Yes — a bank incorporated in Pakistan can recover a loan issued abroad in a Pakistani Banking Court, provided the debtor resides in Pakistan and jurisdictional requirements are met.
Discover how Habib Bank Ltd. successfully challenged a jurisdictional dismissal to pursue a loan recovery from a Dubai-based transaction in Pakistan’s courts.
It all began with a financial agreement in Dubai, a default, and a legal battle that clarified the reach of Pakistan’s Banking Courts.
In 2001, WRSM Trading Company, LLC, a company based in Dubai, UAE, secured a loan of UAE Dirhams 2,042,059.22 (equivalent to PKR 33,285,602.25) from the Dubai branch of Habib Bank Ltd., a bank incorporated in Pakistan. The loan was guaranteed by the company’s directors, who resided in Pakistan. When the company defaulted, Habib Bank filed a recovery suit in Banking Court No. 1 in Lahore on November 22, 2002. However, the Banking Court dismissed the suit, claiming it lacked jurisdiction since the loan was issued outside Pakistan. The Lahore High Court upheld this dismissal, prompting Habib Bank to appeal to the Supreme Court of Pakistan.
The core issue was whether a Pakistani Banking Court could hear a case involving a loan issued abroad by a Pakistani bank’s foreign branch. The Lahore High Court had ruled that Habib Bank was not a “financial institution” under the Financial Institutions (Recovery of Finances) Ordinance, 2001 (FIO, 2001) for this transaction, as it occurred outside Pakistan. It also argued that interest-based loans were void under Pakistan’s laws, citing State Bank of Pakistan (SBP) circulars and Section 23 of the Contract Act, 1872. But were these findings legally sound?
The Supreme Court scrutinized the FIO, 2001, particularly Section 2(a), which defines a “financial institution” as any company incorporated in Pakistan transacting banking business, including through branches abroad. Habib Bank, incorporated in Pakistan, clearly fit this definition, regardless of where the loan was issued. The Court noted that amendments to the FIO, 2001, explicitly included loans issued outside Pakistan to customers residing in Pakistan, as per Section 2(d)(viii), introduced in 2016. This amendment reinforced the legislative intent to allow Banking Courts to handle such cases.
The Court also addressed the interest-based loan argument. The Lahore High Court had claimed that SBP circulars from 1984, issued under the Banking Companies Ordinance, 1962, prohibited interest-based transactions in Pakistan after January 1, 1985, rendering the Dubai loan agreement void. However, the Supreme Court clarified that these circulars were regulatory guidelines, not laws that void contracts. Sections 3A, 25, and 41 of the Ordinance, 1962, empower the SBP to issue directives, but they do not nullify interest-based agreements made abroad. The Court cited Azam Wazir Khan vs. Industrial Development Bank of Pakistan (2013 SCMR 678), confirming that interest-based loans remain recoverable under Pakistani law.
Another key point was jurisdiction. The respondents, including the guarantors, resided in Pakistan, satisfying Section 20 of the Civil Procedure Code, 1908 (CPC), which allows courts to hear cases where defendants reside. The FIO, 2001, further empowers Banking Courts to handle disputes involving a financial institution, a customer, and a default, regardless of where the loan was issued. The principle of “creditors follow debtors” supported this, as did the doctrine of forum non conveniens, which favors adjudication in the country with the most substantial connection—in this case, Pakistan, where the debtors resided.
The Supreme Court found the Lahore High Court’s dismissal flawed. It ruled that Banking Courts have jurisdiction over such cases when the financial institution is incorporated in Pakistan, the customer resides in Pakistan, and a default has occurred. The Court overturned the dismissal and remanded the case to the Banking Court for a decision on merits, ensuring Habib Bank could pursue recovery.
This landmark 2018 ruling clarified that Pakistani banks can recover foreign loans in domestic courts, protecting their rights and reinforcing the jurisdiction of Banking Courts over international transactions involving Pakistani residents.
FAQs
Can a Pakistani bank recover a loan issued abroad in a Pakistani court?
Yes, if the bank is incorporated in Pakistan and the debtor resides in Pakistan, Banking Courts have jurisdiction under the FIO, 2001.
Does a loan issued abroad by a Pakistani bank’s foreign branch qualify for recovery in Pakistan?
Yes, the FIO, 2001, includes loans issued by foreign branches of Pakistani banks, as per Section 2(a) and 2(d)(viii).
Are interest-based loans issued abroad void in Pakistan?
No, interest-based loans issued abroad are not void under Section 23 of the Contract Act, as SBP circulars are regulatory, not statutory laws.
What role does the debtor’s residence play in jurisdiction?
The debtor’s residence in Pakistan allows Banking Courts to assume jurisdiction under Section 20 of the CPC and the FIO, 2001.
What is the principle of forum non conveniens?
It supports adjudication in the country with the most substantial connection to the case, such as where the debtor resides.
Disclaimer
This blog is for public awareness only and does not constitute legal advice.
