Zeeshaan Zafar Hashmi is an Advocate of the High Courts of Pakistan with a Masters in Constitutional Law from Harvard Law School. He is a partner at the law firm Shujra, Farooq & Hashmi (SFH) which is a full-service law firm with offices in Lahore, Islamabad, and Multan.
SFH is working in collaboration with Zameen.com to conduct research and advocacy on Pakistan’s property and banking laws in relation to affordable housing such as the Naya Pakistan Housing Scheme.
The first part of this article discussed the recent history of mortgage foreclosure laws in Pakistan. The second part discusses whether the Recovery of Mortgage Backed Security Ordinance 2019, hereon referred to as ‘New Ordinance’, can pass constitutional muster before the Courts.
The New Section 15 and the New Ordinance
Through the Financial Institutions (Recovery of Finances) (Amendment) Act, 2016, the government inserted a new section 15 into the FIO, this time purportedly in compliance with the judgement in the SAF Textiles case.
Without the possibility of non-judicial foreclosures, banks were reluctant to invest in the housing sector, so the new section 15 attempted to fall within the scope of a constitutional non-judicial foreclosure as mentioned at the end of the SAF Textiles judgement.
The new section 15 includes the provision of a reserve price and further provides that a bank can only buy foreclosed property at an auction if it pays an amount ten percent higher than the highest bidder.
It also provides for objections to be filed after an auction but before the property vests with the auction purchaser, upon deposit of twenty-five percent of the reserve price with the Banking Court.
The new section 15 is certainly much less harsh for mortgagors than the old section 15, but it was still challenged before the Lahore High Court in 2016. All actions taken by banks under the new section 15 have been stayed till the final judgement in the case. It took over three years for the case to be finally argued, and judgement was reserved on 7th November, 2019.
Yet another development took place late at night on 7th November: twelve different Ordinances, including the New Ordinance, were placed before the National Assembly and published on the website of the National Assembly. This is significant because the New Ordinance contrasts with the new section 15 in a number of ways, and the challenge to the new section 15 before the Lahore High Court did not consider the effect of the New Ordinance.
The New Ordinance has a contradiction that needs to be addressed. It provides for two different methods of foreclosure. Under section 3, a bank can, after serving a 60 day single notice period upon the mortgagor, take possession of mortgaged property without the intervention of a court.
However, section 5 states that to recover mortgaged property, the bank needs to send three notices of 14-14-30 days as stated in section 15, FIO. The New Ordinance also only provides for a limited scope of appeal against actions taken in section 3 where effectively such actions can only be challenged by a mortgagor by depositing in the Banking Court the entire mortgage money in cash.
Interestingly, both the new section 15 as well as the New Ordinance state that they have overriding effect over any other law for the time being in force.
It appears that the New Ordinance contrasts with the ruling in SAF Textiles, and therefore might undergo significant judicial scrutiny. In particular, the limited scope of appeal against actions taken without the intervention of a court under section 3 of the New Ordinance, that too ex post facto the bank taking possession of mortgaged property, might be found to be against the right to fair trial and due process under Article 10A of the Constitution.
The jury is still out on the new section 15, but it is a possibility that the New Ordinance will be severely scrutinized following SAF Textiles.
Another legal issue that the New Ordinance will face is that Ordinances only last for 120 days. After 120 days of an Ordinance’s promulgation, it can be extended for a further 120 days by the National Assembly or the Senate, but after a maximum of 240 days, an Ordinance lapses and ceases to be a law under Article 89 of the Constitution.
The New Ordinance, promulgated on 22nd July, 2019, has already passed the 120-day deadline. The government withdrew all the Ordinances it laid before the National Assembly on 7th November, including the New Ordinance. This means that the New Ordinance has not received an extension of 120 days by the National Assembly, so currently, the New Ordinance has lapsed i.e. it has ceased to have legal effect.
It will need to be enacted by Parliament to continue to have effect, and even if it is enacted, it most likely will need to be amended so as not to fall afoul of the judgement in SAF Textiles.
An interesting challenge has been mounted against the all of the Ordinances recently promulgated by the President. This year alone, more than twenty Ordinances have been promulgated by the President.
The general legal understanding is that an Ordinance can only be promulgated when the National Assembly is not in session and an emergency situation has arisen after the prorogation of the last National Assembly which needs to be responded to immediately by making a law without going to the National Assembly.
A member of the National Assembly is arguing before the Islamabad High Court that the Ordinances passed over the course of this year do not meet this criterion and therefore should be annulled.
The Naya Pakistan Housing Scheme is indeed a laudable initiative for affordable housing. Whether this will be brought to fruition is something that remains to be seen as the Recovery of Mortgage-backed Security Ordinance, 2019 needs to be enacted by Parliament and will undergo judicial scrutiny before the Courts on a number of grounds unless it is amended by Parliament.
Until then, the search will have to continue for a way to fit a non-judicial foreclosure around the judgement in SAF Textiles so that banks are more confident in backing affordable housing.
Disclaimer: The views and opinion expressed by the author is solely of the individual and do not necessarily represent those of Zameen.com and its employees.