ASIAN DEVELOPMENT BANK REGIONAL TECHNICAL ASSISTANCE PROJECT NO: 5795-REG INSOLVENCY LAW REFORMS REPORT ON PAKISTAN Report by Aman Piracha, Khan & Piracha TABLE OF CONTENTS General Introduction Sections A. Forms and Structures of and Sources of Finance for Business Organisations B. Availability and Forms of Financing for Enterprises C. Secured Financing D. Trading Debts DD. Equipment Leasing E. Collection and Recovery of Unsecured Debt F. Civil/Penal Sanctions G. Attitudes Toward Financial Difficulty and Insolvency H. Work Outs I. Insolvency Law Regime J. Case Management of Insolvent Enterprises K. Assets Available to Creditors KK. Fraud L. Claims of Creditors M. Investigation by Administrators N. Termination of Administration O. Connection Between Debtor and Forum P. Foreign/Cross-Border Elements Q. New Developments R. Inter-Relationship Between Lenders and Borrowers in Context of Financial Difficulty/Insolvency of the Borrower S. Assessment of Processes T. Sale and Transfer of Assets U. Liquidity Problems 2 INTRODUCTION Pakistan was established as an independent sovereign state on August 14 1947. Prior to this date Pakistan formed part of the British colony of India. At its birth Pakistan inherited the legal system prevalent in British India and the Pakistan insolvency legislation is a derivative of the same. Bankruptcy law applies primarily to the insolvency of individuals and is contained in the Provincial Insolvency Act 1920 and the Insolvency (Karachi Division) Act 1090 and does not form the subject matter of this Report. Winding Up or liquidation law applies to companies and is contained in the Companies Ordinance 1984. Corporate rescue i.e. restructuring or receivership is also covered by the Companies Ordinance. Additionally, new legislation has been enacted in 1997 to provide for recovery of corporate debt by banks and development finance institutions, namely the Banking Companies (Recovery of loans, advances, credits and finances) Act 1997. Recovery of debts due may also be initiated under the Civil Procedure Code, 1882. 3 SECTION A FORMS AND STRUCTURES OF AND SOURCES OF FINANCE FOR BUSINESS ORGANISATIONS A1. Forms of Business (Enterprise) Organisation (a) What are the main form of business organisation for medium and large scale enterprises in this economy? The main forms of business organisations for medium and large scale enterprises are companies, both private limited and public limited, statutory corporations, foundations, trusts and joint ventures. (b) Is there a system of registration for these business organizations? If so, briefly describe. Companies, both private and public are to be registered under the Companies Ordinance, 1984 (the Ordinance). Registration is effected by the filing with the Registrar of Companies of the Memorandum and Articles of Association as per a prescribed form. Certificate of incorporation entitling the company to do business is issued on the registration of the Memorandum. Statutory corporations do not require registration and are established by act of Parliament, the provisions of which Act govern their functioning. Foundations and Trusts may be registered under the Societies Registration Act, 1860 with the Registrar of Societies Joint Ventures may be set up by agreement under the Contract Act, 1872. (c) Are there any minimal capitalisation requirements for these enterprises? There are no minimum capital requirements for Pakistan companies. (d) Briefly describe the main features of each type of these business organisations, by reference to public/private/state ownership and management; accounting and auditing responsibilities (particularly the standards which apply to accounting and auditing practices); director and management responsibility (including, if relevant, possible liability for debts); and the role of regulatory authorities regarding these enterprises. Companies incorporated under the Companies Ordinance may be either private or public limited companies. The division does not depend on the scale of economic activity but upon the extent of permitted public participation in the company. A private limited company needs at least two members for incorporation and maximum membership is limited to fifty exclusive of employees, it is allowed to allot shares and commence business immediately on incorporation and is not required to file with the Registrar copies of its annual balance sheet and profit and loss account or to hold statutory meeting and file a statutory report. The articles of a private limited company must restrict the right to transfer shares. A public limited company must have at least seven members and no maximum is prescribed. Management of both private and public limited companies vests with the board of directors. Companies are required by law to keep proper books of account (Sec.230) and to preserve the accounts of at least the previous ten years. The books of account are open to inspection by the Registrar of Companies or any person authorised by him. The directors of a company are under obligation to lay at the Annual General Meeting a balance sheet and profit and loss account or expenditure account (Sec.233). The balance sheet must reflect a 4 true and fair view of the state of affairs of the company and the profit and loss account or expenditure account must give a true and fair view of the profit and loss of the company for the financial year and must conform to the standards prescribed by the Ordinance (Sec.234). These standards are fairly stringent. In the case of listed companies the law requires that international accounting standards be followed. Every company is under liability to appoint auditors who have access to all books, papers, accounts and vouchers of the company and who must make a report on every balance sheet and profit and loss account or income and expenditure account and every other document forming part thereof which are laid before the company in general meeting. The management or directors are responsible for their acts only to the extent of mismanagement or gross negligence. Statutory corporations are owned by the state and are governed by the statutes by virtue of which they are established. Provisions regarding management etc are contained in each individual enactment. Trusts and Funds are owned by trusts or societies and are governed by their founding documents and the statutes under which they are established. Joint Ventures can be entered into by any parties through contract and are subject to the Contract Act 1872 governed by the terms of the contract under which they are established. A2. Controls and Influences (a) Are there any relevant observations to make concerning political, social (powerful family), financier (bank equity or involvement) or cultural controls or influences in respect of these types of business organisation? Up to the nineteen seventies the major industries were considered to be in the control of a number of powerful families, who jointly controlled a significant percentage of the total wealth of the country. Because of continued authoritarian rule in Pakistan cronyism has been on the rise and influential lobbies/groups primarily headed by family members and associates of the people in power have taken hold. With the nationalisation of banks in the seventies, issuance of credit on grounds of political pressure became common and this trend has continued unabated with the nationalised banks and a development Finance Institutions’ (DFI’s) being encumbered with vast unpaid debt, write offs and restructurings to favour the corporate debtors with influential backing. [Having identified the types of business organisation, they will now (for ease of reference) be referred to as ‘corporates’ and, thus, `corporate borrower’, `corporate debtor’ and so forth] 5 SECTION B AVAILABILITY AND FORMS OF FINANCING FOR ENTERPRISES B1. Business Financing Arrangements Generally (a) Is it more usual for the financing needs of these types of corporates to be satisfied out of capital (equity) raisings; retained earnings; or external borrowings? It is more usual for these corporates to resort to external borrowing for their financing needs. However, the State Bank of Pakistan (SBP) Prudential Regulations place a limit on the extent of lending by banks and require that a certain debt-equity ratio be maintained at a prescribed level (presently 60:40 ). Consequently, external borrowing has to be balanced to that extent. (b) What are the main sources for borrowing for these types of corporates? Commercial banks are the main source for borrowing for these types of corporates. In addition DFIs, Investment Banks, Foreign Lenders such as IFC, ADB, IDB etc. play a role. In some cases borrowings are in the form of lease financing from leasing companies with buy back arrangements, but this constitutes a minor portion of the borrowings. (c) Is there significant competition among lenders and significant choice of sources for borrowing available to these types of corporates? There is significant competition as there are a large number of commercial banks interested in offering financing especially for what are considered to be blue chip companies. Depending on the repayment period, most lenders (including foreign banks operating in the country) are keen to meet the short term financial needs of the corporates. Local banks and DFIs are open to long term lending and therefore corporates have a sufficient choice of lenders. (d) What is the present average rate of interest payable in respect of unsecured and secured debt? Unsecured debt is not allowed by the SBP and the interest rate for secured debt depends on the credit rating of the borrower but the average rate varies between 16 to 22% with leasing companies charging up to 25%. (e) Is finance generally available for long, medium and short-term borrowings? Finance for long and medium term borrowings is usually available only from the public sector banks and DFIs. Private commercial banks prefer short term lending. B2. Central or Other Similar Bank Control or Influence (a) What part does the central bank of this economy play in the regulation of the banking and finance sector? Would it intervene or seek to influence the outcome or course of events if, for example a large corporate with debt exposure to a number of banks was in financial difficulty? The SBP plays a regulatory role in the banking and finance sector and in implementing the country’s monetary policy. The SBP Prudential Regulations set out the 6 rules for corporate borrowing. Although there is a recent precedent of the SBP intervening in case of an insolvent financial institution (the Mehran Bank) to bail out the depositors but not vice versa , the SBP is not known to have played the role of directly bailing out a borrower in financial difficulty. (b) Is there any tradition in this economy for a ‘main’ or ‘house’ or ‘lead’ bank to become involved as a chief negotiator or leader in the case of the financial difficulty or insolvency of a large corporate borrower with debt exposure to a number of banks? In the case of syndicate borrowing, the lead bank would theoretically assume the role of leader in negotiating a restructuring etc, however, this is not always the case and the general experience is that each time the lead bank has assumed this role, it has failed and every bank has gone its own way. [These issues are further raised later in this working guide, so a general answer will suffice here] B3. Assessment of Borrowing Risk and Monitoring of Financial Position (a) Is assessment or analysis of lending risk widely practised in this economy? Yes, assessment or lending risk is widely practised. (b) If so, does the average lending bank make adequate assessment of risk analysis when contemplating lending to a corporate borrower? All banks are required to make adequate assessment or risk analysis when contemplating lending to a corporate borrower and foreign banks and private sector banks do make adequate risk assessment. However, historically as the bad debt portfolio of public sector banks and DFIs in Pakistan has shown, the assessment by these institutions is not adequate or is deliberately ignored. (c) Would it be usual or common for a lending bank to regularly monitor the financial performance of a corporate borrower? It is common for a lending bank to monitor the financial performance of a corporate borrower. However the level of monitoring is not necessarily adequate particularly in short term financing. (d) Would it be usual or common for a lending bank to be regularly supplied with copies of the financial statements of a corporate borrower? The requirement for regular provision of financial statements or information is a standard provision in all agreements for financing as well as being a stipulation of the SBP’s Prudential Regulations. However, this requirement is not always strictly complied with in short term financing and also the quality and accuracy of information varies. B4. Foreign Bank Lending (a) Is there a significant source of foreign bank lending in this economy? There is a significant source of foreign lending, but primarily in the public sector. Foreign lending to the private sector is barely 12% of the total foreign debt to Pakistan. 7 (b) If so, is it usual for this funding to be provided by the foreign bank/s alone or in combination with funding from local or domestic bank/s? Funding by foreign banks is provided both alone and in combination with local or domestic banks. The foreign banks generally concentrate their lending to what are considered blue chip companies. (c) Are you able to detect whether there are significant differences in approach and funding terms when a foreign bank is involved in the lending (as compared with a purely local or domestic funding)? There is a significant difference in approach when a foreign bank is involved. (d) If so, what are the main differences? There is much greater due diligence and the financing documentation and evaluation of security is more stringent. Moreover, considerations other than risk factor do not play a role in financing by foreign banks. B5. Exclusive Lending (a) Is ‘related’ or ‘exclusive’ lending (ie where a corporate borrower and a bank have an established commercial relationship such that only that lender is looked to as the source of borrowing by the corporate borrower) common in this economy? This is rare for large corporates, but not unknown for small and medium sized corporates. (b) If no, what effect does this have if the corporate borrower is in financial difficulty or is insolvent? All the risk is placed on one institution and a bail out may be more difficult to obtain. B6. Syndicated Lending (a) Is ‘syndicated’ lending (i.e. where a group of banks or financial institutions join together to provide funding for a corporate borrower) common in this economy? Syndicated lending is known, but only for top rated companies. (b) If so: (i) Does a lead bank perform the role of ‘agent’ on behalf of all the lenders; and/or Sometimes a lead bank performs the role of agent on behalf of all the lenders. (ii) Is the concept of a ‘trustee’ (or similar) for a syndicate of banks (ie where the ‘trustee’ holds any security for the syndicated funding on trust for the syndicate of banks) known and/or practised in this economy? This concept is prevalent where there are offshore lenders in term finance. 8 (iii) If the corporate borrower is in financial difficulty or is insolvent what function does the ‘agent’ or ‘trustee’ perform? The agent or trustee is expected to regularly monitor the changes in financial position of the borrower in difficulty and in case of the borrower’s insolvency may be required to secure and receive assets. B7. Subordinated Debt (a) Is the concept known as ‘debt subordination’ (ie, a contractual arrangement between lenders in which there are ‘layers’ of ‘senior’ and ‘junior’ debt and which has the effect of postponing repayment of the ‘junior’ debt until payment has been made of the ‘senior’ debt) recognised and practised in this economy? The concept of debt subordination exists in Pakistan primarily in relation to mortgages and charges. (b) If so, is debt subordination recognised and/or enforced under the insolvency regime of this economy? Debt subordination is recognised and enforced under the registration of mortgages and charges regime. B8. Banks and Equity/Debt (a) Is it permissible for banks to own equity in a corporate borrower? There is no bar on holding of equity by banks. (b) If so, is it permissible for a bank to convert debt to equity? It is permissible for a bank to convert debt to equity. (c) Are there instances where this has in fact occurred, particularly in the context of either: (i) in the context of an ‘informal work out’ as a result of the insolvency or approaching insolvency of a corporate borrower; or Yes, in a few cases. (ii) in the context of a formal insolvency administration of a corporate borrower? Not known. (d) In such a case, is it usual for the bank to be then represented on the management or board of the corporate borrower? Where debt is converted to equity it would be normal for the bank to be represented on the management or board of the corporate borrower. 9 B9. Debt Trading (a) Is there a market for ‘debt trading’ (ie, where a bank might sell or trade the debt owed to it by a corporate borrower) in this economy? A market for debt trading does not really exist in Pakistan although in some cases Term Finance Certificates (TFCs) have been quoted on the stock exchange. (b) If so, is debt trading common in this economy, particularly where the corporate borrower is insolvent or near insolvent? Debt trading is not common in Pakistan and where the corporate borrower is insolvent or near insolvent, debt trading is unknown. [This issue is raised later in this working guide, so a general answer will suffice here] B10. Guarantees to Support Lending (a) Is the concept of a third party ‘guarantee’ (as distinct from a security over property) to support corporate borrowing known and practised in this economy? The concept of third party “guarantee” to support corporate borrowing is known and practised in Pakistan. (b) Is there a law which regulates the power to take or give a guarantee? The power to take or give guarantees is governed by the Contract Act, 1872. The Ordinance also places certain restrictions on the power of a company to give a guarantee (Secs.195 and 208). (c) Is it common or usual for corporate borrowing to be supported by guarantee/s? Yes, but normally not in the case of blue chip companies or companies having foreign control. (d) If so, are these guarantees usually taken from owners/directors of the corporate borrower; from other corporates associated with the corporate borrower (e.g. subsidiaries or holding company); or from unrelated third parties? These guarantees are usually taken from the owners/directors where the corporate debtor is a private limited company and otherwise from either one of these. (e) Is there a law which regulates the enforcement of guarantees? The enforcement of guarantees is regulated by the Contract Act, 1872. (f) Is it easy or difficult in practice to enforce guarantee obligations? Guarantee obligations are usually easily enforceable if they are backed by mortgage security. 10 (g) Is it usual to require that a guarantor should give security over the property of the guarantor as an additional comfort to the lender? Depends on the guarantor. It is uncommon to require this from corporate guarantors with good credit rating but it is common for lesser known companies or where the guarantor is an individual. (h) Does the insolvency of a corporate borrower have any effect on the enforcement of a guarantee? Enforcement of a guarantee is not affected by the insolvency of a corporate borrower. However, where a winding up order has been passed leave of court will be required for enforcement. 11 SECTION C SECURED FINANCING C1. Property Rights Regime (a) Is the system of ownership rights in respect of both land and other property reasonably stable and certain in this economy? Ownership rights in respect of both land and other property are reasonably stable and certain. (b) In particular: (i) is the system of land ownership and rights sufficiently developed to encourage lending on the security of land; and Yes, the system of land ownership and rights is sufficiently developed to encourage lending on the security of land. (ii) is the system of ownership and rights in relation to property other than land sufficiently developed to encourage lending on the security of such property? The system of ownership and rights in relation to movable property is well developed and in particular a corporate borrower may grant a floating charge over all or any class of its present and future assets. C2. Secured Financing (a) What mechanisms for taking of security over assets of a corporate borrower are available to financiers in this economy (for example mortgages over land; fixed and/or floating charges over personal property; legal and/or equitable mortgages; debentures; pledges; liens, etc.)? A variety of mechanisms for taking security exist in Pakistan. These include legal mortgages over land, equitable mortgages. Additionally corporate borrowers grant floating or fixed charges over movable assets. Various other security mechanisms such as liens, pledges, hypothecations and securing deposit accounts in favour of a lender are also common. (b) In practice, which of these types of security are most commonly employed by financiers? Mortgages over land and fixed and floating charges and pledges are the most common form of security. (c) Is there a system of registration in this economy for any of these types of security taken by financiers? A system of registration for mortgages and charges exists for companies under the Ordinance. Section 121 lists the charges that must be registered in accordance with the provisions of the Ordinance with the Registrar within twenty one days of the date of their creation. These are: (a) a mortgage or charge for the purpose of securing any issue of debentures; 12 (b) a mortgage or charge on uncalled share capital of the company; (c) a mortgage or charge on any immovable property wherever situate or any interest therein; (d) a mortgage or charge on any book debts of the company; (e) a mortgage or charge , not being a pledge, on any movable property of the company; (f) a floating charge on the undertaking or property of the company including stock-in- trade; (g) a mortgage or charge on a ship or any share in a ship; (h) a mortgage or charge on goodwill, on a patent or licence under a patent, on a trade mark, or on a copyright or a licence under copyright; (i) a mortgage or charge or other interest based on agreement for the issue of participation term certificate; (j) a mortgage or charge or other interest based on a musharika agreement; (k) a mortgage or charge or other interest based on a hire-purchase or leasing agreement for acquisition of fixed assets. Section 122 provides that where a company acquires property which is subject to charge, the particulars of such charge must be filed with the Registrar within twenty one days of the acquisition of such property. There is no law in existence for registration of mortgages and charges by societies/ trusts and statutory corporations. (d) To what extent are priorities between competing securities regulated? Priorities are regulated by the order in which the mortgages/charges are registered and by the agreements with the lenders. Certain class of debtors have priority under the winding up proceedings under the Ordinance. C3. Enforcement of Securities (a) When a corporate borrower is in financial difficulties and a secured debt has become due, would it be usual or customary for a secured lender and/or the corporate borrower to attempt to negotiate a suitable arrangement for repayment and/or refinancing before the secured lender invokes legal enforcement methods? It would be usual for a secured lender to attempt a negotiated settlement with a corporate borrower in difficulty before resorting to legal enforcement. (b) What mechanisms are available to security holders to enforce their securities under the legal system of this economy (For example, power to take possession of the property, power to appoint a receiver, power to foreclose on a mortgage, power to sell the secured property, power to wind up the corporate borrower)? All of these. Possession of the secured property can be taken over under a legal mortgage or by virtue of a Power of Attorney or pursuant to a Hypothecation Agreement. A receiver may be appointed by virtue of powers contained in any instrument or by order of court (Sec.137) or under Section 69A of the Transfer of Property Act, 1882 or under Section 16 of the Banking Companies (Recovery of loans, advances, credits and finances) Act 1997 (the Banking Companies Act). Winding Up can be initiated under the Ordinance (Sec.305). A suit for foreclosure may be filed under Section 67 of the Transfer of Property Act 1882. 13 (c) Do these methods include that a secured creditor may ‘self-enforce’ the security (i.e., without the need for an order of a court or the consent of a regulatory authority)? A secured creditor may self-enforce the security in the case of a legal mortgage or through exercise of powers conferred under Powers of Attorney given by the borrower or through contract. However, where a winding up order has been passed leave of court will be required. (d) In practice, which method(s) of enforcement are most commonly employed by security holders? In general the most common method of enforcement is through recovery proceedings under the Banking Companies Act, and through civil suits for recovery in other cases. (e) Briefly describe the process involved in these method(s). Under Section 9 of the Banking Companies Act, a banking company, borrower or customer may institute a suit by filing a plaint supported by a statement of account. A summons is then issued to the defendant and upon an application by the defendant leave to defend is granted. The court may pass an interim decree in respect of part of the claim which appears to the court to be payable (Sec.11). Where the plaint relates to recovery of amount through sale of any property which has been mortgaged, pledged, hypothecated or otherwise charged as security the court may restrain or injunct the sale, attach the property or appoint one or more receivers.(Sec.16). Civil Suit for recovery can be filed by any creditor before a civil court where subject to the normal process for a suit the court will pass a decree for recovery which may be enforced by way of attachment and auction of secured property (Order XXI, Civil Procedure Code). C4. Effectiveness of Judicial System (a) How effective is the judicial or court system for the purpose of enforcing secured property rights? In principle it is considered to be effective in that time frames for final adjudication are prescribed. However, in practice the system is very slow and also corrupt. C5. Effect of Insolvency Proceedings (a) What effect, if any, does the commencement of insolvency proceedings in respect of the corporate borrower (ie where an application has been filed for some type of insolvency procedure but has not yet been adjudicated) have on the process of security enforcement? In a compulsory winding up, any time after the commencement of the insolvency proceedings the court may upon an application by the company or its creditors or contributories restrain further proceedings in any suit or proceedings against the company upon such terms as the court thinks fit. (Sec.313). This section does not affect the ability of a secured creditor to enforce security rights without intervention of the court. Commencement of voluntary winding up does not affect the process of security enforcement. (b) What effect, if any, does the formal pronouncement of an insolvency administration in respect of the corporate debtor have on the process of security enforcement? 14 Leave of court is required for enforcement and under Section 316 once a winding up order has been passed or provisional manager appointed no suit or other legal proceedings shall be proceeded with or commenced against the company except by leave of the court and subject to such terms as the court may impose. Moreover any proceedings by or against the company pending in any court other than the one hearing the winding up petition shall be transferred to such court. Enforcement through out of court methods is not affected by Section 316. 15 SECTION D TRADING DEBTS (a) Is it usual in this economy for suppliers of goods or services to supply those goods or services to corporations on credit? It is common for suppliers of goods in Pakistan to supply goods on credit. This practice also applies to suppliers of services but is less common. (b) If so, what would be the average credit period of time? The average credit period would be 30 to 60 days. (c) Is it possible and/or usual in this economy for a supplier to require security over property of the corporation for the supply of goods or services? It is possible for a supplier to ask for security but this is commonly not done. (d) If so, is the form of supply known as ‘retention of title’ practised and recognised in this economy and is it enforced? This form of supply where title is retained by the supplier is not known in Pakistan. 16 SECTION DD EQUIPMENT LEASING (a) To what extent is this type of business ‘finance’ technique practised in this economy? This mode of financing was introduced only some years ago and is gradually gaining ground but is at the moment confined to office equipment ie computers etc. and not to heavy machinery. (b) If default is made what are the rights of the owner of the property to recover the leased property? These rights are as per the terms of the agreements. It is standard to provide that the owner can forthwith take possession of the property and freely dispose of it. (c) Does the exercise of these rights require court process? In the event of hindrance by the borrower recourse would be to the Banking or Civil Court. (d) How effective in actual practice is the process of recovery (list any relevant impediments, such as the right of access to the place where the equipment is situated; the right to physically take the equipment away from the place; and so forth)? The right of access and physical take-over exists in most arrangements but non- cooperation by the lessee can cause impediments including difficulty of access or physical removal. (e) What effect does the commencement of insolvency proceedings in respect of the corporate debtor have on the recovery of leased property? Commencement of insolvency proceedings has no effect on the recovery of leased property where recovery is made directly pursuant to the agreements, but where intervention of the court has been sought and proceedings are pending, such proceedings may be stayed or transferred to the court hearing the winding up petition. (f) Is it usual for an equipment lease to be supported by guarantees (sureties) for payment of lease charges; default penalties; and so forth? The common form of equipment lease as evidenced in Pakistan is normally not supported by guaranties or sureties or payment of lease charges and default penalties. 17 SECTION E COLLECTION AND RECOVERY OF UNSECURED DEBT E1. Negotiations (a) Where a corporate borrower is in financial difficulty and an unsecured debt has become due, would it be usual or customary for an unsecured creditor (particularly, a bank creditor) and/or the corporate borrower to attempt to negotiate some suitable arrangement for repayment of the debt before the creditor invokes legal recovery methods? Please note that unsecured debt is not allowed under SBP regulations. However, in the event of financial difficulty of a corporate borrower it would be customary for an unsecured creditor to seek an out of court settlement prior to taking recourse to the courts. E2. Enforcement (a) What mechanisms are available under the legal system of this economy for unsecured creditors to collect debts owed to them by the corporate debtor? An unsecured creditor may file a suit for recovery under the civil law and obtain a decree for recovery which may include a garnishee order under Section 46A of the Civil Procedure Code. An unsecured creditor may also initiate winding up proceedings under the Companies Ordinance. (b) In practice, which method(s) of recovery of unsecured debts are most commonly employed by unsecured creditors of a corporate debtor? Unsecured creditors mostly take resort to civil suits. E3. Effectiveness of Judicial System (a) How effective is the judicial and court system for the purposes of debt collection? The judicial system is generally very slow. E4. Effect of Insolvency Proceedings (a) What effect, if any, does the commencement of insolvency proceedings against a corporate debtor have on debt recovery proceedings? Upon presentation of petition for winding up the Court may upon an application by the company, or a creditor or contributory stay further proceedings in any suit or proceeding against the company (Sec.313). In the absence of such order the proceedings continue. (b) What effect, if any, does the formal pronouncement of an insolvency administration in respect of the corporate debtor have on debt recovery proceedings? Once a winding up order is made or provisional manager appointed no proceedings can be commenced or proceeded with against the corporate debtor without leave of the Court and subject to such terms as the Court may impose and any pending proceedings may be transferred to the Court which has passed the order for winding up (Sec.316). 18 SECTION F CIVIL/PENAL SANCTIONS (a) Are there civil or penal/criminal sanctions in the legal system of this economy in relation to the incurring and non-payment of debts by corporate debtors (for example, some type of sanction—such as the concept of ‘insolvent trading’— to which the directors of the corporate debtor may be subject)? Only where fraudulent or criminal actions are involved. (b) What are these sanctions? Under the Ordinance where during the course of a winding up it appears that: • any officer of the company or past or present liquidator has misapplied any property or is in breach of trust in respect thereto the Court may on an application of a liquidator or creditor order such person to repay or restore the money with a surcharge as the Court deems appropriate (Sec.412). • any business of the company has been carried on with intent to defraud the creditors or for any fraudulent purpose, the Court may on an application by a liquidator or creditor or contributory declare any person who was knowingly party to the fraud as being personally liable without limitation for the debt or other liabilities of the company (Sec.413). Liability under Sections 412 and 413 may be extended to persons who were directors at the relevant time (Sec.414). Imprisonment of up to five years and fine of up to Rs. 20,000 is prescribed for officers of a company under liquidation for: • obtaining credit on false pretences or by means of other fraudulent actions or for disposing of or transferring the property of the company with intent to defraud creditors (Sec.415). • failing to keep proper books of account (Sec.416). • falsification of books (Sec.417). • being guilty of criminal acts (Sec.418). • intentionally giving false evidence (Sec.419). • failing to give full and complete information to the liquidator or for making complete disclosure to the liquidator or concealing facts and property from the liquidator or removing property of the company, falsifying or tampering with the record of the company or for making false representation to the creditors for the purpose of arriving at an arrangement (Sec.420). Under Sec.19 of the Banking Companies Act, where a corporate debtor is guilty of a fraudulent act with respect to mortgaged/hypothecated property, or making of a false statement in an application for a loan or other financing or obstructing the execution of a decree or of issuing a cheque which is dishonoured, the chief executive of the corporate debtor by whatever name called and any director or officer involved is deemed guilty of the offence and liable to be proceeded against and punished. Penalty for these offences is imprisonment of up to one year or fine or both. (c) Do any of these sanctions have the effect of encouraging the directors of a corporate debtor to seek protection for the corporate borrower under the insolvency law regime? No such protection is available in the insolvency law regime. 19 (d) Does the presence of the possible application of any of these sanctions create a problem if a corporate debtor which is in financial difficulty or insolvent seeks to negotiate an informal work out with creditors? The sanctions become applicable once formal application for recovery or winding up are initiated and therefore cannot stand in the way of an informal workout which would be initiated prior to any formal action being initiated. 20 SECTION G ATTITUDES TOWARD FINANCIAL DIFFICULTY AND INSOLVENCY [In this part we seek to discover underlying attitudes to debt; financial difficulty; and insolvency as it affects both corporate borrowers and lenders. The response to this section may, therefore, be expected to be founded on general impressions.] G1. From the Position of A Corporate Borrower (a) If a corporate debtor is in financial difficulty, is there an attitude of ‘concealment’ or ‘denial’ toward the admission or exposure of that financial difficulty? Normally a corporate debtor in financial difficulty will attempt to conceal or deny the debt. (b) If so, is the reason for this based on cultural or other factors? Cultural factors to the extent that a social stigma is attached to such difficulty. The desire to put off the attending and consequential problems that occur once the issue of financial difficulty gets publicly known also play a part. Also in a large number of cases there is mala fide in that the projects for which loans are taken are unviable right from their inception and therefore there is a continued effort to cover up. (c) Is it likely that a corporate debtor would: (i) volunteer the fact of its financial difficulty to a lender or group of lenders; or Not likely. (ii) admit or concede it only if and when confronted by a lender or group of lenders? Yes, often after avoiding the confrontation. (d) If a corporate debtor is in financial difficulty, is it likely that the corporate debtor would: (i) do nothing; Do nothing for as long as the admission can be possibly deferred. (ii) seek expert assistance and advice; or Probably try to exert influence. (iii) accept the appointment by a lender of an outside expert/advisor? Only if forced to do so. 21 (e) If it was agreed between a lender and a corporate debtor that an expert/advisor would be appointed, is it likely that a corporate debtor would give the expert/advisor unrestricted access to all relevant financial and other information regarding the corporate debtor? Not likely. (f) In that situation, is it likely that the financial and other information regarding the corporate borrower would be: (i) complete; and Probably not. (ii) accurate (particularly regarding the valuation of assets and the assessment of liabilities)? Probably not. G2. From the Position of Lenders (a) Is it more common that the financial difficulty of a corporate borrower will be: (i) volunteered by a corporate debtor; or Voluntary admission or information is not likely. (ii) discovered by a lender (and, if so, how)? A lender usually discovers the existence of a corporate borrower’s financial difficulty when the borrower defaults on repayment either to the lender itself or to other lenders. (b) If a lender becomes aware that a corporate debtor is in financial difficulty, is it likely that the lender would seek to investigate the financial crisis of the corporate debtor itself and employ an expert/advisor to investigate the financial position? Yes. (c) If so, is the expert/advisor likely to be: (i) an independent professional; or (ii) an ‘in-house’ employee of the lender? The expert/advisor is usually an in-house employee of the lender. (d) Is it likely that information regarding the financial position of a corporate borrower as discovered from the work of an expert/advisor would be: (i) kept secret from other lender/s or creditors; (ii) disclosed to other/selected lenders? Normally a lender making the discovery would keep it to itself, but depending on the circumstances of each case and inter creditor relations the information may also be shared. 22 (e) If there were 2 or more lenders (not in a syndicate) involved with the same corporate borrower, is it likely that they would: (i) join together to share information and endeavour to work out a common approach to the financial problems of the corporate borrower; or (ii) act secretly and independently of one another? This again depends on the relationship between the creditors. Expediency would demand that to save a dual or multiple exercise joint action would be initiated. (f) If there was a group of lenders (whether in a syndicate or not) involved with the same corporate borrower, is it likely that one of them would offer or seek to be the leader on behalf of them all? In a syndicate it is common for a lead bank to assume the role of negotiation. In other cases this may happen. (g) If so, is it likely that such a proposal would be agreed to by the other lenders? Probably. (h) Is it likely that local lenders would have employees who are experienced in informal work outs? Local lenders usually have employees who are experienced in informal work outs. (i) If there was foreign bank lending involved, is it likely that domestic lenders would: (i) combine with; or (ii) act independently of the foreign lender/s? Where foreign bank lending is involved the local bank will normally act in combination with the foreign banks. (j) Is it likely that ‘junior’ or ‘minor’ lenders might seek to trade their debt? Trading of debt by ‘junior’ or ‘minor’ lenders is not likely nor likely to meet with success. 23 SECTION H WORK OUTS The concept of the informal ‘work out’ might be said to be based on a combination of the following elements: • the fact that there is a significant size of debt owed to a number of different creditors (mostly these would be bank or other financial institution creditors) and the present inability of the corporate debtor to service that debt; • the attitude that it may be preferable to negotiate an arrangement for the financial difficulties of the debtor both between the debtor itself and the financiers (and perhaps other lesser creditors) and also between the financiers themselves; • the availability of relatively sophisticated refinancing, security and other commercial techniques that might be employed to alter, re-arrange or re-structure the debts of the corporate debtor or the corporate debtor itself; • the sanction that if the negotiation process cannot be started or breaks down there can be relatively swift and effective resort to the application of an insolvency law; and • the prospect that there may be a greater benefit for all through the negotiation process than by direct and immediate resort to the insolvency law. In relation to these elements: (a) Identify which of these elements are appropriate and relevant to this economy; The elements listed at 1,2 and 5 are relevant to Pakistan. (b) Which of these elements might be considered absent, ineffectual or of little consequence in this economy? Elements listed at 3 and 4. (c) Which of these elements would be viewed as the least persuasive if a work out was contemplated? Elements listed at 3 and 4. (d) Are there any other elements that are relevant to this issue in this economy? Political pressures for a negotiated settlement. This is particularly relevant in the case of lenders subject to Government control such as public sector banks and DFIs. 24 SECTION I INSOLVENCY LAW REGIME [Note: It would be helpful in this section if, where it is relevant to the answer, the relevant sections or articles of the insolvency law were identified] I1. Underlying Philosophy (a) What is the underlying philosophy of the insolvency law of this economy? (For example is it distributive, rehabilitative or penal?) The Pakistan insolvency law is based on a mixed philosophy with an emphasis on distribution. (b) Are there elements of more than one philosophy present in the insolvency law of this economy? Yes. (c) Briefly describe the relevant elements, and if applicable, any penal sanctions available. Distributive – the main emphasis of the Pakistan corporate insolvency regime is on distribution, the object being to apportion liability and settle as much of the debt as possible (Sec.349). The Banking Companies Act also lays emphasis on recovery of debt and distribution. Rehabilitative – Parts IX and X of the Ordinance provide for rehabilitation. This may be effected by appointment of a manager or receiver (Sec.137), arrangement and reconstruction (Sec.284), appointment of an administrator (Sec.295) or declaration of the corporate borrower as a sick unit (Sec.296). Penal – there is also an element of penal action where fraudulent acts have led to insolvency. In such cases penal sanctions such as imprisonment and fines are applicable. The following sections of the Ordinance set out offences which are antecedent to or arise in the course of winding up: • Sec.412 – power of court to assess damages against delinquent directors. • Sec.413 – liability for fraudulent conduct of business. • Sec.415 – fraud by officers of company in liquidation. • Sec.416 – liability where proper accounts not kept. • Sec.417 – penalty for falsification of books. • Sec.418 – prosecution of delinquent directors. • Sec.419 – penalty for false evidence. Section 19 of the Banking Companies Act sets out the following offences which are subject to penalty under the Act: (1) (a) dishonest breach of the terms of letter of hypothecation or trust receipt. (b) creation of a further charge or dispossession of a property once it has already been charged in favour of a banking company. (2) making a materially false statement in an application for loan or finance. (3) resistance or obstruction of execution of a decree. (4) dishonest issuance a cheque which is dishonoured. 25 I2. Jurisdiction in Insolvency Matters (a) In which judicial category is insolvency law classified in the legal system of this economy? (For example civil, commercial or administrative.) Insolvency law in Pakistan is classified primarily in Commercial law but also in Civil law and with the enactment of the Banking Companies Act also in the Banking law. (b) Which Courts, tribunals or administrative bodies in this economy are competent to exercise jurisdiction in insolvency matters? High Court and Banking Tribunals headed by a District judge or a judge of the High Court and Civil Courts. (c) Are any limitations placed on the jurisdiction of any of these bodies? Jurisdiction of Banking Tribunals is limited to cases by and against banks and DFIs. I3. Types of Insolvency Procedures (a) What types of insolvency procedure are available in the legal system of this economy for the administration of corporate debtors in financial difficulty? (For example bankruptcy, liquidation (winding up), receivership, restructuring or other forms of administration.) The following insolvency procedures are available in the Pakistan legal framework for administration of corporate debtors: Under the Ordinance: (1) Winding Up by the Court (Secs.275 and 305 (e)) (A) Winding Up by the Court under Sec.275 pursuant to an order granted on a complaint for fraud or mismanagement (Sec.290) (B) Winding Up by Court under Sec.305. (2) Reconstruction (Sec.284), (3) Appointment of a receiver or manager (Sec.137), (4) Appointment of an administrator (Sec.295), (5) Declaration of a company as a sick unit and order for rehabilitation (Sec.296) Under the Banking Companies Act: • Recovery under Section 9 of the Act. • The Code of Civil Procedure, 1908. • Suit for recovery. It may be pointed out that there is a carve out for banking and insurance companies, the insolvency procedures for which are set out in the Banking Companies Ordinance , 1962 and the Insurance Act, 1938 respectively. The salient features of these procedures are given below: Banking Companies Ordinance, 1962 Part III of this 1962 Ordinance lays down special provisions affecting insolvency procedures against banking companies. These are: 26 (a) the grant by the High Court of a stay of proceedings against a banking company on an application by such company accompanied by a report of the SBP showing that in the opinion of the SBP the banking company will be able to pay its debts if the stay is granted. (Sec.45 of the 1962 Ordinance). (b) restriction on compromise or arrangement between banking companies and creditors unless the same is certified by the SBP as being workable and not detrimental to the interests of the depositors. (Sec.46 of the 1962 Ordinance). (c) application by the SBP under Section 47 of the 1962 Ordinance to the Federal Government for an order of moratorium in respect of the banking company and order of moratorium by the Federal Government staying the commencement or continuance of all actions against the banking company for a fixed period of time, not to exceed six months.(Sec.47 (2) of the 1962 Ordinance). During the period of moratorium the SBP may in the interest of depositors, pubic interest,, better management of the banking company prepare a scheme for the reconstruction of the banking company or for the amalgamation of the banking company with another banking company. (Sec.47 (4) of the 1962 Ordinance). (d) procedure for amalgamation (Sec.48 of the 1962 Ordinance). (e) Winding up by the High Court where the banking company is unable to pay its debts or an application for winding up is filed by the SBP.(Sec.49 of the 1962 Ordinance). (f) appointment of Court Liquidator (Sec.50 of the 1962 Ordinance). (g) Notice to preferential claimants (Sec.55 of the 1962 Ordinance). (h) preferential payments to depositors (Sec.58 of the 1962 Ordinance). Insurance Act, 1938 Sections 53 to 61 of the 1938 Act lay down special provisions affecting insolvency procedures against insurance companies. These are: Sec.53 – Winding up may be ordered by the Court in accordance with the Companies Ordinance, 1984 on the following additional grounds: (a) if with the sanction of the court a petition is presented by shareholders not less than one-tenth in number of the entire number of shareholders and holding not less than one-tenth of the whole share capital or by not less than fifty policy holders of policies held for at least three years and of a total value of not less than Rs. fifty thousand. (b) application of winding up by the Controller of Insurance. • Sec.54 – Bar on voluntary winding up. • Sec.55 – valuation of liabilities. • Sec.56 – value of the assets and liabilities of the insurer in respect of life insurance to be ascertained separately from the value of any other assets and liabilities and not to be applied to the discharge of any liabilities other than those for life insurance. • Sec.58 – scheme for partial winding up of insurance companies. • Sec.59 – return of deposits. • Sec.60 – notice of policy values. • Sec.61 – power of court to reduce the amounts of the insurance contracts. (b) Briefly describe the main features of each type of insolvency procedure for corporate debtors: including, for example the manner in which each procedure is initiated and administered, and the aims of each procedure. Winding Up is initiated where a company is unable to pay its debts normally by a creditor either directly under Section 305 or through the Authority under Sec.275 by virtue of an order under Sec.90. Winding up may be initiated through a special resolution by the company under Section 358 (b), but this is not an insolvency procedure. The procedure is administered by a liquidator singly or together with a committee of inspection. In some cases 27 where the Court feels that although the facts would justify the making of a winding up order, the making of such order would unfairly prejudice the creditors, the Court may make such order for regulating the affairs of the company as it thinks fit including an order for change in management. The aim of the procedure is to liquidate and to distribute the assets to the creditors such that the interests of the creditors as also those of the employees and tax authorities are safeguarded. Reconstruction can be initiated under Section 284 of the Companies Ordinance on application to the Court by any creditor or the company or a member or in the case of a company being wound up by the liquidator. The aim of the procedure is to reorganise the company and to protect the interest of the creditors. Appointment of a receiver or manager can be initiated by an application to the court where a financing document provides for such appointment. The aim of the procedure is the take over of the assets of the company for settling the debt. A receiver may also be appointed under Sec.16 of the Banking Companies Act by the court itself where the plaint relates to recovery of any amount through a sale of charged property. Appointment of an administrator can be initiated through a representation to the Securities and Exchange Commission of Pakistan (SECP) by a creditor(s) having an interest equivalent to sixty percent of the paid up capital of the company (Sec.295). The aim of the procedure is to prevent mismanagement. The Federal Government may declare a company owning an industrial unit which is facing financial problems a sick company and order a plan for its rehabilitation (Sec.296). The aim of the procedure is rehabilitation of the company. Recovery under the Banking Companies Act can be initiated by instituting a suit in the Banking Court set up under Sec.9 of the said Act. The aim of the procedure is to recover loans. (c) Identify the relevant legislation governing each type of insolvency procedure available for corporate debtors. The Companies Ordinance 1984 for winding up, arrangement or management, appointment of receivers/administrators, and rehabilitation. Banking Companies (Recovery of Loans, Advances, Credits and Finances) Act, 1997. The Code of Civil Procedure, 1904 for recovery of loans. I4. Commencement of Insolvency Procedures (a) Is it usual or customary in respect of a corporate debtor which is insolvent to attempt to negotiate an informal administration before formal insolvency procedures are commenced? A lender would normally attempt to negotiate an informal administration before initiating any formal proceedings. However, such attempts are usually not successful. (b) In relation to each type of insolvency procedure available in the legal system of this economy, who may commence the procedure? (For example the corporate debtor, secured creditors, unsecured creditors, directors, shareholders, the State.) 28 Winding up through the court can be commenced on an application by the Registrar pursuant to an order under Sec.90 passed on a complaint by creditors having interest equivalent in amount to at least 20% of the paid up capital of the company or under Sec.305 by the company, any creditor or contributory (Sec.309). Reconstruction can be commenced on an application by a creditor or the company or a member. Appointment of a receiver or manager can be obtained by any person under any powers contained in any instrument i.e. by a creditor by virtue of a financing document. A receiver may also be appointed under Sec.16 of the Banking Companies Act by the court itself where the plaint relates to recovery of any amount through a sale of charged property. An administrator can be appointed upon representation by a creditor having interest equivalent to sixty percent of the paid up capital of the company. A company may be declared a sick unit and its rehabilitation ordered by the Federal Government. Suit for recovery under the Banking Companies Act can be filed by any banking company, creditor, secured or unsecured, or customer. Suit for recovery through the courts can be filed by any creditor, secured or unsecured. (c) On what basis may each type of insolvency procedure be commenced, or what requirements must be satisfied before the procedure may be commenced? (For example non-payment of debts; balance sheet/cash flow insolvency; trading losses; resolution by directors to enter insolvency procedure.) (1) Winding up can be commenced pursuant to an order under Sec.90 passed on a complaint by creditors having interest equivalent in amount to at least 20% of the paid up capital of the company or under Sec.305 if a creditor to whom the company is indebted in a sum exceeding one per cent of its paid up capital or Rs. 50,000, whichever is less has raised a demand and the demand is not met for thirty days after receipt of demand, or if a decree or order of Court in favour of a creditor is not satisfied or if it is proved to the satisfaction of the Court that the company is unable to pay its debts. Voluntary winding (Sec.358) up can be commenced when the company through a special resolution decides to wind up the company but is unable to file a declaration that it is insolvent. Voluntary winding up is not strictly an insolvency procedure. (2) Sanction for reconstruction or arrangement or compromise can be obtained where a majority in number representing three fourth in value of the creditors or class of creditors or members vote for reconstruction or arrangement or compromise (Sec.284 (2)). (3) Appointment of a receiver or manager can be through order of a court in a debenture holders’ action or under any powers contained in any instrument or under Sec.16 of the Banking Companies Act or under Order XL of the Civil Procedure Code. (4) Administrator can be appointed through a representation by a member(s) or a creditor(s) having interest equivalent to sixty percent of the paid up capital of the company on grounds of mismanagement or negative financial state of the company. (5) Company may be declared a sick unit and subjected to rehabilitation by the Federal Government where company is facing financial problems. 29 (6) Recovery proceedings under the Banking Act can be filed by a banking company when there is default in payment. (7) Recovery proceedings before the Court can be filed by any creditor when there is default in payment or for a material breach of the financing agreements which breach would normally include provisions relating to the ability of the corporate debtor to meet its financing obligations to a lender. (d) How is each type of insolvency procedure commenced? (For example by application to the Court, by administrative act, by written notice to the business organization.) Application for winding up is to be made by way of a petition to the Court (Sec.309). Reconstruction, arrangement or compromise may be entered into by application to the Court (Sec.284). Appointment of receiver or manager may be commenced by application to the Court or directly where power to so appoint is conferred by agreement. Appointment of administrator is through a representation to the SECP (Sec.295). Declaration of a company as a sick unit is made by the Federal Government suo moto (Sec.296). Recovery under the Banking Act can be commenced by instituting a suit in the Banking Court. Recovery through the Court can be commenced by instituting a suit in the Civil Court. (e) What is the usual time period between the commencement of formal insolvency proceedings and the declaration or imposition of a formal administration on the corporate debtor? Winding up-appointment of liquidator – Prescribed period under the Ordinance is about three to three and a half months. However, in practice this period is very often not adhered to. Recovery suit under the Banking Act – leave to defend to be granted within twenty one days of an application to defend and suit to be disposed within ninety days after leave to defend has been granted. An appeal may be preferred against a decree of the Banking Court within thirty days of the decree and the same must be decided within ninety days of the date of admission. In practice the time limitations are not adhered to. Recovery through a civil suit – up to three years in the first instance. (f) How effective is the judicial or court system (or administrative system) in relation to the handling of formal insolvency proceedings? In theory time limits are prescribed by law; however, in practice these limits are not adhered to and there are delays. I5. Effect of Insolvency Procedures (a) In relation to each type of insolvency procedure available in the legal system of this economy, what is the effect on the corporate debtor, its 30 constituent parts and its business relationships of initiation of the relevant insolvency procedure? (For example how does initiation of the insolvency procedure affect: • the powers of management of the debtor; • the interests of owners/shareholders of the debtor; • contracts to which the debtor is a party; • legal proceedings to which the organization is a party; • remedies available to persons in contractual (non-debt) relationships with the debtor); A. Under the Ordinance Winding Up The powers of management of the debtor: From the date of commencement of the winding up, the official liquidator or the liquidator is deemed to have taken the place of the directors, chief executive and managing agents of the company as the case may be (Sec.402 ) and all the powers of the directors and chief executive and other officers cease except for the purpose of passing a resolution for winding up and appointment of liquidator (Sec.378). The debtor therefore relinquishes the powers of management upon appointment of the liquidator. • The interests of owners/shareholders of the debtor Under Sec.406 every transfer of shares and alteration in the status of a member made after the commencement of winding up shall, unless approved by the liquidator, be void. Shareholders also relinquish their right to bind the company through special resolution • Contracts to which the debtor is a party; Contracts will continue, but under Sec.407, the liquidator has the power with the leave of the Court to disclaim onerous contracts. Legal proceedings to which the debtor is a party: Upon a winding up order being issued no suit or other legal proceeding shall be proceeded with or commenced against the company except by leave of the Court and the Court which is winding up the company shall have jurisdiction to entertain or dispose of any suit proceeded by or against the company (Sec.316 of the Ordinance). • Remedies available to persons in contractual (non-debt) relationships with the debtor); In a winding up the liquidator has the power to disclaim onerous contracts. This power must, however, be exercised within twelve months of the commencement of winding up. (Sec.407). Reconstruction, Arrangement or Compromise An application for reconstruction, arrangement or compromise under Sec.284 does not have any formal effect on the powers of the management, the rights of the shareholders or owners, contracts or remedies available to persons who have a contractual relationship with the company. However, under Sec.284(5) the Court may at any time after an application has been made to it for arrangement or compromise stay the commencement or continuation of any suit or proceeding against the company. However, once a scheme is 31 approved by the Court, depending on the nature of the scheme the Court may make provision for the following matters: (a) the transfer to the transferee company of the whole or any part of the undertaking, properties or liabilities of any transferor company; (b) the allotment or appropriation by the transferee company of any shares, debentures, policies, or other like interests in that company which are to be allotted or appropriated by that company to or for any person; (c) the continuation by or against the transferee company of any legal proceedings pending by or against any transferor company; (d) the dissolution without winding up of any transferor company; (e) the provisions to be made for any persons who dissent from the compromise or arrangement; (f) such incidental, consequential and supplemental matters as are necessary for giving effect to the reconstruction or arrangement. Appointment of Receiver or Manager The appointment of a receiver or manager will affect the powers of the management to the extent of the mandate conferred on the receiver by his instrument of appointment and in particular with reference to powers over the property or assets of the company. The appointment of a receiver or manager has no effect on legal proceedings by or against the debtor company, contracts to which the debtor company is a party or remedies available to persons in contractual relationship with the debtor company. Appointment of Administrator The Powers of Management of The Debtor From the date of appointment of an administrator under Sec.295, the management of the affairs of the company shall vest in him and all the directors and persons in whom management vested prior to his appointment shall cease to function and hold office. • The Interests of Owners/Shareholders of the Debtor The interests of owners/shareholders are not affected by the appointment of an administrator. • Contracts to Which The Debtor is A Party Where it appears to the administrator that any purchase or sales agency contract has been executed or employment given to benefit any director or other person in whom the management vested or his nominees to the detriment of the company the administrator may with the written approval of the SECP terminate such contract or employment. Legal Proceedings to Which The Debtor is A Party Appointment of an administrator does not affect legal proceedings by or against the debtor company. • Remedies Available to Persons in Contractual (Non-Debt) Relationships with The Debtor); The appointment of an administrator does not have any effect on remedies available to persons in contractual relationships with the debtor company. However, no suit or 32 prosecution lies against the Administrator for acts done in good faith in pursuance of his functions. Declaration of A Company as A Sick Unit Declaration of a company as a sick unit does not have any formal effect on the management powers, legal proceedings by or against the company, contracts or remedies therefore. However, once a rehabilitation plan is approved, the same may provide for the following: (a) reduction of capital; (b) alteration of share capital and variation in the rights and obligations of shareholders; (c) alteration of loan structure, debt rescheduling etc.; (d) acquisition or transfer of shares of persons who are or have been sponsors or otherwise managing the affairs of the company; (e) issue of further capital; (f) removal and appointment of directors or other officers of the company; (g) amendment, modification or cancellation of any existing contract; (h) alteration of the Memorandum and Articles of Association or of accounting policy and procedure. B. Under the Banking Companies Act Recovery proceedings under the Banking Companies Act do not impact on the management or running of the company and have no formal effect on legal proceedings by or against the debtor company, rights of shareholders or owners, contracts or remedies available to persons in a contractual relationship with the debtor company unless an order affecting any one of these is passed by the Banking Court. C. Under the Civil Law Recovery proceedings in any civil court do not impact on the management or running of the company and have no formal effect on legal proceedings by or against the debtor company, rights of shareholders or owners, contracts or remedies available to persons in a contractual relationship with the debtor company unless an order affecting any one of these is passed by the Court. (b) If another insolvency procedure has already been initiated in relation to the corporate debtor, how does the initiation of a second procedure affect the first? This depends on the discretion of the Court before whom the proceedings are pending. If an insolvency procedure is pending any second procedure is likely to be clubbed with the first procedure. 33 SECTION J CASE MANAGEMENT OF INSOLVENT ENTERPRISES J1. Administration of Insolvency Procedures Generally (a) In relation to each type of insolvency procedure available in the legal system of this economy, what are the administrative organs/entities involved in the implementation and management of that procedure? (For example a trustee, liquidator, receiver, government official.) Winding up – Liquidator singly or together with a committee of inspection comprising of creditors or their nominees. Reconstruction/ arrangement – the company itself. Appointment of administrator – the administrator. Appointment of receiver manager – Receiver or Manager. Rehabilitation following declaration as sick unit – person authorised by the Federal Government. (b) What qualifications must each type of administrator of insolvency procedures possess? Is there a system of regulation of insolvency administrators in this economy? Winding up – liquidators are chosen from a list of persons recommended by the SECP. Receiver or manager – any person may be appointed other than a minor, person of unsound mind, body corporate, a director of the company, an undischarged insolvent, a person disqualified by a Court for the said purpose. Administrator – to be selected from a panel maintained by the SECP on the recommendation of the SBP. (c) Are the creditors of a corporate debtor permitted to participate in the administration of the relevant insolvency procedure, and if so, how? (For example are the creditors permitted to assist the administrator, or supervise or dictate the conduct of the administration?) The creditors may participate by order of the Court through a committee of inspection (Sec.331), which acts with the liquidator. J2. Powers of the Administrator (a) In relation to each type of insolvency procedure available in the legal system of this economy, what are the powers given to each type of administrator by statute, at general law or pursuant to the terms of the appointment? (for example power to carry on the business of the organization, to pay creditors, to compromise claims of or against the debtor, to issue or defend legal proceedings, to obtain credit, to sell property, to execute documents on behalf of the debtor.) 34 Winding up – the liquidator has with the sanction of the Court or the committee of inspection the following powers: (a) to institute or defend any legal proceedings in the name and on behalf of the company. (b) to carry on the business of the company so far as may be necessary for the beneficial winding up of the company. (c) to pay any classes of creditors in full. (d) to make any compromise or arrangement with creditors. (e) to compromise all calls and liabilities to calls, debts and liabilities. (f) to sell the movable and immoveable property and things in action of the company by public auction or private contract. Additionally subject to any general or specific direction of the Court or of the committee of inspection, the liquidator has the power to: (a) to do all acts and deeds on behalf of the company. (b) to prove rank and claim in the bankruptcy, insolvency or sequestration of any contributory for any balance against his estate and to take all actions in respect thereto. (c) to draw, accept, make and endorse any bill of exchange or promissory note in the name and on behalf of the company. (d) to raise money on the security of the assets of the company. (e) to take out in his official name letters of administration to any deceased contributory and to do any other necessary act for obtaining payment of any money due from a contributory or his estate. (f) to appoint an agent to do any business which the agent cannot do himself. (g) to do all other acts as may be necessary for winding up the affairs of the company and distributing its assets. Receiver – such powers to manage the property of the company as are assigned by the court or through instrument of appointment. Administrator – manage the affairs of the company and exercise all powers of the directors or other persons in whom the management is vested including the power to terminate with the approval of the SECP any contract or employment which the Administrator deems detrimental to the interest of the company. (b) To what extent and in what circumstances may each type of insolvency administrator seek assistance, advice or direction in the conduct of the administration, and from what sources? (for example the Court, his appointor, the creditors of the debtor, a solicitor, accountant or other relevant person.) Winding up- the liquidator may subject to the general direction of the committee of inspection or the Court appoint an agent to do any business which he is unable to do himself (Sec.333 (2) (f)) or appoint a person entitled to appear before the Court or such person as may be prescribed to assist him in the performance of his duties. (Sec.335). A receiver may apply to the Court for directions in relation to any matter arising in connection with the performance of his functions. An administrator may seek instructions from the SECP both with regard to the manner in which the management of the company should be conducted as well as in relation to any matter arising in the course of such management. 35 J3. Duties of the Administrator (a) In relation to each type of insolvency procedure available in the legal system of this economy, what are the duties imposed upon each type of administrator by statute and at general law? (for example a duty to take possession of assets of the debtor, to realise those assets, to discharge the debt owed to his appointor, to call for proofs of debts owed to creditors, to adjudicate upon claims of creditors, to apply available assets in discharge of those claims, to report on the conduct of the debtor by the proprietors.) Winding up – the liquidator shall upon his appointment: (a) obtain a statement of affairs setting out details of the company in respect of the company ‘s assets, debts and liabilities, names and addresses of creditors, debts owed to the company and such other particulars as may be prescribed by the Court (Sec.328). (b) submit a preliminary report on the affairs of the company to the Court (Sec.329). (c) take into his custody and control all the books and papers, property, effects and actionable claims belonging to the company or to which the company appears to be entitled (Sec.330) (d) summon meetings of creditors and contributories to determine whether a committee of inspection should be set up and to determine the membership of such committee (Sec.331). (e) apply to the Court for summary determination of any proceedings pending in the said Court in respect of any debt due to the company. (Sec. 424). (f) exercise any and all of his powers for the effective winding up of the company such as call for proofs of debts owed to the creditors, pay any classes of creditors in full, make any compromise or arrangement with creditors or compromise any calls and liabilities to calls, debts and liabilities (Sec. 421) administer and apply assets in discharge of those claims (Sec. 388 (4)). (g) subject to any directions given by the Court distribute funds left after providing for the expenses of the winding up among the creditors or contributories. (Sec. 349). Additional powers and duties of the liquidator in a voluntary winding up: (a) exercise the powers of the Court under the Companies Ordinance of settling a list of contributories, and making calls. (b) summon general meetings of the company and creditors for obtaining sanction of the company by special resolution or for any other purpose he may think fit. (Sec. 387). Duties of a Receiver – management and disposal of the property of the Company and such other duties as the Court may assign. Duties of Administrator – management of the affairs of the company and any other duties assigned by the SECP. J4. Breach of Duty and Liability of Administrators (a) What remedies and/or sanctions are available in the legal system of this economy in respect of breaches of duty or transgressions committed by each type of insolvency administrator? Winding up – Any liquidator making a default in complying with the provisions of the Ordinance may be ordered by the Court to make good the default or make amends within a specified time frame at the liquidator’s cost (Sec.435). Any liquidator retaining any money which should have been paid by him into the company’s liquidation account shall in addition 36 to such money pay surcharge on the amount retained at the rate of 2% per month and be liable to pay any expenses or losses resulting from such failure and be also liable to disallowance of all or part of his remuneration (Sec.432 (8)). Any liquidator failing to make a regular statement to the Court on a pending winding up where proceedings have exceeded one year shall be liable to a fine extending to Rs. 100 for each day of default (Sec.429 (4)). Administrator – The Ordinance does not prescribe any precise penalty. Any administrator involved in any transgression would however be liable under the Civil Procedure Code and for fraudulent acts under the Criminal Procedure Code. Receiver or Manager – The Ordinance does not prescribe any precise penalty. Any receiver involved in any transgression would however be liable under the Civil Procedure Code (Order 40, Rule 4 of the Civil Procedure Code) and for fraudulent acts under the Criminal Procedure Code. (b) Have there been actual instances of breach of duty or transgressions committed by insolvency administrators? (c) If so, give the details of any major cases and a summary of the action taken and the results. 37 SECTION K ASSETS AVAILABLE TO CREDITORS K1. Assets Available to Creditors Generally (a) In relation to each type of insolvency procedure available in the legal system of this economy, what assets of the corporate debtor are available to its administrator to satisfy the claims of its creditors? Winding Up – Contributions by every present member and any past member who was a member within one year before the commencement of the winding up and was a member when the debt was contracted, all movable and immovable assets of the company including negotiable securities. Receiver or Manager – Property/assets that are subject to a charge or are the subject of a suit. Administrator – all property and assets of the company. K2. Avoidance of Past Transaction Affecting the Assets of A Corporate Debtor (a) To what extent and in what circumstances may the administrator of a corporate debtor take steps to recover assets of the debtor by overturning past transactions involving property of the debtor? (for example preferences given to certain creditors over others, invalid charges granted by the debtor, uncommercial transactions entered into by the debtor, profits on sales to and from the debtor at an undervalue or overvalue.) Winding Up Every transfer of shares and alteration in status of a member made after the commencement of winding up shall be void unless it is approved by the liquidator and any transfer of movable or immovable property, including actionable claims, or any delivery of goods if not made in the ordinary course of business or in favour of a purchaser or encumbrancer in good faith if made within one year before the presentation of the winding up petition shall be void against the liquidator (Sec.406). The liquidator may also by leave of Court and within 12 months of the commencement of the winding up proceedings disclaim any property of the company which is burdened with onerous covenants, shares or stocks, unprofitable contracts or other property that is unsalable (Sec.407). Any conveyance, mortgage, delivery of goods, payment, execution or other act relating to property made by or against the company within six months before commencement of the winding up shall which is deemed fraudulent shall be invalid. (Sec.408) Any attachment, distress or execution put in force without leave of court or any sale without leave of court of any of the properties of the debtor company after commencement of winding up shall be void (Sec.410). A floating charge on the undertaking or property of the company created within twelve months of the commencement of the winding up shall be invalid except to the amount 38 of any cash paid to the company at the time of or subsequent to the creation of the charge plus a prescribed surcharge as determined by the SECP (Sec.411). Appointment of an Administrator Where it appears to the administrator that any purchase or sales agency contract has been executed or employment given to benefit any director or other person in whom the management vested or his nominees to the detriment of the company the administrator may with the written approval of the SECP terminate such contract or employment (Sec.295(4)). (b) What powers or mechanisms are available to each type of administrator for investigation of the affairs of the corporate debtor, for examination of persons formerly involved in the management or control of the debtor, and for the discovery of assets of the debtor? Winding Up The liquidator has the power to take into his custody all assets of the company and has the power to cause any persons formerly involved in the management of the company to hand over such assets and to furnish to the liquidator such information and explanations as he may require (Sec.330). The Liquidator may also apply to the Court and ask for examination of officer or director of the company where in the opinion of the Liquidator any fraud has been committed in relation to the Company (Sec.352). Appointment of administrator The administrator may require any person to deliver to him any property, records or documents relating to the company or furnish any information required by him (Sec. 295(9)). (c) What procedures may be employed by each type of administrator for the recovery of assets of the corporate debtor which are available for distribution to creditors? (for example initiation of legal proceedings, compensation from directors.) Winding Up – In the exercise of his powers hereinbefore mentioned the liquidator may seek the assistance of the District Magistrate having jurisdiction over the assets (Sec.330). Administrator – The SECP has power under Section 295(9) to impose a fine of up to Rs. one million and a continuing fine for Rs. one thousand for each day of continuing default on any person failing to deliver any property of the company to the Administrator. 39 SECTION KK FRAUD This section deals with fraud by owners/directors of corporate debtors. It may be ‘hard’ fraud (for example, transfer of assets of the corporate debtor, illegal transfer of money) or “soft’ fraud (for example, false accounting). (a) Are there instances of fraud in relation to a corporate debtor in this economy? Yes. (b) If so, is it usual that instances of such fraud will be revealed when a corporate debtor is in financial difficulty or becomes insolvent? Yes. (c) What is the attitude that is normally taken to such fraud in this economy? There has been so much corporate fraud by well placed political personalities that a certain cover is given to the fraud in the name of political victimisation by the parties in opposition and because of political pressure particularly on the public sector banks and DFIs, it is considered natural for such fraud to be overlooked and covered up. (d) Is it the case, for example, that ‘soft’ fraud may be overlooked (or not pursued) and ‘hard’ fraud may more likely be pursued in this economy? In fact the reverse is more likely as “hard” fraud is protected by political influence and “soft” fraud when detected is allowed to be pursued as it does not attract serious penalties. If there have been instances of fraud: (i) does the insolvency law (or other civil law) provide for possible recovery of the proceeds of (or damage caused by) the fraud; The Ordinance provides for recovery of proceeds or damages caused by fraud (Sec.412). (ii) does the criminal law provide for possible sanctions; Under the Pakistan Penal Code theft and fraud are punishable with imprisonment and/or fine. (iii) how effective is the application of these laws in practice? The application is fairly effective where the cases are pursued in earnest and not made the subject of political influence and pressure. (e) Would it be common or usual that instances of fraud would: (i) be largely ignored; (ii) settled by negotiation; or (iii) pursued through either civil or criminal law sanctions? 40 SECTION L CLAIMS OF CREDITORS L1. Claims Admissible for Payment (a) In relation to each type of insolvency procedure available in the legal system of this economy, what types of claims of creditors are properly admissible for payment in the context of that procedure? (for example liquidated debts, future debts, contingent claims, secured claims, unliquidated claims for damages, interest claims, costs of administration or of legal proceedings, periodical payments, debts owed by guarantors of the business organization.) In a winding up all debts, payable on a contingency and all claims against the company, present or future, certain or contingent, ascertained or sounding only in damages are admissible to proof against the company (Sec.403). In all other formal insolvency proceedings all claims against the company, secured or unsecured are admissible to proof. (b) At what date are the amounts of admissible debts computed? Winding Up – as on the date on which petition for winding up is filed. Receiver/Administrator – as on the date on which payment is to be made. Suit for recovery – as at the date of the order. (c) By what method are claims of creditors proven by those creditors in the context of each type of insolvency procedure? Documentary or oral evidence. (d) How are disputed claims made by creditors adjudicated upon? (for example by the administrator, or by a Court.) By the liquidator in a creditors voluntary winding up, otherwise by the Court. L2. Priority and Payment of Creditors’ Claims (a) In relation to each type of insolvency procedure available in the legal system of this economy, what principles apply to the division of available assets of the corporate debtor among those of its creditors entitled to payment? Is there a basic principle of equality of payment, or are rights of priority of payment enjoyed by secured creditors, or by certain classes of creditors over others? (for example costs of the administration, claims for taxes owed by the debtor, amounts owed to employees of the organization.) Winding up – Secured creditors can stand outside the liquidation proceedings and can rely upon their security or a decree, if they have obtained one provided leave to proceed has been obtained from the Court. In a creditors voluntary winding up all costs, charges and expenses incurred in the winding up including the remuneration of the liquidator shall after settlement of secured debts be paid out of the assets of the company in priority to all other 41 claims (Sec.393). Thereafter, the following preferential payments have priority over other debts: (a) revenues, taxes, cesses, rates and dues from the company to any governmental authority. (b) all wages and salary for employees for a period not exceeding four months and any compensation payable to any workman under any law. (c) all accrued holiday remuneration payable to any employee. (d) insurance contributions (e) amounts due in respect of any compensation or liability to any workman. (f) sums due to any employee from a provident fund, pension fund or gratuity. (g) expenses of any investigation into the affairs of the company (Sec.405). In all other formal insolvency proceedings, once secured creditors have been paid all other creditors rank equally. (b) Give a brief account of the order of priorities, if any, of payment of creditors prescribed by the legal system of this economy. Once secured creditors have been satisfied, all other creditors rank equally. 42 SECTION M INVESTIGATION BY ADMINISTRATORS (a) In relation to each type of insolvency procedure available in the legal system of this economy, what powers are given to, or duties imposed upon, each type of administrator to investigate, discover and report to a Court or to regulatory authorities of the government any breaches of the law by former management of the corporate debtor? Winding up – the liquidator is under obligation to make a full report on the state of affairs of the company as also the need for any inquiry as to any matter relating to the company (Sec.329) and for this purpose the liquidator is empowered to seek the return to the Company of any money, property, books or papers to which the Company is prima facie entitled and which are in the possession of any trustee, employee, officer past or present of the Company (Sec.340); to call for an examination of any person and seek from such person any information pertaining to the Company and to report any fraud that has been committed in relation to the affairs of the Company (Secs.351 and 352). An administrator appointed under Sec.295 has the power to ask any person to produce and deliver to the administrator any property, records or documents relating to the debtor company. (b) What methods are available to each type of administrator to exercise such powers or discharge such duties? (for example examinations of directors, powers to inspect books and records, obligations to report to government authorities.) The liquidator may apply to the court for summoning any officer of the company suspected of holding property of the company (Sec.351) or may apply to the Court for action against any person who has misapplied or retained or become liable for the property or money of the company or who has been guilty of misfeasance or breach of trust in relation to the company (Sec.412). The administrator may report to the SECP any failure by any person to supply to the administrator any property, document or record summoned by him or any act of obstruction in the management by him of the affairs of the debtor company. On such a complaint being made the SECP has the power to fine the defaulting person in an amount up to Rs. one million and a further fine of Rs. one thousand per day for each continuing day of default.(Sec.295(9)). 43 SECTION N TERMINATION OF ADMINISTRATION (a) In relation to each type of insolvency procedure available in the legal system of this economy, by what means may the administration of the corporate debtor be terminated? Winding up – the administration ceases upon dissolution of the corporate debtor. Receiver – by order of the Court or under the terms of the agreement under which the Receiver was appointed. Administrator – by order of the SECP. (b) Who may initiate the termination of each type of insolvency procedure? Administration ceases automatically upon dissolution. Receiver may be terminated upon application by the creditors to the Court or suo moto by the Court or under the terms of the agreement under which the receiver was appointed. Decision for terminating administrator is taken by the SECP. (c) On what grounds may each type of insolvency procedure be terminated? Winding up – upon completion of dissolution. Receiver/Administrator may be terminated where the purposes for which the appointment was made have been fulfilled or where management of the property is no longer required or expedient. (d) What are the consequences for the corporate debtor of termination of the insolvency procedure? (for example to whom does control of the debtor revert following termination of the procedure; or if the debtor no longer exists, what are the procedures for and consequences of its dissolution?) In a winding up the corporate debtor ceases to exist and any money representing unclaimed dividends or undistributed assets in the hands of the liquidator at the date of dissolution is paid into the SBP to the credit of the Federal Government in an account specified as the Companies Liquidation Account (Sec.432). Where a receiver is appointed, the receiver manages the property of the company for so long as he holds this position and may be removed or may cease to hold the position upon order of the court, whereupon the property being managed by him will be managed as per order of the court. Where the SECP determines that purposes for which administrator is appointed have been fulfilled it may terminate the administrator and allow the company to appoint directors and take over management of the company. Where recovery proceedings are initiated, control stays in the hands of the debtor and the fate of the company depends on its situation once recovery has been made. 44 SECTION O CONNECTION BETWEEN DEBTOR AND FORUM (a) In relation to each type of insolvency procedure available in the legal system of this economy, what connection must there be between the debtor organization and the law of the forum? In relation to each type of insolvency procedure available in the legal system of this economy, what connection must there be between the debtor organization and the law of the forum? (for example which of the following requirements, if any, must be satisfied in order for an insolvency procedure to be initiated in relation to a corporate debtor in your economy: • principal residence of debtor; • domicile of the debtor; • nationality of the debtor; • personal whereabouts at the material time; • location of principal place of business; • location of a place of business, branch or agency; • location of assets of debtor; • place where transaction or event took place which gave rise to liability; • place where payment, discharge or performance of liability is due to take place.) Jurisdiction is governed by location of the registered office and place where cause of action or part thereof arose and in respect of immovable property by location of the same. Are any other requirements imposed in relation to a connection between the debtor and the forum before an insolvency procedure may be initiated? If so, briefly describe these requirements. No. (b) Are any particular rules or conditions imposed in the legal system of this economy regarding the opening or commencement of an insolvency procedure in cases where the connection between the debtor and the forum is limited to only one of the factors mentioned in (a) above? In the case of proceedings governed by the Ordinance jurisdiction is limited to a place where registered office is located. In a suit for recovery any one of the factors mentioned in the response to (a) above is sufficient for claiming jurisdiction. 45 SECTION P FOREIGN/CROSS-BORDER ELEMENTS P1. Claims of Foreign Creditors (a) In relation to each type of insolvency procedure available in the legal system of this economy, to what extent are the claims of foreign creditors recognised in the context of administration of that procedure? Foreign creditors are recognised to the same extent as any other creditors (Sec.318). Foreign creditors of a company which is incorporated outside Pakistan and carried on business in Pakistan can prove their claims in the winding up proceedings of the company as an unregistered company. (b) What principles or rules apply to the recognition and admission of claims by foreign creditors? (for example (i) Are claims by foreign creditors subject to particular rules in relation to priority of payment? No. (ii) Do foreign creditors have to satisfy special or additional requirements in order for their claims to be admitted?) No. (c) What law is applied to establish the validity of foreign claims? The governing law agreed upon in the agreement under which the debt arose or Pakistan law where the Court comes to the conclusion that Pakistan law is the most closely connected to the lender. P2. Jurisdiction Over Foreign Assets (a) To what extent does the insolvency law of this economy claim jurisdiction over assets of a corporate debtor situated abroad? A company incorporated outside Pakistan but carrying on business in Pakistan may be wound up as an unregistered company in Pakistan. All creditors of the company which is being wound up whether they are at the place of incorporation or in the towns where it has branches are entitled to a share in the assets. P3. Foreign Insolvency Procedures (a) To what extent do the rules of private international law of the legal system of this economy recognise insolvency procedures commenced in foreign jurisdictions? Insolvency procedures commenced in foreign jurisdictions are not recognised in Pakistan. 46 (b) Under what circumstances, if any, may orders or judgments resulting from foreign insolvency procedures or administrations be recognized or enforced in the legal system of this economy? Any foreign judgement or order including a judgement or order resulting from foreign insolvency proceedings may be recognised in one of two ways-(a) if judgement or order is given in a state which has reciprocal status notified as such by Pakistan, then the order can be enforced as a decree or (b) in all other cases through proceedings filed in Pakistan on the basis of the judgement or order, which judgement or order will be deemed to be conclusive unless the defending party can show that the order or judgement was not given by a court of competent jurisdiction or on the merits of the case or is opposed to natural justice or has been obtained by fraud or is in breach of Pakistan law or is prima facie founded on an incorrect view of international law. P4. Foreign Insolvency Administrators (a) What recognition is accorded in the legal system of this economy to the status and capacity of insolvency administrators (for example trustees, liquidators, receivers) appointed in foreign insolvency procedures? No recognition is accorded to liquidators etc. appointed in foreign insolvency procedures. To obtain recognition ancillary winding up proceedings would have to be initiated in Pakistan. (b) To what extent are foreign insolvency administrators entitled to claim, take control of, and realise or deal with property of the corporate debtor situated within the jurisdiction of the legal system of this economy? Foreign insolvency administrators would first have to initiate ancillary winding up proceedings in Pakistan and control of assets of the corporate debtor in Pakistan would depend on the orders of the court in such proceedings. P5. Foreign Security Holders (a) To what extent does the legal system of this economy recognise the validity of rights of security asserted by foreign creditors over assets of the corporate debtor? To the same extent as of any local creditor. (b) Are any special rules applicable to determine the validity, extent and ranking of such security rights? No. P6. International Conventions (a) To which international conventions having some application in insolvency matters is this economy a party? None, to our knowledge. (b) When were these conventions entered into, and what other states are parties? 47 See (a) above. (c) What observations can be made about the practical results achieved under these international instruments? See (a) above. P7. Cross-Border Insolvency (a) Are there any other particular issues or special problems in the field of cross-border insolvency, not included in the answers supplied above, which have presented themselves before the courts of the legal system of this economy? No. P8. UNCITRAL Model Law on Cross-Border Insolvency (a) Is the government of this economy aware of the UNCITRAL model law on cross-border insolvency, approved by the United Nations in June 1997? Yes. (b) If so, are you aware of whether the government has any proposals to enact the terms of the model law? This has not been made part of domestic law so far nor does any imminent proposal for doing so seem likely.
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