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 country, 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: the Official Liquidator (in the case of winding up by the Court) or Liquidator (in the case of volulntary winding up), singly or together with the Court or a Committee of Inspection comprising of creditors or their nominees.

Compromises, Arrangements, Reconstruction: The Court.

Management by Administrator: The Administrator appointed by the SEC.

Rehabilitation of companies owning sick industrial unit: The Federal Government or any person authorised by the Federal Government (Task Force appointed by the Federal Government).

(b) What qualifications must each type of administrator of insolvency procedure possess? Is there a system of regulation of insolvency administrators in this country?

Winding up: In the case of an Official Liquidator, under Section 321 of the Companies Ordinance, they are chosen by the Court from a panel of persons recommended by the SEC. In the case of other liquidators, no qualification is prescribed.

Management by Administrator: Selected from a panel maintained by the SEC. The SEC may seek recommendation of the State Bank of Pakistan (which is the central bank of the country).

Rehabiliation of companies owning sick industrial units: No qualifications are prescribed for the person nominated by the Federal Government to implement the rehabiliation plan. Insolvency administrators of the types mentioned above case are regulated by or pursuant to the Companies Ordinance.

(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 administation?) Winding up under the Companies Ordinance ?

Winding up by the Court

Section 331 of the Companies Ordinance stipulates that when a winding up order has been made by the Court, the Liquidator is required within 30 days thereof to summon separate meetings of the creditors and contributories of the company for the purposes of determining whether or not an application is to be made to the Court for the appointment of a Committee of Inspection to act with the Liquidator, and who are to be members of the committee if appointed. The Section also provides that where the winding up order has been made on the ground that the company is unable to pay its debts, it shall not be necessary for the Liquidator to summon a meeting of the contributories. The Court may make any appointment and order required to give effect to any such determination, and if there is a difference between the determinations of the meetings of the creditors and contributories (if applicable), the Court decides the difference(s) and makes such order as it thinks fit.
Section 332 of the Companies Ordinance goes on to provide that a Committee of Inspection appointed under Section 331 shall consist of creditors and contributories of the company or persons holding "general powers of attorney" from creditors or contributories in such proportions as may be agreed on by the meetings, and in the case of a difference (s), this may be determined by the Court. Section 333 also provides that where a winding up order has been made on the ground that a company is unable to pay its debts, the committee shall consist of creditors or persons holding general powers of attorney from creditors. The Committee of Inspection acts by way of a majority of its members present at a meeting, but shall not act unless a majority of the member of the committee are present.
As further described below, the Liquidator has extensive powers which are conferred by way of Section 333 of the Companies Ordinance in conducting the winding up of a company. In order to exercise these powers, the Liquidator where so ordered by the Court under Section 331 is required to exercise such powers with the sanction of the "Committee of Inspection". Therefore, whilst the Liquidator is the primary person under the Companies Ordinance designated for winding up a company, he cannot exercise his powers under Section 333 for doing so, without the approval of the Court or the Committee of Inspection. Thus, the Committee of Inspection would have an influential bearing on the manner in which winding up of a company is proceeded with by the Liquidator. It should be noted that such Liquidator is appointed by the Court from a panel of persons maintained by it for this purpose. Therefore, the creditors cannot procure or decide who should be appointed as a Liquidator.
In the context, Section 338 of the Companies Ordinance specifically provides that the Liquidator of a company which is being wound up by the Court, shall in the administration of assets of the company and in the distribution thereof among its creditors, have regard to any directions that may be give by resolution of the creditors or contributories at any meeting or by the Committee of Inspection, and any directions given by the creditors or contributories at any meeting shall in case of conflict be deemed to override any directions given by the Committee of Inspection.

Voluntary Winding up

In a creditors voluntary winding up, Section 376 provides that the creditors at the meeting to be held in pursuance of Section 373 of the Companies Ordinance or at any subsequent meeting may, if they think fit, appoint a Committee of Inspection consisting of not more than five persons. If such a committee is appointed, the company may either at the meeting at which the resolution for winding up is passed or at any subsequent general meeting, appoint such number of persons, not exceeding five, as they may think fit to act as members of the committee. If the creditors so resolve, the person mentioned in the resolution passed at a general meeting of the company shall not, unless the Court otherwise directs, be qualified to act as a member of the committee. Regarding directions of the Court, on any application to the Court regarding a person who is to act as a member of the committee, the Court may if it thinks fit appoint other persons to act as such members in place of the person(s) mentioned in the creditors resolution.

Regarding the manner in which the creditors participate in the administration of a company voluntarily wound up, Section 376 provides that the provisions of Section 332 with respect to a Committee of Inspection for the purposes of winding up a company by a Court shall apply. As in the case of a company being wound up by the Court, the sanction of the Committee of Inspection (or of the Court) is required by the liquidator before exercising his powers.
As discussed earlier, Section 378 provides that on the appointment of the Liquidator, all powers of the directors, chief executive and other officers cease. However, this is subject to the exception that such powers may to certain extent continue to be exercised if sanctioned by the Committee of Inspection or where there is no such Committee, the creditors of the company being wound up.
Under Section 380, where: (a) a company is proposed to be, or is in the course of being wound up altogether voluntarily; and (b) the whole or part of its business or property is proposed to be transferred or sold to another body corporate, the Liquidator can only with the sanction of the Committee of Inspection: (i) receive compensation or part compensation for the transfer or sale, shares, policies or other like interests in a transferee company for distribution among the members of the transferor company; or (ii) enter into any other arrangement whereby the members of the transferor company may, in lieu of receiving cash, shares, policies, or other like interests or in addition thereto participate in the profit of, or receive any other benefit from the transferee company.
Section 390 further provides that where arrangement entered into between a company about to be, or in the course of being wound up and its creditors, shall be binding on the company if sanctioned by a special resolution (of the company) and on the creditors, if acceded to by three-fourth in number and value of the creditors.
Thus, it is abundantly evident that the creditors in a voluntary winding up play a pivotal role in the manner in which a company is wound up.

Compromises, Arrangement and Reconstruction under the Companies Ordinance

Where a compromise or arrangement or reconstruction is being proposed under and pursuant to Section 284 of the Companies Ordinance, then such compromise or arrangement will only be sanctioned by the Court and binding if a majority in number representing three-fourths in value of the creditors agree to the compromise or arrangement. Thus, in order for any compromise or arrangement between a company and its creditors or members to be valid, an agreement representing a three-fourths majority in value of the creditors must be present.

Management by Administrator under the Companies Ordinance

Under Section 295, there is no scope for the participation of the creditors in the management of the company once an Administrator is appointed. However, the creditors (being not less than 60% of the paid-up capital of a company) in their request to the SEC for appointment of an Administrator may suggest the manner in which the affairs of the company may be remedied by the Administrator, although, the SEC may not adopt such suggestions by the company's creditors.

Rehabilitation of companies owning sick industrial units under the Companies Ordinance

Section 296 of the Companies Ordinance does not provide for the participation of creditors for the purposes of drawing up or implementing a rehabilitation plan, the contents of which may include the aspect discussed in detail earlier in this Report. However, it is unlikely that a rehabilitation plan will be implemented without the participation of creditors espcially where matters such as alteration of loan structures and debt rescheduling are concerned, or indeed where financing and project documents are intrinsically tied to matters concerning alteration and issue of share capital and alteration in the Memorandum and Articles of Association of a company. The applicable law may develop further to give powers and authorities to the creditors.

J2. Powers of the administrator: (a) In relation to each type of insolvency procedure available in the legal system of this country, 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.)

Winding up under the Companies Ordinance

Winding up by the Court: Under Section 333 of the Companies Ordinance, the Official Liquidator has with the sanction of the Court or the Committee of Inspection, the following powers:

(a) to institute or defend any suit, action, prosecutionor other 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 or persons claiming to be creditors in respect of any claim, present or future, certain or contingent, ascertained or sounding only in damages against the company, or whereby the company may be rendered liable;
(e) to compromise all calls and liabilities to calls, debts and liabilities capable of resulting in debt and all claims, present or future, certain or contingent, ascertained or sounding only in damages, subsisting or supposed to subsist between the company and a contributory or alleged contributory or other debtor or person apprehending liability to the company, and all questions in any way relating to our affecting the assets or winding up of the company, on such terms as may be agreed, and take any security for the discharge of any such calls, debt, liability or claim and give a complete discharge in respect thereof;
(f) to sell the movable and immovable property and things in action of the company by public auction or private contract, with power to transfer the whole thereof to any person or company or a sell the same in parcels.

Additionally subject to any general or specific direction of the Court or of the Committee of Inspection, the Official Liquidator also has the power under Section 333 (2) to:
(a) to do all acts and to execute in the name of the company, all deeds, receipts, and other documents, and for that purpose to use, when necessary, the company's seal;
(b) to prove rank and claim in the bankruptcy, insolvency or sequestration of any contributory for any balance against his estate and to receive dividends in the bankruptcy, insolvency or sequestration in respect of that balance, as a separate debt due from the bankrupt or insolvent, and rateably with the other separate creditors;
(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 any money requisite;
(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 which cannot be conveniently done in the name of the company; and in all such cases the money due shall, for the purposes of enabling the liquidator to take out the letters of administration or recover the money, be deemed to be due to the liquidator himself;
(f) to appoint an agent to do any business which the agent cannot do himself; and
(g) to do all other acts as may be necessary for winding up the affairs of the company and distributing its assets.
The exercise by the Official Liquidator of the powers under Section 333 are subject to the control of the Court and the Committee of Inspection. However, any creditor or contributory or the Registrar of Companies may apply to the Court with respect to any exercise or proposed exercise of any of the said powers by the Liquidator.

Voluntary Winding up

Section 387(1) of the Companies Ordinance provides for the powers and duties of Liquidators in a creditors voluntary winding up. These are as follows:

(a) with the sanction of either the Court or the Committee of Inspection, or (if there is no such committe) of a meeting of the creditors, exercise any of the powers given by Section 333(1) to a liquidator in a winding up by the Court;
(b) without the sanction referred to in (a) above, exercise any of the other powers given by the Companies Ordinance to the liquidator in a winding up by the Court;
(c) exercise the power of the Court under the Companies Ordinance of settling a list of contributories, which shall be prima facie evidence of the liabilities of the persons named therein to be contributories;
(d) exercise the power of the Court of making calls;
(e) summon general meetings of the companies and the creditors for the purpose of obtaining the sanction of the company by special resolution or for any other purpose he may think fit. Section 387(3) to (5) provide for certain duties of a Liquidator specified lates in this Report. Under Section 391, the Liquidator also has the power to apply to the Court: (a) to determine any question arising in the winding up of a company; or (b) to exercise as respect the enforcing of calls, the stay of proceedings or any other matter, all or any of the powers which the Court might exercise if the company were being wound up by the Court.

Compromise, Arrangement and Reconstruction under the Companies Ordinance

Under Section 285 of the Companies Ordinance, where the Court makes an order under Section 284 sanctioning a compromise or an arrangement in respect of a company, it may, at any time make such order or at any time thereafter give such directions in regard to any matter or make such modifications in the compromise or arrangement as it may consider necessary for the proper working of the compromise or arrangement.

Management by Administrator under the Companies Ordinance

Under Section 295 of the Companies Ordinance, the Administrator manages the affairs of the company and the exercise of all powers of the directors or other persons in whom the management vested and all such directors and persons shall stand divested of that management and powers. The Administrator also has the power to terminate with the approval of the SEC any contract or employment given patently to benefit any director or other person in whom the management vested or his nominees and to the detriment of the interest of the general members.

Rehabilitation of companies owning sick industrial units under the Companies Ordinance

Under Section 296, the Federal Government or any authority or other person authorised by it (the Task Force, above referred) has the power to supervise the implementation of the rehabilitation plan and may issue such directions to the parties concerned as may be deemed necessary by the Federal Government or authority or person (i.e. the Task Force) as the case may be.

(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 under the Companies Ordinance

In the case of winding up by the Court, the Liquidator in the exercise of his powers under Section 333 (or the purposes of winding up a company), has to obtain the sanction of the Court or the Committee of Inspection (which includes the representatives of Creditors). Moreover, under Section 333(2)(f), the Liquidator is empowered to appoint an agent to do any business which the liquidator is unable to do himself, and under 333(2)(g), do all such other acts and things as may be necessary for winding up the affairs of the company and distributing its assets. Thus, the Liquidaor in being obliged to, can seek assistance, advice or directions prior to exercising his powers under Section 333, in addition to which, the Liquidator is also given broad powers under sub-sections (f) and (g), to seek third party assistance or advice in conducting the winding up. Further, in the course of winding up a company, the Liquidator can seek the assistance of the Court by asking the Court to exercise its power under Section 340 to require delivery of property by a contributory to the Liquidator, including money, property or books and papers including documents to which the company is prima facie entitled. Assistance of the Court can also be sought by the Liquidator, by the Court exercising its power under Section 341 to order payment of debts by a contributory.
In the case of a creditors voluntary winding up, a Liquidator may seek assistance of the Committee of Inspection (which, as mentioned above, includes representatives of creditors), or where there is not one, the creditors. Further, under Section 391 of the Companies Ordinance, the Liquidator has the power to apply to the Court: (a) to determine any question arising in the winding up of a company, or (b) to exercise as respect the enforcing of calls, the staying of proceedings or any other matter, all or any of the powers which the Court might exercise if the company were being wound up by the Court. The Liquidator under Section 391 may also seek assistance of the Court, by applying for an order setting aside any attachment, distress or execution put in force against the estate or reflect of the company after the commencement of winding up.
It should further be noted that the Liquidator takes the position of the Chief Executive and Directors. Therefore, they have the same powers. Accordingly, the Liquidator may seek and obtain advice, where necessary, from any solicitor, advocate, legal advisor, accountant or other person.

Management by Administrator under the Companies Ordinance

Under Section 295(10) of the Companies Ordinance, an administrator may seek instructions from the SEC 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. Secondly, the Administrator is invested with the powers of the Directors and Chief Executive. Therefore, he may, in exercise of his powers, seek and obtain advice, where necessary, from solicitors, accountants and other persons.

Rehabililation of companies owning sick industrial units under the Companies Ordinance

Although not expressly provided for in Section 296, an authority or person appointed under that section (Task Force) may seek advice, direction and assistance from the Federal Government in relation to any matter connected with a rehabilitation plan. No restriction is imposed in the Section. In any event, advice of the SEC may always be obtained.

J3. Duties of the administrator:

(a) In relation to each type of insolvency procedure available in the legal system of this country, 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.)

The duties of an administrator under the various insolvency procedures are prescribed by the Companies Ordinance in the case of a corporate debtor.

Winding up under the Companies Ordinance

Winding up by the Court: The Liquidator upon his appointment is required to:

(a) obtain a statement of affairs (which is to be delivered to the Official Liquidator) 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, where any property of the company is not in its custody or possession, the place where and the person in whose custody or possession such property is, full address of the places where the business of the company was conducted during the six months preceding the relevant date and names and particulars of the persons incharge of same, details of any pending suits or proceedings in which the company is a party and such other particulars as may be prescribed by the Court (Section 328).
(b) submit not later than 30 days after receipt of the statement of affairs in Section 328, a preliminary report on the affairs of the company to the Court setting out: (a) particulars of cash, bank balances and negotiatable instruments, debts due from contributories, debts due to the company and securities, if any, available in respect thereof, movable and immovable properties belonging to the company and unpaid call; (b) if the company has failed, as to the causes of the failure; and (c) whether in his opinion further inquiry is desriable as to any matters relating to the promotion, formation or failure of the company or the conduct of its business. (Section 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 (Section 330); (d) within 30 days of the winding up order of the Court, summon separate meetings of creditors and contributories for determining whether a Committee of Inspetion should be set up and to determine the membership of such committee (Section 331);
(e) keep in the manner prescribed, proper books and papers in which he shall cause to be made entries or minutes of proceedings at meetings and of such other matters as may be prescribed (Section 336);
(f) at least twice in each year, present to the Court an account of his receipts and payments and dealings as liquidator together with scuh further information as may be prescribed and when directed by the Court, the Liquidator shall and if such accounts and file copies with the Court and Registry of Companys and send a copy to every creditor and contributory (Section 337); (g) to take necessary steps for proving of debts owed by the company (Section 404);
(h) subject to any directions given by the Court, distribute funds left after providing for the expenses of the winding up or for other preferential payments under the Companies Ordinance, among the creditors or contributories within (30) days of receipt thereof (Section 349).

(i) Creditors Voluntary Winding up

The duties of a Liquidator in the event of a creditors voluntary winding up include the following:

(a) Under Section 381 (1), in the event of the winding up continuing for more than one year, the Liquidator shall:

(i) summon a general meeting of the company and a meeting of creditors at the end of the first year from the commencement of the winding up, and, if the proceedings are extended, then within 30 days of such extended period;
(ii) lay before the meeting an audited account of his receipts and payments and acts and dealings and of the conduct of the winding up during the preceding year together with a statement in prescribed form and containing the prescribed particulars with respect to the proceedings and position of liquidation including reasons for the delay in finalisation of winding up and steps taken to expedite the winding up; and
(iii) forward by post to every creditor and to every contributory a copy of the account and statement referred above together with the auditors report and notice of the meeting atleast 10 days before the meeting required to be held.

(b) Under Section 382, as soon as the affairs of the company are fully wound up, the Liquidator shall: (a) make a report and account of the winding up; and (b) call a general meeting of the company and a meeting of the creditors for the purpose of laying the report and account before the meetings and giving any explanations thereof.

(c) Under Section 387(3), the Liquidator shall pay the debts of the company and shall adjust the rights of the contribution among themselves.

(d) Under Section 387(4), the Liquidator shall within 30 days of the coming into his hands of any funds sufficient to distribute among the creditors or contributoring after providing for expenses of the winding up or for other preferential payment as provided in the Companies Ordinance (see later in this Report), distribute in accordance with the provisions of the Ordinance.

(e) Under Section 387(5), the Liquidator is duty bound to complete the winding up proceedings within a period of one year from the date of commencement of winding up. However, with the sanction of a Court, extension is possible.

(f) Under Section 404, the Liquidator has the authority to take necessary steps for proving of debts owed by the Company.

Notwithstanding the above, there are certain duties of the Liquidator which are as under :

(a) With the sanction of the Court: (i) pay any class of creditors in full; (ii) make any compromise or arrangement with creditors or perons claiming to be creditors having or alleging themselves to have any claim, present or future, whereby the company may be rendered liable; (iii) compromise any calls and liabilities to calls, debts and liabilities capable of resulting in debts and all claims, present or future, certain or contingent, subsisting or supposed to subsist between the company and a contributory or alleged contributory or other debtor or person (Section 421);

(b) Apply to the Court for summary determination of any proceedings pending in respect of any debt due to the company (Section 424);

(c) Where a company is being wound up, if the winding up is not concluded within one year after its commencement, the Liquidator shall once in each half year and at intervals of six months or such period prescribed until the winding up is concluded, file in the Court or with the Registrar of Companys, a statement in the prescribed form containing particulars with respect to the account, proceedings in and position of the liquidation along with the report of the auditors (Section 430);

(d) Every liquidator of a company is duty bound to pay and keep all moneys received by him or which become available with him or come under his control in his capacity as such in a special account opened by him in that behalf (Section 431).

(e) Where any company is being wound up, if the liquidator has in his hands unclaimed dividends and undistributed assets, the liquidator is duty bound to pay the same into the State Bank of Pakistan to the credit of the Federal Government in an account called the Companies Liquidation Account (Section 323).

Please note that since the focus of your query is on insolvency by winding-up, this query is not relevant to the other forms of insolvency procedure.

J4. Breach of duty and liability of administrators:

(a) What remedies and/or sanctions are available in the legal system of this country in respect of breaches of duty or transgressions committed by each type of insolvency administrator?

Winding up under the Companies Ordinance In the case of winding up by the Court and a creditors voluntary winding up, the follwing remedies/sanctions are available under the Companies Ordinance in respect of breaches of duty or transgressions committed by an Official Liquidator or a Liquidator, as the case may be:

(a) Where a liquidator to file a statement under Section 430 of the Companies Ordinance (referred above) in connection with a winding up which has not concluded within one year after its commencement, the liquidator is punishable with a fine which may extend to Rs.5000 and in the case of a continuing failure, to a further fine which may extended to Rs.100 for every day after the first during which the default continues (Section 430(4)).

(b) Any liquidator retaining any money which should have been paid by him into the Companies Liquidation Account under Section 432 of the Companies Ordinance, shall in addition to such money pay a surcharge on the amount at the rate of 2% per month or part thereof and shall also be liable to pay any expenses or losses occasioned by reason of his default and he is also liable to disallowance of all or such part of his remuneration as the Court may think just and to be removed from his office by the Court on application of the Companys Registrar to the Court (Section 433). In this context, in connection with the "powers and duties" of a liquidator in a voluntary winding up, under Section 387 of the Companies Ordinance (discussed earlier), if a liquidaor thereunder is convicted of misfeasance, or breach of duty or other lapse or default in relation to winding up proceedings of a company, he ceases to be the official liquidator of the company and shall also become disqualified, for a period of tive years from such conviction from being a liquidator of or to hold any other office including that of a director in any company, and if he already holds any such office, he shall forthwith deemed to have ceased to hold such office (Section 387(b)).

(c) Any liquidator making a default in complying with the provisions of the Companies Ordinance or commit any other irregularity in the performance of his duties, fails to make good the default or undo the irregularity, within 30 days after service on him of a notice, an order may be made by the Court directing the liquidator and any other person involved to make good the default or undo the irregularity or otherwise make amends, as the circumstances require, and within such time as may be specified. Where the Companys Registrar makes an application, the Court is obliged to dispose of the same within 14 days of the submissions thereof (Section 435).

In respect of the other insolvency procedures discussed in this Report no specific remedies/sanctions are provided for. However, in respect of Management by Administrator and Rehabilitation of companies owning sick industrial units, for any default under the Companies Orders, a fine of Pakistan Rupees one thousand for the original default and a further fine of Pakistan Rupees fifty per day for so long as a default continues may be imposed.