Habib Bank Limited through Muhammad Ajmal Senior Manager LHR Vs MS Taunsa Gypsum Pvt Ltd etc

Stereo. H C J D A 38.

JUDGMENT SHEET

THE LAHORE HIGH COURT, LAHORE

JUDICIAL DEPARTMENT

RFA No.7759 of 2022 Habib Bank Limited etc. Vs. M/s Taunsa Gypsum (Pvt.) Limited etc.

JUDGMENT

Date of Hearing 20.05.2026 For Appellants Mr. Ashar Elahi, Advocate For Respondents: Ch. Jamshaid Sadiq, Advocate

Hassan Nawaz Makhdoom, J.- Through the instant Regular First Appeal, preferred under Section 22 of the Financial Institutions (Recovery of Finances) Ordinance, 2001 (the “Ordinance”), the appellants have called in question the legality and propriety of the judgment and decree dated 22.12.2021 rendered by the learned Judge, Banking Court No.1, Lahore, in Suit No.130/01/2020, whereby the suit instituted by the respondents was decreed and the appellants were directed to reverse the debit and adjustment of US$353,640.49 effected from the foreign currency account jointly maintained by respondent Nos.2 and 3, and further to restore the said amount together with profit calculated at the prevailing bank rate from the date of adjustment until its actual realization.

2.The facts necessary for adjudication of the present appeal are that in the year 1992 respondent No.2, Muhammad Khan Malik, submitted a bid for purchase of assets of Gypsum Corporation Limited, then under liquidation before the Hon’ble Sindh High Court, Karachi. The bid was accepted for Rs.15.9 million and the purchaser was required to deposit the purchase price within the stipulated time. For arranging the remaining amount, respondent No.2 approached the appellant-Bank for issuance of a bank guarantee. The Bank declined to issue the guarantee and advised that foreign currency deposit be placed under lien for obtaining running finance. Consequently, finance facility of Rs.8.4 million was arranged in favour of respondent No.1-company, whereas

foreign currency account No.40655-9, jointly maintained by respondent Nos.2 and 3, was treated by the Bank as security.

3.The respondents instituted the suit seeking declaratory relief, mandatory injunction and, in the alternative, recovery of compensation/damages. The crux of their case was that the appellant- Bank, acting unilaterally and without lawful justification, appropriated funds lying in the foreign currency account jointly maintained by respondent Nos.2 and 3. According to the respondents, the Bank neither served any effective demand notice nor established the alleged liability before any competent forum, and further lacked authority from respondent No.3, who was admittedly a joint account holder. It was pleaded that, despite these legal deficiencies, the appellant-Bank debited and encashed US$353,004.08 on 08.07.1993 and a further sum of US$636.41 on 12.07.1993 under the head “TRF/MISC”, thereby appropriating an aggregate amount of US$353,640.49 from the said foreign currency account.

4.The respondents further asserted that the foreign currency deposit had merely been placed under lien as collateral security and that neither ownership nor dominion over the deposit had ever been transferred to the Bank. It was their categorical stance that the arrangement did not amount to a pledge, assignment or any other security mechanism conferring an express right of sale, realization or appropriation upon the Bank. Consequently, while the Bank might have possessed a limited right to retain the security in accordance with law, it was not legally entitled to convert, encash or appropriate the deposit on the basis of its own unilateral determination of liability. The respondents, therefore, maintained that any realization of the deposit could only be effected through lawful process and after compliance with the requirements of due process, including proper demand, notice and determination of the alleged liability by a competent forum.

5.The appellants resisted the suit by maintaining that respondent No.2 had voluntarily and consciously created a lien over the foreign

currency deposit as collateral security and had further executed an unequivocal guarantee securing repayment of the finance facility extended in favour of respondent No.1. According to the appellants, the finance facility was duly availed and, upon respondent No.1’s failure to discharge its repayment obligations, a default occurred, thereby entitling the Bank to enforce the security in accordance with the contractual arrangement governing the transaction. It was their specific case that the lien, guarantee and other finance documents conferred lawful authority upon the Bank to realize and encash the foreign currency deposit and to appropriate the proceeds towards liquidation of the outstanding liability. The appellants further asserted that the impugned adjustment was neither arbitrary nor unauthorized but was effected strictly in exercise of contractual rights flowing from the security documents executed by the parties. In addition to contesting the claim on merits, the Bank also raised various preliminary objections, inter alia, that the suit was barred by limitation, that a suit for declaration and mandatory injunction was not maintainable in the circumstances of the case, that the plaint disclosed no valid cause of action against the Bank, and that the proceedings had not been instituted by a duly authorized and competent person on behalf of the plaintiffs. Thus, dismissal of the suit was sought in its entirety.

6.Out of divergent pleadings of the parties, the learned Banking Court framed the following issues:

1.Whether the suit is within time? OPP

2.Whether the suit is not maintainable having not been filed by an appropriate person? OPD

3.Whether the suit has not been filed by a duly authorized person? OPD

4.Whether the plaintiff is entitled to a decree for recovery of the amount claimed against the defendants? OPP

5.Relief.

7.To discharge the burden of proof cast upon them under the aforesaid issues, both parties produced oral as well as documentary evidence. The respondents/plaintiffs examined Muhammad Khan Malik as PW-1, who reiterated the assertions contained in the plaint and

produced the relevant banking record, correspondence, account statements and other documents relied upon in support of the claim. Through his testimony, the respondents sought to establish that the foreign currency deposit standing in the joint names of respondent Nos.2 and 3 had merely been placed under lien as collateral security and that the appellant-Bank lacked lawful authority to unilaterally encash and appropriate the same without prior demand, effective notice and determination of liability by a competent forum. In support of their case, the respondents also relied upon the account opening documents, correspondence exchanged between the parties and other documentary material relating to the disputed encashment and adjustment. In rebuttal, the appellants/defendants produced Mr. Muhammad Akram Malik, Branch Manager, as DW-1, who appeared on behalf of the appellant-Bank and brought on record the finance documents, Letter of Lien (Ex.D-2), guarantees, finance agreement, account statements, alleged notices of demand and other banking documents. Through the said evidence, the appellant-Bank endeavoured to establish that respondent No.2 had voluntarily furnished an unequivocal guarantee and created a lien over the foreign currency deposit as security for repayment of the finance facility extended in favour of respondent No.1; that default had occurred in repayment of the finance facility; and that the Bank was contractually authorized to realize, encash and adjust the security towards liquidation of the outstanding liability. However, instead of examining the controversy on merits, the suit was initially dismissed solely on the ground that it was barred by limitation. The said finding was challenged by the respondents through R.F.A. No.338 of 2009 before this Court. Upon a comprehensive examination of the record and the applicable law, this Court, vide judgment dated 02.03.2020, reversed the finding of the learned Banking Court on the question of limitation and held that the suit had been instituted within the prescribed period of limitation. Consequently, the appeal was allowed and the matter was remanded to the learned Banking Court for adjudication of the remaining

issues on merits. Since the entire evidence of the parties had already been recorded prior to the dismissal of the suit, no further evidence was required, and the learned Banking Court was directed to decide the outstanding issues on the basis of the evidence already available on record. Thus, the question of limitation stood conclusively determined in favour of the respondents and attained finality between the parties, leaving the learned Banking Court to undertake an adjudication of the substantive controversy arising from the pleadings, evidence and documentary record.

8.After remand, the learned Banking Court decided issues No.2 and 3 against the Bank, holding that the Bank had failed to prove that the suit was not filed by an appropriate person or was not instituted by a duly authorized person. While deciding the pivotal issue No.4 regarding entitlement of the respondents, the learned Banking Court held that due service of an effective notice of demand had not been proved; that notices were sent at an incomplete address; that the documents were admittedly signed in blank and filled in later; that respondent No.3 had neither created lien nor consented to adjustment of the joint account; and that the Bank had acted both as a claimant and judge in its own cause without prior adjudication of liability. Consequently, the learned Banking Court answered the material issues in favour of the respondents and, through the impugned judgment and decree dated 22.12.2021, decreed the suit to the effect of directing reversal and restoration of US$353,640.49 to the foreign currency account of respondent Nos.2 and 3 together with profit accrued thereon at the applicable bank rate. The appellants, being dissatisfied with the findings and conclusions recorded by the learned Banking Court, have invoked the appellate jurisdiction of this Court seeking reversal of the impugned judgment and decree.

9.Learned counsel for the appellants vehemently contended that the impugned judgment and decree cannot be sustained in law as the same are founded upon a misreading and non-reading of the material evidence available on record. According to the learned counsel, the learned

Banking Court failed to accord due weight and legal effect to the documentary evidence produced by the appellant-Bank, particularly the Letter of Lien (Ex.D-2), the finance agreement, the guarantees executed by respondent No.2 and the joint account opening documents, all of which, according to him, formed an integral part of a single financial arrangement between the parties. It was argued that the grant of the finance facility to respondent No.1 and the creation of lien over the foreign currency deposit by respondent No.2 were admitted and undisputed facts. Therefore, once default in repayment of the finance facility had occurred, the appellant-Bank became legally and contractually entitled to realize the collateral security and appropriate the proceeds towards liquidation of the outstanding liability.

10.Learned counsel submitted that the learned Banking Court erroneously ignored the contractual terms governing the transaction and failed to appreciate that the Bank's action was taken in exercise of rights expressly conferred through the security documents executed by the parties. Placing reliance upon Section 176 of the Contract Act, 1872, learned counsel argued that the Bank, in its capacity of a secured creditor, was lawfully authorized to realize the security upon default and that no separate recovery proceedings were required before exercising such contractual rights. It was further contended that the subject foreign currency account was maintained on an “either or survivor” basis, thereby authorizing either of the account holders to operate the account independently. Hence, the objection regarding the absence of separate consent or authorization from respondent No.3 was legally untenable and misconceived. Learned counsel further maintained that the respondents had incorrectly invoked the jurisdiction of the Banking Court through a suit for declaration and mandatory injunction. Per learned counsel, the relationship between the parties was purely contractual in nature and, even if any grievance regarding the Bank's action existed, the respondents' remedy, if any, lies in seeking compensation or damages and not in obtaining declaratory or restorative relief. On the strength of

these submissions, it was urged that the impugned judgment and decree suffer from serious legal and factual infirmities, warranting interference by this Court in exercise of its appellate jurisdiction.

11.Conversely, learned counsel appearing on behalf of the respondents supported the impugned judgment and decree in its entirety, contending that the same is firmly grounded in the evidence available on record and is fully consistent with the settled principles governing banking transactions and enforcement of securities. It is argued that a lien, in its ordinary legal connotation, is merely a right of retention and does not, per se, confer any authority upon the holder thereof to sell, convert, encash or appropriate the secured property unless such power is expressly and lawfully conferred through a valid contractual arrangement. Contended that the appellant-Bank has failed to demonstrate the existence of any clear and unambiguous authorization entitling it to unilaterally encash and appropriate the foreign currency deposit without first resorting to lawful proceedings. Learned counsel further emphasized that the Bank never instituted any recovery proceedings against the respondents, nor did it file any counterclaim, seek any set-off before a competent forum, or secure any judicial determination of the liability allegedly outstanding against respondent No.1. Instead, the Bank proceeded on the basis of its own unilateral assessment of the amount claimed to be due and appropriated the deposit without any adjudication from a Court of competent jurisdiction. Thus, such a course of action was inconsistent with the requirements of due process and fair adjudication recognized by law. It was further argued that the respondents' case found substantial support from the admissions made by the Bank’s own witness during cross-examination. Particular reliance was placed upon the admission that certain finance and security documents had been signed in blank and were subsequently filled in by the Bank; Equally significant, was the Bank’s failure to establish effective service of the alleged demand notices through reliable documentary evidence. The witness produced by the Bank was unable to

satisfactorily prove the mode, dispatch or delivery of the notices, thereby lending credence to the respondents’ assertion that no lawful demand was ever communicated prior to the impugned encashment. Learned counsel submitted that, in these circumstances, the learned Banking Court rightly concluded that the appellant-Bank had assumed unto itself the dual role of claimant and adjudicator by determining the alleged liability on its own and thereafter proceeding to realize the security without recourse to a competent forum. He maintained that the learned Banking Court correctly appreciated both the oral and documentary evidence and rightly applied the principles of law enunciated by the Hon’ble Supreme Court of Pakistan in Messrs Summit Bank Limited through Manager v. Messrs Qasim & Company through Muhammad Alam and another (2015 SCMR 1341), wherein it was held that a financial institution cannot arrogate to itself judicial authority for determining disputed liability and thereafter enforce recovery on the basis of its own unilateral determination. In view of the above submissions, learned counsel urged that the appeal, being devoid of merit, deserves dismissal, while the impugned judgment and decree merit affirmation, as the findings recorded by the learned Banking Court are based upon a proper appreciation of the oral and documentary evidence and are in complete accord with the law declared by the superior Courts.

12.Arguments heard and the record perused.

13.It is evident that the controversy requiring determination in the present appeal lies within a narrow compass. The existence of the finance facility extended in favour of respondent No.1 is not seriously disputed. Likewise, the fact that certain security arrangements were entered into by the parties, including the creation of a lien over the foreign currency deposit, also stands admitted. The dispute, therefore, does not revolve around the grant of finance or the existence of security as such. The real and determinative question requiring adjudication is whether the appellant-Bank, solely on the strength of the lien, guarantee and allied security documents, was authorized and legally entitled to unilaterally

encash and appropriate the foreign currency deposit, jointly held by respondent Nos.2 and 3, towards satisfaction of the alleged outstanding liability of respondent No.1. A further question arising for consideration is whether the appellant-Bank could lawfully appropriate the foreign currency deposit without first establishing effective service of demand notice and without affording the respondents a reasonable opportunity to discharge, explain or contest the alleged liability. Another significant aspect requiring examination is whether the appellant-Bank could lawfully proceed with appropriation of the deposit in the absence of any prior adjudication or lawful determination of the amount allegedly due and payable from the respondents. In other words, the principal controversy is not qua the existence of the debt or the security, but the legality, validity and enforceability of the mechanism adopted by the appellant-Bank for realization of the alleged liability and the extent of authority conferred upon it under the governing contractual documents and the applicable law.

14.Before proceeding further, it would be advantageous to examine the true nature and character of the suit instituted by the respondents. The preliminary objection raised by the appellants regarding non- maintainability of the suit on the premise that it was merely a declaratory action, does not withstand scrutiny when tested against the pleadings and reliefs claimed in the amended plaint. A careful reading of the amended plaint reveals that the respondents primarily sought a declaration that the encashment and appropriation of the foreign currency deposit by the appellant-Bank were unlawful, unauthorized and of no legal effect. However, such declaration was not sought in isolation. As a consequential and substantive relief, the respondents prayed for reversal of the impugned debit entries and restoration of the appropriated amount to the foreign currency account from which it had been withdrawn. The claim for damages amounting to Rs.76,651,804/- was pleaded only as an alternative relief to be considered in the event the primary restorative relief could not be granted. It is noteworthy that the learned Banking

Court did not decree the alternative claim for damages, nor did it award compensation. Rather, the learned Banking Court confined the relief strictly to reversal/restoration of the amount which had been debited and appropriated by the appellant-Bank, together with the consequential profit accruing thereon. The decree, therefore, was essentially restorative in nature and was aimed at undoing the consequences of what the Court found to be an unlawful appropriation of the respondents’ funds. The relief granted by the learned Banking Court is, in substance, one of mandatory injunction coupled with restitution of an amount allegedly appropriated without lawful authority. The decree restored the parties to the position in which they stood prior to the impugned encashment and to undo the consequences of the disputed debit entry by directing reversal/restoration of the amount to the respondents’ foreign currency account. Such relief falls squarely within the recognized domain of civil remedies and cannot be characterized as a mere declaratory decree devoid of enforceable consequences. The objection regarding maintainability is, therefore, bereft of substance and is liable to be repelled.

15.The distinction between the existence of a lien and the authority to encash or appropriate the subject matter of that lien is both fundamental and legally significant. A lien, in its ordinary legal sense, merely confers upon the holder a right of retention over the property or asset concerned as security for satisfaction of an obligation. By itself, it neither divests the owner of his proprietary interest nor transfers title, ownership, dominion or beneficial interest in the asset to the lien-holder. A lien, by its very nature, does not ordinarily confer a power of sale, realization, conversion, encashment or appropriation. Such authority can only arise where it is expressly granted by a statutory provision or is embodied in clear, specific and unequivocal contractual terms mutually agreed upon between the parties. It follows that the mere existence of a lien cannot automatically be equated with an unrestricted right to realize or appropriate the underlying asset. Where a bank seeks to justify

encashment or appropriation of a depositor’s funds on the basis of a lien document, it must go beyond merely proving the creation of the lien itself. The burden squarely rests upon the bank to establish, through clear, unambiguous and legally enforceable contractual provisions, that the depositor expressly authorized the bank not only to retain the security but also to convert, encash or appropriate it towards satisfaction of the alleged liability upon specified contingencies. This requirement assumes even greater significance where the asset sought to be appropriated consists of funds standing in a depositor’s account, for such funds constitute the property of the account holder and attract protection of well-recognized proprietary rights. Any contractual clause purporting to authorize unilateral deprivation of such property must, therefore, be strictly construed and rigorously scrutinized by the Court. The authority claimed cannot be inferred by implication, conjecture or expansive interpretation of general language. Moreover, where the relevant document has been prepared by the financial institution itself, any ambiguity, uncertainty or lack of clarity therein cannot ordinarily be interpreted to the detriment of the depositor whose proprietary rights stand affected. It is, therefore, incumbent upon the party claiming a right of encashment, realization or appropriation to establish, through clear and unequivocal language, the legal basis of such authority. Where the exercise of such power results in deprivation of another person’s proprietary rights, the Court must be satisfied that the authority relied upon is expressly conferred by law or by a valid and enforceable contractual arrangement, leaving no room for ambiguity or implication. In the absence of a plainly expressed contractual stipulation conferring such power, a lien remains a right of retention and cannot, per se, be elevated into a right of unilateral realization, encashment or appropriation of the secured asset.

16.The controversy, however, does not rest solely upon the nature and scope of the lien. An equally significant aspect pertains to the question whether the appellant-Bank succeeded in establishing that a valid and

effective demand had been communicated to the respondents prior to the impugned encashment and appropriation of the foreign currency deposit. Upon a careful appraisal of the evidence, the learned Banking Court returned a categorical finding that effective service of demand notice had not been proved by the Bank. The evidentiary deficiencies in this regard are both apparent and substantial. During cross-examination, DW-1 was unable to state with certainty whether the alleged notices had been dispatched through ordinary post or through registered post. The Bank also failed to produce any acknowledgment due card, postal receipt, courier record, certificate of posting, delivery confirmation or any other independent and reliable evidence capable of establishing either dispatch or actual delivery/service of the notices upon the respondents. Significantly, the dispatch register, which according to the witness was available at the branch and constituted the primary contemporaneous record of outgoing correspondence, was withheld from production without any satisfactory explanation. Such withholding of the best available evidence inevitably attracts an adverse inference against the party in possession thereof. The matter is further compounded by the fact that the notices relied upon by the appellant-Bank did not contain the complete address of the respondents. The record reveals that the account opening documents and other banking records contained the respondents’ full address, including “Lahore Cantonment” and the relevant postal codes/particulars. Notwithstanding the availability of such information, the notices allegedly dispatched by the Bank were addressed in an incomplete manner. This discrepancy assumes considerable significance as proof of proper addressing constitutes an essential component of proof of service. Where the address itself is shown to be deficient or incomplete, the presumption of due delivery, stands substantially weakened. In these circumstances, and particularly in the absence of any reliable documentary evidence establishing dispatch, delivery and due service of the alleged notices, the learned Banking Court was fully justified in concluding that effective service of

demand notice had not been proved. The finding recorded by the learned Banking Court is neither speculative nor conjectural; rather, it flows directly from the evidentiary shortcomings appearing on the record and is fully supported by the material produced by the parties.

17.The requirement of notice in matters involving realization or appropriation of security cannot be treated as a mere technical formality or an inconsequential procedural step. It constitutes a fundamental procedural safeguard designed to ensure fairness, transparency and observance of due process before a person is deprived of his property, proprietary interest or valuable financial asset. The object of such notice is not merely to communicate the creditor’s intention, but to afford the alleged debtor, guarantor or provider of security a meaningful and effective opportunity to protect his rights and interests before irreversible action is taken against the security. A valid demand notice serves several important purposes. It informs the concerned person of the nature and extent of the liability claimed against him; enables him to verify or challenge the correctness of the amount asserted to be due; provides an opportunity to discharge the alleged obligation, redeem the security, rectify any default or dispute the creditor’s claim; and, where necessary, allows him to seek recourse before a competent judicial forum for protection of his proprietary rights. In the absence of such notice, the affected person is effectively deprived of the opportunity to contest the claim or to prevent realization of the security through lawful means. This requirement assumes even greater significance where the security sought to be realized consists of funds lying in a foreign currency deposit account. Such deposits represent valuable proprietary interests of the account holder and cannot be lightly interfered with. Before a financial institution proceeds to encash, realize or appropriate such funds, it must demonstrate strict compliance with the procedural safeguards contemplated by law and contract, including proof that the depositor was given a fair, reasonable and effective opportunity to respond to the demand and protect his interest in the security. Failure to establish due

and effective notice strikes at the very foundation of the creditor’s subsequent action, for a person cannot lawfully be deprived of his property on the basis of a process that he had no knowledge of and against which he was afforded no meaningful opportunity of response. The requirement of notice, therefore, is not an empty formality but an essential component of fairness, natural justice and due process, the observance whereof is indispensable before any security can be lawfully realized or appropriated.

18.The reliance placed upon the maxim “debtor seeks the creditor” is misconceived and of little assistance to the appellants in the facts and circumstances of the present case. At best, the said principle embodies the obligation of a debtor to discharge an admitted and lawfully recoverable liability. It cannot, however, be expanded beyond its legitimate sphere so as to confer upon a creditor the authority to unilaterally determine the extent of an alleged liability, dispense with the requirement of demand and notice, and proceed to realize or appropriate a depositor’s funds on the basis of its own assessment. There exists a fundamental distinction between the obligation to repay a debt and the legal process through which recovery thereof may be enforced. While a debtor may be under a contractual duty to satisfy his financial obligations, the creditor remains bound to pursue enforcement in a manner sanctioned by law and consistent with the principles of fairness and due process. The former concerns the existence of liability; the latter concerns the legality of the mechanism adopted for its realization. Acceptance of the appellants’ contention would lead to the anomalous consequence of permitting a financial institution to assume unto itself the dual role of claimant and adjudicator. Such an approach would enable the creditor to independently quantify the alleged liability, determine the occurrence of default, and thereafter execute recovery by appropriating the depositor’s funds without recourse to any independent process of verification or adjudication. The law does not countenance such a course. A creditor cannot be permitted to become the sole arbiter of its own claim

and simultaneously the executing authority for its enforcement. The position becomes even more untenable where, as in the present case, the appropriation relates to funds lying in a joint account and the alleged liability itself had neither been judicially determined nor otherwise established through a legally recognized process. In such circumstances, observance of due process, including effective demand, proper notice and lawful determination of the liability claimed to be due, assumes paramount importance. The maxim relied upon by the appellants, therefore, cannot be invoked to legitimize an action which effectively deprived the respondents of their proprietary rights without adherence to the procedural safeguards mandated by law.

19.The requirement of notice prior to realization of pledged or collateral security is not merely a procedural nicety; rather, it constitutes a substantive safeguard recognized by long-settled principles of law. In Usman Malik v. The Bank of Bahawalpur Ltd. (PLD 1959 Karachi 725), it was held that before exercising the power of sale in respect of pledged goods, the creditor is under a legal obligation to furnish reasonable notice to the debtor. The rationale underlying this requirement is self-evident: the owner of the security must be afforded a fair opportunity to redeem the pledged asset, discharge the liability, or otherwise protect his proprietary interest before irreversible action is taken. The judgment further provides that a sale effected without proper notice is not binding and may expose the creditor to legal consequences arising from unauthorized realization of the security.

The same principle finds expression in Ma Me Shin v. R. M. R. M. N. Chettyar Firm (AIR 1933 Rangoon 76), wherein it was recognized that realization of collateral security without due and adequate notice is inconsistent with established legal norms and may render the creditor liable for wrongful conversion. The common thread running through these authorities is that a creditor cannot lawfully deprive a person of his proprietary rights in the secured asset unless the minimum requirements of fairness and notice have first been satisfied.

The appellants have sought support from a judgment reported as First Pakistan Securities Limited and another v. Bank Islami Pakistan Limited (2021 CLD 1422). However, a careful reading of the same reveals that it does not dilute or depart from the settled requirement of notice. The judgment merely clarifies that a notice issued under Section 176 of the Contract Act, 1872 need not necessarily specify the exact date and time of the proposed sale, provided that the debtor or pledgor is afforded a reasonable and meaningful opportunity to redeem the security before its realization. Thus, the essence of the requirement remains intact; namely, that notice must be effectively communicated so as to enable the affected person to safeguard his rights.

20.The present case stands on an entirely different footing. The controversy here is not whether the notices omitted to mention the precise date, time or mode of realization. The defect goes to the very root of the matter. The appellant-Bank has failed to establish, through reliable and cogent evidence, that any effective demand notice was ever duly served upon the respondents. Consequently, the question is not one of sufficiency of the contents of the notice, but of the very existence and proof of effective service thereof. In the absence of proof that the respondents were lawfully and effectively informed of the alleged default and the intended realization of the security, the appellants cannot derive any assistance from the principle expounded in the referred judgment. The legal principle emerging from the earlier authorities is that observance of the requirement of notice constitutes an indispensable safeguard before realization of security. Since effective service of notice has not been established in the present case, the impugned realization cannot be regarded as legally sustainable.

21.The appellants have placed considerable reliance upon Messrs PETROSIN and 2 others v. Messrs FAYSAL BANK (2009 CLD 361) in support of the proposition that, upon occurrence of default, a financial institution is entitled to realize and adjust collateral security towards satisfaction of the outstanding liability. There can be no cavil with the

legal proposition enunciated therein. Indeed, where default stands established, the contractual documents do confer a right of realization or appropriation, under the procedure prescribed by law. A secured creditor may legitimately enforce the security in accordance with its contractual and legal rights. It is a settled principle that judicial precedents are binding only for the ratio decidendi they embody and must be applied with due regard to the factual background in which the legal principle was evolved. A careful examination of the Petrosin (Pvt.) Ltd.’s case (supra) reveals that the Court proceeded on the premise that the relevant contractual documents were validly executed, the occurrence of default was not seriously disputed, and the Bank’s documentary evidence regarding its entitlement to adjust the security remained substantially unrebutted. It was in those circumstances that the Court upheld the Bank’s right to enforce the collateral security. The factual background of the present case is materially different and, therefore, the said precedent is clearly distinguishable. The very foundation of the appellant-Bank’s asserted authority stands clouded by serious evidentiary deficiencies. The Bank’s own witness admitted during cross-examination that certain documents had been signed in blank and were completed subsequently. Such an admission inevitably casts doubt upon the integrity, completeness and evidentiary value of the documents relied upon by the Bank to establish its authority of appropriation. Furthermore, the appellant-Bank has failed to prove effective service of the alleged demand notices, thereby depriving the respondents of the opportunity to redeem the security, discharge the alleged liability or challenge the Bank’s claim before appropriate action was taken.

22.The distinction becomes even more pronounced when it is observed that the liability allegedly outstanding against the respondents was never subjected to adjudication by any competent forum. The Bank neither instituted recovery proceedings nor obtained any judicial determination of the amount claimed to be due before proceeding to encash and appropriate the foreign currency deposit. Consequently, the

amount appropriated rested exclusively upon the Bank’s own unilateral assessment and calculation. Such circumstances are materially different from those in Petrosin (Pvt.) Ltd.’s case (supra). Moreover, the foreign currency account from which the impugned appropriation was made stood in the joint names of respondents No.2 and 3. The record does not satisfactorily establish that respondent No.3 either executed the lien document, authorized creation of the security interest, or consented to the unilateral appropriation of the joint deposit. The absence of such authorization constitutes an additional distinguishing feature, rendering the precedent relied upon by the appellants inapplicable to the peculiar facts of the present case.

23.The controversy in the present case is squarely governed by the principle laid down in Messrs Summit Bank’s case (supra). The Honourable Supreme Court of Pakistan, while examining the scope of a banker’s lien and the right of set-off under Section 171 of the Contract Act, 1872, held that such rights are exercisable only where there exists complete mutuality between the parties and the amount sought to be adjusted constitutes a due, certain and legally ascertainable liability. It was observed that “it is essence to the validity of a banker’s lien that there should be a mutuality of claim between the Bank and the depositor” and that “the banker may exercise the right of set-off only when the money owed to him is a sum certain which is due.” More significantly, the Hon’ble Supreme Court emphasized that “determination of the amount due is an essential pre-requisite” and unequivocally declared that “the bank cannot be conferred with the judicial powers for determination of the amount due against its customer/borrower.” It was further held therein that “the right/power to set-off would be available only where the amount claimed was due and is certain and determined by a competent judicial forum.” The ratio decidendi emerging from the said judgment is that a financial institution may possess a claim against its customer, but the existence of a claim cannot be equated with lawful determination of liability. The questions relating to default, quantum of liability and entitlement to recovery remain matters for adjudication by a competent forum and cannot be

conclusively determined through the unilateral assessment, calculations or internal records of the creditor itself. The principle is firmly rooted in the doctrines of due process and the rule of law, which do not permit a party asserting a financial claim to simultaneously assume the roles of claimant, adjudicator and executing authority. In the present case, the appellant-Bank neither obtained any judicial determination of the alleged liability nor secured any decree, adjudication or legally enforceable determination quantifying the amount claimed to be outstanding. Instead, it proceeded upon its own assessment of the accounts, treated the respondents as defaulters, quantified the alleged liability and thereafter encashed and appropriated the foreign currency deposit towards satisfaction of its claimed dues. Such a course of action falls squarely within the mischief identified in Summit Bank’s case. The legal position emerging therefrom is that a lien, by its very nature, confers, at best, a right of retention and does not, in the absence of a legally determined liability and lawful authority, clothe a bank with an unfettered power to unilaterally realize, appropriate or adjust disputed amounts. Consequently, where liability remains unadjudicated and the amount sought to be recovered has not acquired the character of a due, certain and legally determined obligation, any encashment or appropriation effected under the guise of lien or set-off is rendered legally unsustainable and cannot receive judicial approval.

24.The facts of the present case bring the controversy squarely within the ambit of the aforesaid principle. The appellant-Bank did not institute any recovery proceedings against the respondents prior to the impugned appropriation. It did not obtain any decree, order or determination from a competent judicial forum establishing the amount allegedly recoverable. The alleged liability was never subjected to determination through any independent adjudicatory process capable of establishing the amount, if any, lawfully recoverable from the respondents. The appellant-Bank proceeded on the basis of its own assessment of the accounts, declared the respondents to be in default, and thereafter

encashed the foreign currency deposit and appropriated the proceeds towards liquidation of the liability claimed by it to be outstanding. The sequence of events unmistakably demonstrates that the appellant-Bank acted as claimant, assessor and enforcing authority all at once. It determined the alleged default, quantified the amount allegedly due, proceeded to realize the security and adjusted the proceeds, all without the intervention of a competent forum and without securing a lawful determination of the liability sought to be recovered. Such a course of action undermines the safeguards inherent in the adjudicatory process and is inconsistent with the principles laid down by the Superior Courts.1 25. A Full Bench judgment reported as Muhammad Umar Rathore v. Federation of Pakistan (2009 CLD 257) lends further support to the conclusion reached herein. It reaffirms the settled principle that a statement of account maintained by a financial institution, irrespective of the regularity with which it is kept, cannot be accorded the status of conclusive proof of liability nor treated as an unquestionable record for purposes of enforcing proprietary claims against a customer. The judgment emphasizes that where the property, assets or financial interests of a person are sought to be affected, the existence, extent and legality of the alleged default must ordinarily be established through a fair, impartial and legally recognized process of adjudication. The questions relating to default, quantum of liability and entitlement to recovery are not matters that can be left exclusively to the unilateral determination of one of the interested parties, particularly where the consequence thereof is deprivation of valuable proprietary rights. This principle assumes significance in cases involving realization of security or appropriation of assets belonging to a customer, for before such coercive measures are undertaken, the liability sought to be recovered must stand determined through a process consistent with the

(i)Agricultural Development Bank of Pakistan v. Sanaullah Khan and others (1988 PLD S.C. 67);

(ii)Mian Ayaz Anwar and others v. State Bank of Pakistan and others (2019 CLD 375); and (iii) Misbah ud Din Zaigham and 3 others v. Federal Investigation Agency through Assistant Director (FIA/CBC/LHR) and another (2021 CLD 906)

requirements of law, fairness and due process, making adjudication by an independent and unbiased forum a sine qua non, which admittedly is missing in the present case. A financial institution cannot be permitted to convert a disputed claim into an enforceable liability through its own calculations and internal processes, thereby circumventing the safeguards inherent in the adjudicatory framework recognized by law. Such a course is neither sanctioned by legal principle nor compatible with the requirements of fairness, due process and orderly administration of justice. Consequently, the unilateral appropriation of the respondents’ foreign currency deposit cannot be sustained merely on the basis of the Bank’s assertion regarding the existence or quantum of liability. The principle enunciated by the Hon’ble Supreme Court of Pakistan in Summit Bank Limited’s case (supra), therefore, applies with full force to the facts of the present case and furnishes a complete answer to the principal contention advanced by the appellants. The impugned action of the appellant-Bank, being founded upon a unilateral determination of liability and realization of security without lawful adjudication, is, thus, unsustainable in law.

26.The contention advanced by the appellants that the foreign currency account was maintained on an “either or survivor” basis is equally devoid of merit and does not withstand legal scrutiny. The authority conferred upon joint account holders to operate an account for the purposes of banking convenience cannot be conflated with or taken as an authority to create security interests, pledge the entire deposit, encumber the proprietary rights of a co-account holder, or permit a unilateral realization and appropriation of the whole fund towards the liability of one account holder or a separate legal entity. The expression “either or survivor” merely regulates the mode of operation of the account inter se the account holders and facilitates withdrawal or operation of the account by either of them during their lifetime and by the survivor upon the death of the other. It does not, in the absence of an express and legally enforceable authorization, empower a financial

institution to treat the entire balance as belonging exclusively to one account holder for the purposes of securing or satisfying his personal obligations.

27.In the present case, it is an admitted position that the foreign currency account stood jointly in the names of respondent Nos.2 and 3. The record does not establish that respondent No.3 was a borrower, co- borrower or a debtor/customer under the finance facility extended in favour of respondent No.1. More importantly, the appellant-Bank failed to prove that respondent No.3 had executed the alleged lien document, consented to the creation of a security interest over the entire deposit, or otherwise authorized the Bank to encash and appropriate the joint funds towards liquidation of the liability allegedly incurred by respondent No.1. In the absence of such proof, the proprietary interest of respondent No.3 in the joint account could not be disregarded or treated as subordinate to the Bank’s claim against another person. The assumption adopted by the appellant-Bank that respondent No.2 alone was the beneficial owner of the entire deposit is unsupported by any evidence available on record and contrary to the legal incidents ordinarily attached to a joint account. Such an assumption could not furnish a lawful basis for appropriating the whole of the joint deposit, particularly when the rights and interests of another account holder stood directly affected. Consequently, in the absence of a clear authorization by respondent No.3 and for not having secured any lawful determination permitting realization of the joint funds, the appellant-Bank lacked lawful authority to appropriate the entire amount lying in the joint account, and, thus, the finding recorded by the learned Banking Court in this regard calls for no interference.

28.The learned Banking Court granted restoration of the status quo ante through reversal of the impugned debit entries and reversal of US$353,640.49 to the foreign currency account from which the amount had been appropriated, together with profit at the applicable bank rate. The decree, therefore, was not punitive in character, nor was it intended

to penalize the appellant-Bank beyond the consequences of its own impugned action. The decree was fundamentally founded upon the equitable principle of restitution, its object being to reverse the consequences of the unlawful appropriation and to restore the respondents, as nearly as possible, to the financial position they would have occupied had the disputed encashment and adjustment not been undertaken by the appellant-Bank. The relief granted is firmly rooted in the equitable principle of restitution, which seeks to prevent a party from retaining the benefit of an act found to be unauthorized or unlawful. The object was not to confer any windfall upon the respondents, but merely to restore to them which had been withdrawn from their account without lawful justification. In these circumstances, the decree cannot be characterized as excessive, punitive or disproportionate; on the contrary, it represents a measured and legally appropriate response to the findings recorded by the learned Banking Court on the evidence available on record.

29.It is a settled principle of appellate jurisprudence that a first appellate Court is not confined to a superficial examination of the conclusions reached by the trial Court. The first appellate Court is required to reassess the entire record with due care, independently evaluate the oral and documentary evidence, and formulate its own conclusions on the factual and legal questions arising for determination. Keeping this obligation in view, this Court has undertaken an independent examination of the pleadings, the oral and documentary evidence brought on record, the findings recorded by the learned Banking Court, and the submissions advanced by the learned counsel appearing for the parties. Upon such independent scrutiny, this Court finds no reason to depart from the conclusions reached by the learned Banking Court on the material questions in controversy. The findings regarding the failure of the appellant-Bank to establish effective service of demand notices, the admission concerning documents signed in blank and completed subsequently, the absence of any prior adjudication or

lawful determination of the alleged outstanding liability, and the lack of proof demonstrating authorization or consent on part of the respondent No.3 to create the security interest or permit appropriation of the joint deposit, are all firmly anchored in the evidence available on record. These findings are neither speculative nor conjectural; rather, they flow directly from the oral testimony and documentary material produced by the parties themselves. The appellants have been unable to point out any material piece of evidence that was ignored, misconstrued or excluded from consideration by the learned Banking Court. Likewise, no instance of misreading, non-reading or erroneous appreciation of evidence has been demonstrated which could justify interference in exercise of appellate jurisdiction. The conclusions reached by the learned Banking Court represent a logical and legally sustainable outcome of the evidence on record and do not suffer from any factual or legal infirmity warranting reversal by this Court.

30.Before parting, it is observed that there can be no cavil with the proposition that financial institutions are entitled to recover amounts lawfully due to them and to enforce valid securities created in their favour. However, the right to recover a debt is distinct from the authority to determine the existence and extent of liability, and the former cannot be exercised in a manner that dispenses with the safeguards of law. The recovery proceedings, irrespective of the legitimacy of the underlying claim, must be pursued through lawful means and in conformity with the requirements of fairness, due process and established legal procedure. These fundamental safeguards cannot be subordinated to considerations of banking discipline, commercial convenience, contractual expediency business viability or financial efficiency, particularly in circumstances where the existence or extent of the alleged liability remains disputed. A financial institution may assert a claim, but it cannot unilaterally adjudicate upon the validity of that claim, determine the amount recoverable and simultaneously enforce recovery thereof. To permit a bank to act as claimant, adjudicator and executing authority in the same

cause would be to confer upon it functions that belong to independent judicial forums and would effectively deprive the affected party of the protections inherent in the adjudicatory process. Such a course is inconsistent with the rule of law and due process, incompatible with the principles of fairness and impartiality, and impermissible under the settled principles governing banking and financial jurisprudence.

31.For the reasons recorded above, this Court finds no legal, factual or jurisdictional infirmity in the impugned judgment and decree dated 22.12.2021 warranting interference in exercise of appellate jurisdiction. The findings recorded by the learned Banking Court are firmly rooted in the evidence available on record, are consistent with the applicable legal principles and do not suffer from any misreading, non-reading or erroneous appreciation of the material produced by the parties. The learned Banking Court rightly concluded that the appellant-Bank failed to establish lawful justification for the unilateral encashment and appropriation of the respondents’ foreign currency deposit and was, therefore, justified in directing reversal/restoration of the amount so appropriated. Consequently, the instant appeal being bereft of merit, is hereby dismissed and the impugned judgment and decree are maintained. No order as to costs.

(KHALID ISHAQ) (HASSAN NAWAZ MAKHDOOM)

JUDGE JUDGE

Announced in open Court on 29.06.2026.

Judge Judge

Approved for reporting

Judge Judge Iqbal/*