MUSHTAQ GHUMMAN

ISLAMABAD: The government has decided to empower Federal Investigation Agency (FIA) to investigate all complaints filed by financial institutions regarding willful default cases, well informed sources in Finance Ministry told Business Recorder.

Giving the background, the sources said, financial institutions (Recovery of Finances) Ordinance, (FIRO) was promulgated in 2001, primarily to deal with the recovery process of bank loans and loan defaults. The FIRO, 2001 provided a comprehensive legal framework on foreclosure specially Section 15 which empowered the financial institutions to sell mortgaged property.

However, Supreme Court of Pakistan in Civil appeals No. 146,204 to 254, 289 to 303, 505 to 534, 1147 & 1148/2009, 690/2010 and 391-I to 408/L/2009 passed an order on December 10, 2013 and declared Section 15 of the Ordinance as ultra vires of the Constitution of Pakistan. The Supreme Court had primarily invalidated Section 15 on constitutional grounds like absence of Reserve Price concept, non-transparent way of auctioning, derogation of court’s jurisdiction and financial institutions acting as seller, purchaser, auctioneer and the beneficiary at the same time.

State Bank of Pakistan (SBP) in the light of the judgment of the Supreme Court and the requirement of the financial institutions initiated the financial institutions (Recovery of Finances) (Amendment) Bill, 2016 which was enacted after receiving President’s assent on August 12, 2016.

Under Section 8(5) of the financial institutions (Recovery of Finances) Amendment Act2016, Rules are required to be made to specify the mode, conduct or method of sale of the mortgaged property. Relevant section is as follows: “in addition to its powers under sections 25 and 26, the Federal Government may, by notification in the official gazette, make rules specifying the mode, conduct or method of sale of the mortgaged property and in addition to the conditions stipulated in sub-section(4)”.

Under Section 20(7) of FIRO, 2001 an investigating agency is required to be appointed: “Notwithstanding anything to the contrary provided in any other law for the time being in force, action in respect of an offence of willful default shall be taken by an investigating agency, to be nominated in this behalf by the Federal Government, on a complaint in writing filed by an authorized officer of a financial institution after it has served a thirty days notice upon the borrower demanding payment of the loan, advance or financial assistance”.

The Rules as required in section 8(5) have been drafted and duly vetted by Ministry of Law and Justice. Rule 5 of the draft rules propose that Federal Investigation Agency may be appointed as investigating agency.

The Federal Investigating Agency (FIA) shall be the agency to investigate all complaints filed by the financial institutions regarding willful default cases in terms of sub-section (7) of section 20 of the Ordinance.

High Court of Sindh Karachi in CP No.D-4394 of 2017 titled Syed Basit Rasool Qadri vs Ali. The State and others directed federal government to nominate investigating agency in terms of Section 20(7) of the Financial Institutions (Recovery of Finances) Ordinance (FIRO), 2001 within 15 days of the date of order i.e. May 7, 2018. A complaint report is also required to be sent to the court within 28 of the order.

In this regard, the Finance Division will issue the following notification

NOTIFICATION

SRO. (1)/2018.- In exercise of the powers conferred by section 25 of the Financial Institutions (Recovery of Finances) Ordinance, 2001 (Ordinance No. XLVI of 2001), the Federal Government is pleased to make the following rules, namely: -

1. Short title and commencement. - (1) these rules may be called the Financial Institutions (Recovery of Finances) Rules, 2018.

(2) They shall come into force at once.

2. Definitions. - (1) In these rules, unless there is anything repugnant in the subject or context, “Ordinance” means the Financial Institutions (Recovery of Finances) Ordinance, 2001 (XLVI of 2001).

(2) All other words and expressions used but not defined herein shall have the same meanings as assigned to them under the Ordinance.

3. Procedure for sale of mortgaged property. - A financial institution shall observe the following procedure to sell the mortgaged property under section 15 of the Ordinance, namely:-

(a) for determination of liability,-

(i) before sending the first notice to the mortgagor under sub-section (2) of section 15 of the Ordinance, the financial institution, in order to get the outstanding mortgage money determined, shall forward the case to a chartered accountant firm. Such chartered accountant firm shall be shared by the mortgagees on a pro data basis; and accountant firm shall neither be nor have been during the last three years, a statutory auditor of, or employed or engaged as a consultant by, the concerned financial institution or the mortgagor. In case of more than one mortgagees of the mortgaged properly, the financial institution shall also request these mortgages to submit their respective claims for outstanding mortgage money to the chartered accountant firm so nominated or appointed by the financial institution along with complete documents to support their claims;

(ii) in case of failure of the other mortgagees to submit their respective claims for outstanding mortgage money to the chartered accountant firm in terms of clause (i) the chartered accountant firm shall proceed to determine the outstanding mortgaged money of the concerned financial institution only;

(iii) after seven days due notice to the parties, the chartered accountant firm shall examine the accounts and determine the extent of liability of the customer including cost of funds as per sub-section (2) of section 3 of the Ordinance and submit its report to the financial institution within thirty business days from the date of the appointment;

(iv) the fee of the chartered accountant firm shall be initially borne by the financial institution which may subsequently be adjusted and considered as the expenses for the sale of the mortgaged property. In case of claims by more than one mortgagees of the mortgaged property, the fee of the chartered firm.

(v) the financial institution shall not send any notice of demand, first, second or final, to the customer under sub-section (2) of section 15 of the Ordinance in excess of the liabilities so determined by the chartered accountant firm;

(b) for valuation of mortgaged property:-

(i) within seven business days after the expiry of the thirty days period of the final notice issued to the mortgagor under sub-section (2) of section 15 of the Ordinance, the financial institution shall hire three valuers from the approved list of professional valuers maintained by the Pakistan Banks Association for valuation of the mortgaged property as on the date of the final notice;

(ii) Within fifteen days of their appointment the valuers shall independently evaluate the mortgaged property and determine its forced sale value;

(iii) the highest among the three values determined by the valuers shall be considered as the reserve price under clause (d) of sub-section (1) of section 15 of the Ordinance; and

(iv) if the valuation on the basis of which the reserve price is specified is older than six months at the time of publication of the notice under clause (b) of sub-section (4) of section 15 of the Ordinance, the financial institution shall get the property evaluated afresh as per clause (i); and

(c) for bidding process no bid is received in three auctions, the financial institution, at its discretion, may purchase the mortgage property at a price ten percent higher than the reserve price, with due notice to the mortgagor under sub-section (6) of section 15 of the ordinance.

Provided that a financial institution shall proceed under section 15 of the ordinance in only those cases which involve a mortgaged property and in respect of which the banking court has not, on or after the commencement of the financial institution (Recovery of Finances) (Amendment) Act, 2016 (XXXVIII of 2016), passed a decree in terms of sub-section (11) of section 10 of the Ordinance or allowed the application for leave to defined in terms of sub-section (10) of the Ordinance.

If the financial institution decides to proceed under sub-section (3) of section 19 of the Ordinance, then in addition to the conditions as contained in the said section, rule 3 where relevant shall also apply mutatis mutandis.

The Federal Investigation Agency shall be the agency to investigate all complaints filed by the financial institutions regarding willful default cases in terms of sub-section (7) of section 20 of the Ordinance.

The security to be furnished under sub-section (9) of section 10, sub-section (1) of section 13 and sub-section (3) of section 22 of the Ordinance shall be deemed to be fresh security for the purpose of the said provisions under their rule and shall not include any security already furnished.