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 country?

Both hard fraud and soft frauds are known to occur.

(a) If so, is it usual that instances of such fraud will be revealed when a corporate debtor is in financial difficulty or becomes insolvent?

One answer is in the affirmative.

(b) What is the attitude that is normally taken to such fraud in this country?

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. Nonetheless, under Section 412 of the Companies Ordinances, if during the winding up of a company, it appears that any person who had taken part in the promotion or formation of the company, or any past or present director, Liquidator or officer of the com pany has misapplied or retained or become liable or accountable for any moneys or property of the company, or has been guilty of any misfeasance or breach of trust in relation to the company, the Court may on the application of the Liquidator or any creditor or any contributory, examine into the conduct of such person and compel him to repay or restore the money or property of the company with surcharge at the rate as the Court thinks just, or to contribute such sum to the assets of the company by way of compensation in respect of misapplication, retainer, misfeasance or breach of trust as the Court thinks fit.

(c) 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 country?

It depends on a case to case. Where political and other influence is applied, every type of fraud is overlooked. In other cases, soft as well as hard frauds may be pursued.

If there have been instance of fraud:

(i) does the insolvency law (or other civil law) provide for possible recovery of the proceeds of (or damages caused by) the fraud;
Discussed at KK (b) above.

(ii) does the criminal law provide for possible sanctions;
Under the Pakistan Penal Code, 1860 fraud in certain instances is punishable with imprisonment and/or fine. The Pakistan Penal Code provides for three instances of fraud: (i) Dishonest or fraudulent removal or concealment of prperty to prevent distribution among creditors (Section 421); (ii) Dishonestly or fraudulently preventing debts being available for creditors (Section 422); (iii) Dishonest or fraudulent execution of deed of transfer containing false statement of consideration (Section 423); and (iv) Dishonest or fraudulent removal or concealment of property (Section 424).

(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. Nonetheless, the accused and their lawyers use all types of tactics to delay or avoid proceedings which eventually nullify the entire effect.