SECTION R - INTER-RELATIONSHIP BETWEEN LENDERS AND BORROWERS IN CONTEXT OF FINANCIAL DIFFICULTY/INSOLVENCY OF THE BORROWER

Annexed to this working guide is a copy of a recent initiative launched in Indonesia to encourage private sector restructuring. In effect, this initiative proposes an informal (out of court) "work out" style of corporate restructuring in appropriate cases. We do not put this forward as a perfect model but it provides a good basis for examining the prospect of the possible application of a similar scheme or model in the countries which are the subject of this project.

Thus, in this section we ask that you read the annexure (particularly the part headed "1. Adoption of Principles", paragraphs "a" to "i") and, having considered those principles, comment on their possible application and implementation in your country. In particular we would like to know the following :

(a) by reference to each of the above paragraphs, comment on the suitability of their application in your country;

All the proposals listed in paragraphs "a" to "i" would be suitable for application in any country, including Pakistan. However, it is doubtful that a lender would like to convert its loans into subordinate loans. Secondly, the possibility of converting loans into equity and possibility of issuance of non-voting shares may be included.

(b) state the difficulties that might be encountered in their application in your country;

One difficulty has been highlighted in (a) above. Secondly, it should be noted that Pakistan's Companies Ordinance does contain very specific provisions dealing with rehabilitations of sick companies in Section 296 of that Ordinance. A copy of this Section and rules made thereunder are annexed. There will be a lot of resistance to changing such laws and rules.

(c) briefly state whether (and what) changes or additions might be required to the law in your country for the application of the "work out" methodology and whether such changes or additions are a practical possibility.

Section 296 of theCompanies Ordinance is very comprehensive and the rules made thereunder are general in nature. This law has been put into force very recently and so far no plans of rehabilitation have been implemented. Therefore, it will be seen, on the basis of experience, as to what improvements are required. Nonetheless, a specific provision should be included to the effect that upon the approval of a rehabilitation plan by the Federal Government, all recovery suits and legal proceedings filed for enforcement of security should abate and stand discharged/dismissed.

Finally, in this section, we would like to know your opinion generally on this initiative, the areas that you regard as strengths; areas that are weak; and areas where you consider modification and improvement might be made.

Our comments appearing above on this Section should be noted and considered with reference to this question as well. We would further advise that the model appears to be ideal in theory. However, its practical implementation appears difficult as it envisages perfect harmony and cooperation between the corporate debtor and the creditors as also the presence of managers and advisors who are professional and ethical. Some of the measures proposed (including hiring of managers and consultants) will require the debtor to incur "expenses", which it may not like to incur in view of its precarious financial position. Therefore, cutting of costs will have tobe stressed. Lastly, the real reason which resulted in the deteriorated financial health of the debtor will have to be ascertained. If it is found that the real reasons are corruption and incompetence, then very harsh measures including sale of the company to a good group may be the only option.