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 country, 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.)

Under the insolvency procedure of winding up, the Companies Ordinance makes specific provisions for matter relating to proof and ranking of claims. Section 403 provides that in every winding up, all debts payable on a contingency, and all claims against the corporate debtor, present or future, certain or contingent, ascertained or in damages are admissible to proof against the company. Where the value of the debt cannot be ascertained, Section 403 states that a just estimate will be made so far as possible of the value of such debts or claims which are subject to any contingency, or for damages or for some other reason do not bear a certain value.
In particular, attention is invited to Section 404 of the Companies Ordinance, which provides that in the winding up of an insolvent company, the same rules are to prevail and to be observed with regard to the respective right of secured and unsecured creditors and to debts provable, the valuation of annuities and future and contingent liabilities as are in force under the law of insolvency with respect to the estates of persons adjudged insolvent; and all persons who in such case would be entitled to prove for and receive dividends out of the assets of the company, may make such claims in the winding up against the company. Thus, where a company is insolvent, in order for a creditor to be entitled to make a claim in the winding up, the creditor must show that he would be able to do so if the debtor was an insolvent individual, subject to the provisions of the Provincial Insolvency Act and the Insolvency Act.
The Provincial Insolvency Act, as mentioned earlier in this Report, extends to the whole of Pakistan, except the 'Karachi Division', whilst the Insolvency Act only applies to the Karachi Division. A creditor instituting insolvency provisions in Karachi, will only be able to rely on the Insolvency Act. Both Insolvency Acts contain provisions for the method and manner in which a creditor may prove a debt. The term 'creditor' is broadly defined and "includes a decree holder", the term "debt" is also broadly defined as "includes a judgment-debt" and "debtor", "includes a judgment debtor".
Part III of the Provincial Insolvency Act, provides for the method of proof of debts in respect of different types of creditors:

(a) Section 45 states that a creditor may prove for a debt not payable when the debtor is adjudged an insolvent as if it were payable presently and may receive dividends out of the assets of the insolvent, equally with other creditors, deducting therefrom only a rebate of interest at the rate of 6% per annum computed from the declaration of a dividend to the time when the debt would have become payable.
(b) Section 46 provides that where there have been mutual dealings between an insolvent and a creditor proving or claiming to prove a debt under the Act, the sum due from one party shall be set-off against any sum due from the other party, and the balance of the account, and no more, shall be claimed or paid on either side.
(c) Section 47 relates to the manner in which a 'secured creditor' may prove the debt of the debtor. The term 'secured creditor' is defined to mean "a person holding a mortgage, charge or lien on the property of the debtor or any part thereof as a security for a debt due to him from the debtor". The Section provides that where a secured creditor "realises" his security, he may prove for the balance due to him, after deducting the net amount realised. Where a secured creditor "relinquishes" his security for the general benefit of the creditors, he may prove for his whole debt. Where a secured creditor does not either realise or relinquish his security, he shall, before being entitled to have his debt entered into the "schedule" (containing a particulars of debtors and their debts prepared by a Court), state in his proof, the particulars of his security and the value of same, and such secured creditor shall be entitled to receive a dividend only in respect of the balance due to him after deducting the value assessed of the security. If, for example, the assessed value of the security is Pakistan Rupees one thousand and the amount due to the secured creditor is Pakistan Rupees one thousand and one hundred, the secured creditor shall be entitled to receive a dividend only in respect of Pakistan Rupees one hundred. Where a creditor after having valued his security, subsequently realises it, the net amount realised shall be substituted for the amount of any valuation previously made by the creditor, and shall be treated in all respect as an amended valuation made by the creditor. If the aforesaid provisions of Section 47 are not complied with, the secured creditor is excluded from all share in any dividend.
(d) Section 48 provides for interest payment and states that on any debt or a certain sum, whereon interest is not reserved or agreed and is overdue when the debtor is adjusted insolvent, the creditor may prove for interest at a rate not exceeding 6% per annum: (i) if the debt or sum is payable by virtue of a written instrument at a certain time, from the time when such debt or sum was payable to the date of such adjudication; or (ii) if the debt or sum is payable otherwise, from the time when a demand in writing has been made giving the debtor notice that interest will be claimed from the date of the demand until the time of payment to the date of adjudication.

In respect of the debts provable under Section 45 to 48, Section 49 of the Pronvicial Insolvency Act provides for the mode of proof and states that a debt may be proved under the Act by delivery or sending by post in a registered letter, to the court an affidavit verifying the debt. The affidavit is to contain or refer to a statement of account showing the particulars of the debt and is to specify the vouchers (if any) by which the same can be substantiaed, which may be called for by the court. In the case of companies under winding-up, such affidavit is required to be sent to the Liquidator.
In respect of the Insolvency Act (which applies to the Karachi Division), a creditor may present a petition on the same grounds as in the Provincial Insolvency Act. Regarding proof of debts under the Insolvency Act, the following is provided for in Part III of the Act:

(a) Section 46 states that demands in the nature of unliquidated damages arising otherwise than by reason of a contract or breach of trust shall not be provable in insolvency. In other words, unliquidated damages which do not arise from breach of contract or trust (such as claims in tort) will not be proveable. All debts and liabilities, present or future, certain or contingent, to which the debtor is subject when he is adjudged an insolvent shall be deemed to be debts provable in insolvency.

(b) Where there have been mutual dealings between an insolvent and a creditor proving or claiming to prove a debt, any sum due from one party is to be set-off against any sum due from the other party, and the balance of account, is to be paid.

(c) Section 48 and the Second Schedule of the Insolvency Act provides for proof of debts. Proof in ordinary cases are to be lodged by delivering or sending by post in a registered letter to the official assignee an affidavit verifying the debt. The affidavit is to contain or refer to a statement of the account showing the particulars of debt, and shall specify the vouchers, if any, by which the same can be substantiated.
In the case of winding up of companies, the affidavit will be sent to the Liquidator.
In the case of secured creditors, if a creditor "realises" his security he may prove for the balance due to him, after deducting the net amount realised. If a secured creditor surrenders his security to the official assignee for the ageneral benefit of the creditors, he may prove for his whole debt, but where he neither realises no surrenders his security, he is to state in his proof the particulars of his security, the date when it was given and the value at which he assesses it, and he is entitled only to the balance due after deducting the value so assessed. As in the case of "interest" and "debts payable at a future time", the same provisions exist as under the Provincial Insolvency Act.

(b) At what date are the amounts of admissible debts computed?

In the case of a company ordered to be wound up by the Court, the date of appointment of a 'provisional manager', and if no such appointment has been made, the date of the winding up order. In the case of a voluntary winding up, the date of passing of the resolution for the voluntary winding up.

(c) By what method are claims of creditors proven by those creditors in the context of each type of insolvency procedure?

In terms of the the procedure laid down in the Provincial Insolvency Act and the Insolvency Act, a debt is to be proven by delivering or sending by post in a registered letter to the liquidator, alongwith an affidavit verifying the debt. The affidavit is to contain or refer to a statement of account showing the particulars of the debt.

(d) How are disputed claims made by creditors adjudicated upon? (for example by the administrator, or by a Court.)

In the first place, to the extent possible, by the liquidator. In case this is not possible, or the decision of the liquidator is not accepted, disputed claims will be adjudicated 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 country, 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.)

In the case of a winding up by the Court under Section 349 and in the case of a voluntary winding up under Section 387 the Official Liquidator or Liquidator is required to distribute any funds within (30) days of the funds coming into his hands among the creditors and contributories of the company, after providing for expenses of winding up or for other preferential payments under the Companies Ordinance. The preferential payment referred to are contained in Section 405 of the Companies Ordinance, which provides that the following preferential payments have priority over all other debts:

(a) revenues, taxes, cesses and rates due from the company to any governmental authority at the relevant date and having become due and payable within (12) months next before that date; (b) all wages and salary of any employee in respect of services rendered to the company and due for a period not exceeding (4) months within the (12) months before the relevant date and any compensation payable (not exceeding Rs.2,000) to any workman under any law for the time being in force;
(c) all accrued holiday remuneration becoming payable to any employee;
(d) unless the company is being voluntarily wound up for the purposes of reconstruction or amalgamation with another company, all insurance contributions payable during the (12) months before the relevant date by the company as employer of any persons, under any other law for the time being in force;
(e) unless the company is being voluntarily wound up for the purposes of reconstruction or amalgamation with another company, amounts due in respect of any compensation or liability for compensation to any workman under the Workmens Compensation Act, 1923 in respect of the dealt or disablement of any employee of the company;
(f) all sums due to any employee from a provident fund, pension fund, gratuity or other fund for the welfare of the employees maintained by the company; and
(g) expenses of any investigation into the affairs of the company.

(b) Give a brief account of the order or priorities, if any, of payment of creditors prescribed by the legal system of this country.

Under the Companies Ordinance, the order of priorities of payment of creditors, is as follows:

(1) the payment of preferential payments under Section 405;
(2) the payment of the winding up expenses;
(3) the payment of secured creditors; (please see note below)
(4) the payment of other creditors including unsecured creditors; and
(5) payments to contributories.

Special Note: In a winding up scenario, the secured creditors have the right to independently enforce and realise their security. If the amount realised is less than the amount due to a secured creditor, he may prove for the shortfall amount. A secured creditor may, however, not enforce his security and surrender the same to the liquidator for the benefit of all creditors, including himself, in which case he will share in the distributable funds as unsecured creditor on pari passu basis with unsecured creditors. A secured creditor may also neither realise nor surrender his security but in his affidavit for proof of debt give a value which he assesses of his security. If the liquidator accepts the creditor's valuation of the security, the liquidator may redeem it on payment to the creditor of the assessed value. If the liquidator is not satisfied with the value assessed by the creditor of his security, he may require the mortgaged property to be sold on such terms and conditions as are agreed between the creditor and the liquidator. If an agreement is not reached, then the sale will be made as the court may direct. In case of such sale, the amount, if realised, after the amount of the value of the security assessed by the creditor (if this is less than the amount dueto the creditor) will be paid to the creditor.