LHC bars FIA from arresting bank borrowers before banking court ruling

The Lahore High Court has barred the Federal Investigation Agency from starting criminal proceedings against bank customers accused of wilful default until a banking court has determined the allegation in civil proceedings. The ruling stops lenders from using FIRs and arrests to press borrowers before a court has decided whether a default was wilful at all.

A division bench of Justice Jawad Hassan and Justice Abid Hussain Chattha issued the decision on petitions filed by Qaiser Shabbir and others, who challenged FIA notices issued on complaints by financial institutions under Section 20(7) of the Financial Institutions (Recovery of Finances) Ordinance, 2001.

In each case the lenders had already sued for recovery. Some suits had been decreed, many by consent; others were pending in appeal or in execution proceedings. The FIA notices followed those suits.

The judgment, written by Justice Chattha, held that "a recovery suit only fixes the amount payable and does not establish wilful default". The court described wilful default as a distinct kind of default carrying both civil and criminal dimensions, and noted that the ordinance requires a 30-day demand for payment before a complaint can be filed and ties the punishment to the amount in default.

The bench rejected the argument that the agency's criminal power stands independently of the civil case. It held that the FIA's authority in these matters flows from the 2001 ordinance and the rules framed in 2018, not from the FIA Act.

It also turned down an alternative course: letting criminal proceedings begin and then staying them. That approach, the court said, would give financial institutions an unfettered, unilateral, discriminatory and coercive tool to recover undetermined sums through first information reports and arrests.

On maintainability, the bench observed that notices under Section 160 of the Code of Criminal Procedure are normally not open to challenge, but judicial review is available where they are issued without jurisdiction, with mala fide intent, or against the parent statute.

The court disagreed with a 2019 ruling of a three-member Lahore High Court bench in Mian Ayaz Anwar and others versus the State Bank of Pakistan, to the extent that it held Sections 2(g)(ii) and (iii) of the ordinance needed no prior civil determination.

According to ProPakistani, lawyers for the petitioners argued that the ordinance's civil and criminal remedies are interwoven and that a customer cannot be called a wilful defaulter until the banking court and any appellate court have conclusively determined the breach. Lawyers for the respondents argued that each limb of the offence is independent and that the FIA has exclusive jurisdiction under Rule 5 of the 2018 Rules. The notices, they said, only sought information and were properly filed after payment demands had been issued.