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