Lahore High Court Rules FIA Cannot Arrest Borrowers Until Banking Court Declares Wilful Default

The Lahore High Court has barred the Federal Investigation Agency (FIA) from starting criminal proceedings against bank customers over alleged wilful default unless a banking court has first established the offence through civil proceedings, in a ruling that limits the use of criminal investigations as a loan-recovery mechanism.

The decision came on petitions filed by Qaiser Shabbir and others, who challenged FIA notices issued after financial institutions complained under Section 20(7) of the Financial Institutions (Recovery of Finances) Ordinance, 2001. A division bench of Justice Jawad Hassan and Justice Abid Hussain Chattha allowed the petitions. In each case, the institutions had already sued the petitioners for recovery, with the suits decreed — many by consent — or pending in appeal or execution when the complaints were lodged with the FIA.

Petitioners' counsel argued that the ordinance's civil and criminal remedies are interwoven and that wilful default must first be established before the banking court. They contended that a customer cannot be labelled a defaulter, let alone a wilful defaulter, under the ordinance until the allegations have been conclusively determined by the banking court and the appellate court. The respondents argued that each limb of the offence is independent and that the FIA holds exclusive jurisdiction under Rule 5 of the 2018 Rules, adding that the notices merely sought information.

In the judgment authored by Justice Chattha, the bench first rejected objections to the petitions' maintainability. While notices under Section 160 of the Code of Criminal Procedure are normally not challengeable, the judge observed that judicial review is available where they are issued without jurisdiction, with mala fide intent, or against the parent statute.

On the merits, the bench held that wilful default is a distinct species of default carrying both civil and criminal dimensions. "A recovery suit only fixes the amount payable and does not establish wilful default," the judgment stated, noting that the law requires a 30-day payment demand before a complaint and that punishment is tied to the amount of default.

The bench disagreed with a 2019 ruling by a three-member LHC bench in Mian Ayaz Anwar and others versus the State Bank of Pakistan, to the extent it held that Sections 2(g)(ii) and (iii) of the ordinance require no prior civil determination. It also rejected the approach of allowing criminal proceedings to begin and then staying them, observing that this would give institutions an unfettered, unilateral, discriminatory and coercive tool to recover undetermined sums through first information reports and arrests. The bench held that the FIA's powers flow from the ordinance and the 2018 Rules, not the FIA Act.