Corporate Rehabilitation in Pakistan

1
Corporate Rehabilitationin Pakistan

• Feisal Hussain Naqvi

2
The story till last year

• In order to maximise NPL recovery, Pakistani
  governments introduced several creditor friendly
  laws
• First effective bank recovery law in 1997
• Revised and tightened in 2001
• New recovery law with criminal provisions (NAB)
• Up to 14 years in jail
• Strict liability and presumption of guilt
• Fine equal to defaulted amount
• No bail
• Asset recovery vehicle set up (CIRC)

3
All stick and no carrot makes Jack a dull boy

• Despite all the laws, NPL increased further
• NAB law failed to result in recoveries due to
  court decisions
• CIRC turned into a (lousy) auction house
• Businessmen stopped borrowing
• Hence decision taken to set up a more debtor
  friendly insolvency regime
• English, US and Indian models considered
• US model adopted primarily because
• no shareholder-management divide in Pakistan
• Availability of judicial precedents

4
The CRA last year

• Comprehensive law
• I.e. covered both liquidation and rehabilitation
• Deliberately copied large portions of the US
  Bankruptcy Code
• Super-priority loans
• Automatic stay
• Government debt given same priority as unsecured
  debt
• Compressed timelines
• Included UNCITRAL model cross-border provisions
• Provided support to judges through an Advisory
  Committee

5
The CRA this year

• Work on CRA slowed by transition to democracy
• Upon re-examination, major changes made
• No longer a comprehensive law
• Mandatory mediation
• Institutional capacity building
• CIRC replaced with private vulture capital
  companies
• Modified automatic stay
• Automatic discharge of personal guarantors

6
Comprehensive vs. limited law

• CRA originally covered both liquidation and
  rehabilitation
• Revised CRA only covers rehabilitation because
• Previous caselaw and legal structure is minimally
  disturbed
• Previously almost 1/3rd of Company Law being
  rewritten
• Entire debate about whether a particular company
  is insolvent becomes redundant
• Debtors will now come into rehabilitation out of
  their own choice
• Rehabilitation available as of right but with
  strong anti-fraud provisions
• Failure of rehab means mandatory liquidation

7
Mandatory Mediation

• All cases will be referred to mediation upon
  filing
• Mediator must be qualified to serve as an
  administrator
• Aim is to familiarise parties with new law, their
  rights and probable range of outcomes
• Timelines not affected by mediation
• Plan deadline can be extended only by mutual
  consent
• Debate now over timing of mediation
• I.e. whether mediation should be prior to or
  after advisory committee report
• General practice is to have mediation before
  court takes cognizance of matter

8
Institutional Capacity Building

• Self-evident fact that Pakistan lacks qualified
  personnel
• Problem exacerbated by complexity of law
• Solution is to set up specific independent body
  Institute of Administrators
• Institute will train, regulate and license
  mediators, administrators and liquidators
• Institute will also arrange specialised training
  for judges
• Idea is to build a pool of qualified personnel
  who can serve system in all capacities

9
Other changes

• CIRC replaced with enabling provision for
  vulture capital companies
• Modified Automatic Stay
• Unlike US version, stay will expire after four
  months
• But, stay will remain valid against execution
  proceedings
• Again, idea is to increase pressure on debtors
• Automatic Discharge of Guarantors
• Under US law, personal guarantors are not
  discharged by insolvency of principal
• But, if same rule was applied in Pakistan, would
  remove incentive for rehabilitation
• Under SBP regulations, all directors and major
  shareholders must give personal guarantees