Gul Hassan Khan & 1other Vs Soneri Bank Limitd through Attorney

Form No:HCsJD/C-121

ORDER SHEET

IN THE LAHORE HIGH COURT, LAHORE

JUDICIAL DEPARTMENT

Case No: RFA No.64606 of 2025

Gul Hassan Khan, versus Soneri Bank Limited. etc.

S.No. of order/ Date of order/ Order with signature of Judge, and that of parties or counsel, where necessary. proceeding Proceeding.

23.09.2026 Mr. Muhammad Imran Saleem, Advocate for the Appellants.

The mere fact that a financial institution happens to be both the banker and the employer of a person does not, by itself, merge two distinct legal relationships into one. Whether an employee, who is also a borrower, can compel a bank to adjust his alleged provident fund, gratuity and other service benefits against an outstanding finance liability is the central question arising in this appeal. Through this Regular First Appeal, the Appellants have called into question the judgment and decree dated 17.09.2025 (the “Impugned Judgment and Decree”) passed by the learned Judge, Banking Court-V, Lahore, whereby the suit instituted by the Respondent-Bank for recovery of finance was decreed to the extent of Rs.1,017,705/-.

2.Learned counsel for the Appellants contends that the learned Banking Court proceeded to decree the suit without properly attending to the objections raised in their Application for leave to defend. He submits that Appellant No.1, during his employment with the Respondent-Bank, had an approximate sum of Rs.1.5 million accumulated in shape of Provident Fund, Gratuity, EOBI Funds and other service benefits, which were admittedly lying with the Bank. According to the Appellants, firstly, the said amount ought to have been adjusted against the outstanding finance facility and only the balance, if any, should have been recovered for

adjustment of their liability. As a necessary corollary thereof, he adds, the relevant HR Manuals, Policies, Instructions, Standing Orders and Statement of Accounts relating to such employment benefits were required to be produced by the Bank before the alleged liability of the present Appellant could have been determined. Finally, he prays that Impugned Judgment & Decree is liable to be set aside on this score alone.

3.On previous two dates of hearing, learned counsel for the Appellants was questioned about the correctness of his foretold argument, who, in return, sought time to further prepare the matter. He was directed to assist this Court as to the legal basis whereby gratuity, provident fund or other service benefits of Appellant No.1 could, lawfully, be adjusted or set-off, as claimed by him, against his liability arising out of the finance facility availed by him under the Financial Institutions (Recovery of Finances) Ordinance, 2001 (the “Ordinance”).

4.Today, we have heard the learned counsel for the Appellants at the limine stage and have examined the Impugned Judgment and Decree as well as the material attached therewith with his able assistance.

5.Perusal of the record reveals that the request for and availing of finance, execution of finance documents and creation of securities for repayment were admitted by the Appellants in their Application for leave to defend. Their solitary grievance raised before this Court is that Appellant No.1, during his service tenure, had earned an amount of approximately Rs.1.5 million in shape of contributory provident fund and gratuity, which remained in possession of the Bank. According to the Appellants, the above- mentioned funds of the Appellant No.1 should have been adjusted against his liabilities. After the accounts are set-off,

only then the Bank shall be held liable to seek payment of the remaining sums from the Appellant. The exact position could only have been known when the relevant policies and statements of Contributory Provident Fund, Gratuity, EOBI Funds etc. were presented before the Court. According to the Appellants, this exercise should have been undertaken by the Learned Banking Court before passing the Impugned Judgment & Decree. On this premise, it was contended that amount of finance should have been net off against the amount of his service benefits. The Appellants, therefore, sought production of the relevant record, including account details, policies, HR manuals/booklets and instructions governing the provident fund and other. Their plea, however, did not find favour with the Banking Court and the suit was decreed as aforesaid.

6.The subject of grant of Finance, its Recovery, Institution of the Suit and Execution of the Decree and allied topics is governed by a special law called the Ordinance of 2001. Whereas the claims relating to Gratuity, Provident Fund, EOBI Funds or other service and pensionary benefits do not fall within the ambit of the Ordinance. Any grievance regarding withholding of, delayed payment or non-payment of such service employment benefits is not governed by the Ordinance, as each foregoing subject has its own statutory regime applicable thereon. Therefore, any claim with respect to withholding, delaying or non-payment of service benefits and pensionary entitlements cannot be raised, addressed or dilated upon by the learned Banking Court in exercise of its jurisdiction derived under the Ordinance. Such employment related claims have to be agitated before the competent forum, which is not the Banking Court. Such a claim cannot, as a matter of course, be adjudicated before a Banking Court while exercising jurisdiction under the Ordinance. As stated above, the Appellants, despite given opportunities, could not

produce any statutory provision, rule, policy or other legal material including judicial precedent before this Court in support of the proposition canvassed by them.

7.Insofar as the right of set-off is concerned, suffice it to say that such right, in the facts of this case, is available to a Financial Institution if some amount is due / recoverable from its customer in one account but funds of the same customer are available in another account. Financial Institution, in exercise of its right of set-off, can recover the amount from another account belonging to the customer and adjust such liability. It is in such circumstances that the right of set-off may be exercised. This right of set-off (or net-off as stated in this Appeal) does not belong to the customer. More so, this right of set-off does not travel or transcend from one distinct jurisdiction to another. The Appellants’ contention that the learned Banking Court ought to have exercised the right of set-off in respect of the alleged pensionary or service benefits lying with the Bank against the outstanding finance liability is misconceived. The two claims are separate and distinct in nature and are governed by different legal regimes that cannot be intermingled. Reliance placed by the Appellants on Muhammad Afzal v. IInd Additional District & Sessions Judge and 2 others (PLD 2008 Kar. 189) is misplaced, ill-conceived and not helpful to the Appellants.

8.Since the topic of set-off has been touched upon by the Appellants and is under discussion, therefore, we find it appropriate to canvass this principle in detail. Every Bank enjoys a legal right of general lien over its customer’s properties. When there is credit balance in one account and a debit balance in another account of the same customer, Bank has a right to appropriate the credit balance for adjustment of the debit balance without customer’s permission or consent. This right is known as ‘Banker’s

general lien, Bank’s right of combination of accounts or set- off’. Actually, these are different terms used interchangeably, in case law as well as by academics, but effectively carry the same meaning. This is a right to combine several accounts of a customer for the amount of his general balance without any authorisation from him. The underlying philosophy is “one contract theory” i.e. despite slight variation in title and type of accounts, there is only one contract of banker and customer and when Bank becomes customer’s creditor, it can exercise a right of set-off as regards mutual dealing with him. Such right always exists subject to an agreement to the contrary between the customer and the Bank.

9.Usually at the time of availing of finance, customer signs a declaration to be bound by the standard terms and conditions for grant and use of finance, wherein Bank expressly reserves the above mentioned right to appropriate the credit balance for adjustment of the debit balance without customer’s permission or consent. Furthermore, the same document usually contains another clause allowing Bank to exercise its right to combine several accounts of customer for the amount of his general balance without any authorisation from him.

10.Legal support to exercise this right is derived from Section 171 of Contract Act, 1872 that, inter alia, contains right of general lien of bankers, which is reproduced as under for quick reference:

“Bankers, factors, wharfingers, attorneys of High Court and policy-brokers may, in absence of a contract to contrary, retain, as a security for a general balance of account, any goods bailed to them; but no other persons have a right to retain, as a security for such balance, goods bailed to them, unless there is an express contract to that effect.”

(Emphasis added)

In Pollock & Mulla, the following observation with regards to Banker’s lien have been made:

“The rule of English law that the Bank has a lien or more appropriately a right to set off against all moneys of the customers in his hands has been accepted in India. The banker is at liberty to transfer the deposits of a customer to set off and liquidate debts due from the customer in whatever account the money may be, current or deposit whether they are in the same or different branches but mutuality must exist between the parties.”

(Emphasis is ours)

Section 171 of Contract Act was elucidated in the seminal judgment of Fancy Investment Limited Karachi v. United Bank Limited & 2 others reported as (PLD 1982 Kar. 200). Relevant portion is reproduced hereunder:

4.In this regard first reference has to be made to section 171 of Contract Act which provides that in absence of a contract to the contrary, bankers may retain as a security for a general balance of account any goods bailed to them. Admittedly, section 171 is not exhaustive as held in PLD 1957 Kar. 760. The banker’s lien is subject to any contract to the contrary. Banker has a general lien on all securities that may be deposited with him by a customer. A banker thus acquires a lien over pledged goods for the recovery of his dues and has a right after notice to the debtors to sell those goods to reimburse himself. Therefore, right of lien arises only in respect of such properties which come to his hands in his capacity as bankers and in the course of banking business. In Paget’s law of banking, VIIIth Edn., at page 499 relying on Re Bowes, Earl of Strethemore v. Vane, (1886) 33 Ch. D 586, following observation has been made:

“The nature of the securities subject to lien is further deducible from the condition that they must come to the banker’s hand in his capacity as bankers, in the course of banking business. It is a part of bankers business to advance money and any class of property may by proper means be made the subject of security.”

Lord Chorley in Law of Banking, VIth Edn. at page 292, observed:

“The banker’s lien is a general lien existing by mercantile custom and is binding upon the customer whether he knows of it or not. Furthermore, although a lien normally confers only a right to retain possession, a banker’s lien is exceptional and carries with it the valuable of sale and recoupment. It has indeed been neatly defined as an ‘implied pledge’. The most difficult question that arises is as to the types of property over which a banker is entitled to claim a lien. The principle

of the lien being that of an implied pledge, it can attach only to such property as customer by implication agrees that it shall.”

For determining the nature of banker’s lien all the authors and authorities have heavily relied on Brandao v. Barnett, (1846) 12 Cl. & Fin.787. The following passage has been quoted with approval and has been followed till today:

“Bankers most undoubtedly have a general lien on all securities deposited with them as bankers by a customer, unless there be an express contract, or circumstances that show an implied contract in consistent with lien.”

(emphasis is added)

The subject of set-off and Section 171 of the Contract Act has exhaustively been referred to in the celebrated judgment of Hon’ble Supreme Court of Pakistan handed down in the case of Messrs Summit Bank Limited through Manager v. Messrs Qasim and Co. through Muhammad Alam and another reported as (2015 SCMR 1341) relevant paragraphs whereof are reproduced hereinbelow:

10.The question that arose in this case was/is as to whether the deduction/withdrawal in dispute was lawful or not. The appellant-bank claims to have affected the deduction/withdrawal by exercising its lien/right to set-off the liability of the deceased towards the appellant-bank. The concept of banker's lien/right to set-off as embodied under section 171 of the Contract Act has been aptly explained in the case of Punjab National Bank Ltd. v. Arura Mal Durga Das (AIR 1960 Punjab 632) as under:

"(14). The rule of English Law that the Bank has a lien or more appropriately, a right to set-off against all monies of his customers in his hands has been accepted as the rule in India. According to this rule when the monies are held by the Bank in one account and the depositor owes the Bank on another account, the Banker by virtue of his lien has a charge on all monies of the depositor in his hands and is at liberty to transfer the monies to whatever account, the banker may like with a view to set-off or liquidate the debts...."

It hardly needs any emphasis to understand that a banker can exercise his right of lien or his right to set-off the liability of his customer against the securities and monies in his hand of that customer only and not of anybody else.

11.To elaborate the above mutuality, the judgment proceeds as follows:-

"(15) In order to create Banker's lien on several accounts it is necessary that they must belong to the

payer in one and in the same-capacity. Where the person has two accounts, one a trustee account and another private account at a bank, deposits in the two accounts cannot be set-off, the one against the other....

(16)Bankers have a right to combine one or more accounts of the same customer. But it cannot combine the account belonging to another or to himself along with another account which is the joint account with another.

(17)Similarly, the Banks have no lien on the deposit of a partner, on his separate account, for a balance due to the Bank from the firm. Therefore, the banker is entitled to combine all accounts kept in the same right by the customer. It does not matter whether the accounts are current or deposit or whether they are in the same or different branches. ---- 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. In order that it should be permissible to set-off one demand against another both must mutually exist between the same parties."

12.Furthermore, as rightly commented by Sheldon and Fidler's in their book on Practice and Law of Banking (Eleventh Edition) page 31) "The banker may exercise the right of set-off only when the money owned to him is a sum certain, which is due".

13.Here it may be relevant to note that even under the law which provides for recovery through coercive process such as land revenue, determination of the amount due is an essential pre-requisite. The bank cannot be conferred with the judicial powers for determination of the amount due against its customer/borrower. 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.

(emphasis supplied)

11.From the above exposition of law, we can safely gather that Bank has right to exercise Banker’s general lien, Bank’s right of combination of accounts or set-off, however, right to combine can be abrogated: firstly, by a special agreement; secondly when special property was remitted to the Bank and appropriated for a given purpose; thirdly, a Bank could not combine customer private account with one known to the Bank as ‘Trust Account’, but the Bank should have express knowledge of trust and mere title of account is

immaterial.1 Likewise, the pre-condition for application of Section 171 ibid is that there must not be an explicit or implied contract indicative of contrary. If the customer has deposited the amount with specific instruction to adjust the amount in another account, in that event, when the bank accepts it as such, it cannot vary it or change and adjust to any other account. Thus Section 171 applies when no such specific, express or implied instructions at the time of deposit were conveyed or imparted to the Bank.2

12.Now if we juxtapose the proposition presented by the Appellants with the law expounded above, then it is abundantly clear that Bank has right to exercise Banker’s general lien or set-off, however, it must be noted that exercising this right is Bank’s choice, it is not Bank’s obligation. So, Bank may or may not exercise this right. No party, like the Appellants in the present case, can ask or force the Bank to exercise such right. The above also establishes that the right of set-off can only be exercised against monies or securities that have come into the possession of a Bank in its capacity as a banker. Whereas in the case at hand, the Bank holds the pensionary and service benefits of the Appellant not in its capacity as a banker but as an employer. Therefore, the demand for exercise of the right of set-off cannot be entertained on this ground as well. Besides the fact that monies allegedly lying with the Bank are pensionary benefits / service emoluments also conveys an ‘implied agreement to the contrary’ that monies have not been received as Banker. Lastly and the most important reason for which the Appellants’ claim, i.e. Bank should have exercised the right of set-off before seeking recovery of its finances against its customers, cannot be accepted is that this Greenwood Teale v. William, Williams, Brown & Co. [1918] 2 WWR 791 Agriculture Development Bank of Pakistan v. Mubarak Dairies Limited and others (PLD 2008

SC 442)

right, although available to a bank, can only be exercised where the amount claimed is due, certain and determined by a judicial forum. In the case at hand, without there being a judicial determination, for which the Bank had approached the learned Banking Court, no right of set-off, even if otherwise available, could have been exercised.

13.For the reasons recorded hereinabove, we find no illegality or jurisdictional defect in the Impugned Judgment and Decree warranting interference by this Court. The appeal, being devoid of merit, is accordingly dismissed in limine.

Khalid Ishaq Muhammad Usman Ghani Rashid Cheema Judge Judge

Approved for Reporting

Khalid Ishaq Muhammad Usman Ghani Rashid Cheema Judge Judge

Announced and dictated on 23.09.2026.

Prepared and signed on 23.10.2026.

Waqas*