-based transactions conducted outside Pakistan violated Pakistani law, clarifying that such transactions were valid and enforceable under the prevailing legal framework at the time.

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