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 country?

Our answer is in the affirmative. Almost all properties are either held as free hold or as lease hold. Secondly, almost all properties are registered with some one or other authorities.

(b) In particular:
(i) is the system of land ownership and rights sufficiently developed to encourage lending on the security of land; and

Our answer is in the affirmative. The land revenue authorities maintain records of rights in respect of all land holdings. If a borrower's name appears in such records, as owner, in relation to any particular area of land, his title to such land will be established and may be ascertained by examining such records.

(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?

Our answer is in this case as well in the affirmative.

C2. Secured financing

(a) What mechanisms for taking of security over assets of a corporate borrower are available to financiers in this country (for example mortgages over land; fixed and/or floating charges over personal property; legal and/or equitable mortgages; debentures; pledges; liens, etc.)?

All or any of the above cited securities are used and accepted by banks, depending upon the circusmtances of each borrower.

(b) In practice, which of these types of security are most commoly employed by financiers?

For project financing, a mortgage on land and buildings and on other immovable plant and assets, a hypothecation over movable assets, a floating charge over the general undertaking and property are most commonly obtained by banks. For working capital financing, the most usual form of security is hypothecation of current assets and, in certain cases, pledge of stocks.

(c) Is there a system of registration in this country for any of these types of security taken by financiers?

A system of registration of every type of mortgage and charge exists for companies under the Companies Ordinance. It is mandatory to register any such charge with the Companies Registrar within 21 days of creation of the charge. If such registration is not effected by a company, the charge created by it will be void against any liquidator or other creditors. This requirement only applies to companies under the Companies Ordinance and not to other corporate borrowers, such as a statutory corporation. In the case of a legal mortgage over land created by a Deed, registration under the Registration Act, 1908 is also necessary. There is however, no system of registration of pledges.

(d) To what extent are priorities between competing securities regulated?

Priorities are regulated by the order in which the mortgages/ hypothecations/floating charges are registered under the Companies Ordinance and/or created. However, any lenders may agree amongst themselves that the securities created in their favour at different times will rank pari passu in point of security.

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?

Our answer is in the affirmative. The secured lender will consider enforcing security as a last possible option because of delay and difficulties entailed. Therefore, every effort is made for negotiating an acceptable arrangement, even rescheduling. A loan is recalled and recovery proceedings commenced only when a bank becomes convinced that the borrower is either not in a position to pay or does not intend to pay.

(b) What mechanism are available to security holders to enforce their securities under the legal system of this country (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 options are available. In the case of pledged property (where the pledged property is in the possession of the bank), the bank would directly sell the pledged property after giving notice to the pledgor. However, where the mortgaged or charged property is not in the possession of the bank, it is always useful and prudent to enforce security through a Court.
A company may be wound-up by the Court on account of its inability to pay its debts. Therefore, the bank may exercise this option. However, it is always prudent to enforce security.

(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)?

This is potentially possible in the case of a legal or equitable mortgage or through exercise of powers conferred under Powers of Attorney given by the borrower where a receiver (pursuant to an agreement or the Companies Ordinance) has been appointed. However, from a practical stand point, it is not feasible. In most cases, the mortgaged/charged property is not in the possession of the bank. Therefore, it is not possible for the bank to handover possession to a purchaser. In view of this position, it is advisable to enforce sale of mortgaged/charged property through Court.

(d) In practice, which method(s) of enforcement are most commonly employed by security holders? Our answers at (b) and (c) have fully answered this question.

(e) Briefly describe the process involved in these method(s).

Recovery through Banking Courts.

Recourse is taken to the expeditious recovery procedure set out in the Banking Companies (Recovery of Loans, Advances, Credits and Finances) Act 1997 ("Banking Act").
At the outset, it should be noted that the provisions of the Banking Act are available to any 'banking company', incorporated within or beyond Pakistan which transacts the business of banking or any such associated or ancilliary business in Pakistan and includes a commercial bank, a modaraba, a modaraba management company, a leasing company, an investment bank, a financing company, a unit trust or mutual fund of any kind and credit or investment institution, corporation or company, whether industrial, agricultural or development. A commercial bank is a banking company which has obtained a licence under Pakistan's Banking Companies Ordinance, 1962 to carry on banking business in Pakistan. A 'modaraba' is essentially a closed-end mutual fund. The business of modarabas is governed by the Modaraba Companies and Modarabas (Floatation and Control) Ordinance, 1980 ("1980 Ordinance") which defines "modaraba" as a business in which a person participates with his money and another with his efforts or skill or both his efforts and skill. Under the 1980 Ordinance, a modaraba is to be managed by a "modaraba company", which is a company engaged in the business of floating and managing modarabas. Under the 1980 Ordinance, a modaraba is a legal person and sues and is sued in its own name through the modaraba company. A 'leasing company' is a company formed and licenced pursuant to the Leasing Companies (Establishment and Regulation) Rules 1996 and which is engaged wholly in the business of leasing or which invests in such business at any one time an amount equivalent to at least 70% of the aggregate of its paid-up share capital and free reserves.
The Banking Act contains a recovery procedure where a borrower [defined as a person who has obtained a loan (the term 'loan' being defined as a loan, advance and credit under a system based on interest)] or customer [defined as a person who has obtained finance (the term 'finance' being defined to include accomodation or facility under a system which is not based on interest)] commits a default in fulfilling any obligation with regard to any loan or finance extended by a lender. Under the Banking Act, a bank may institute a suit in the Banking Courts by presenting a plaint duly supported by a verified statement of account. On a plaint being presented before a Banking Court, a summons in prescribed form is served on the 'defendant' (i.e. the borrower or customer, as the case may be) through the baliff or process server of the Banking Court. Upon an application made by a defendant borrower within 21 days of service of the summons, the Banking Court shall give leave to defend the suit, if a serious and bonafide dispute is raised thereby, otherwise the Court will issue a decree in favour of the bank. The Banking Court has the power to grant an interim decree. A suit in which leave to defend has been granted to the Defendant is under the Banking Act, to be disposed of within 90 days from the day on which leave was granted and a decree is to be granted in that regard.
Under the Banking Act, where a claim filed by a banking company (i.e. lender) is for the enforcement of a mortgage of immovable property, the Banking Court passes a final decree for foreclosure or sale.
In cases of pledged or mortgaged property, the Banking Act provides that the bank may sell the same with or without the intervention of the Banking Court either by public auction or by inviting sealed tenders and appropriate the proceeds thereof towards satisfaction of the decree. Where the judgment debtor or any person acting on his behalf does not voluntarily give possession of the mortgaged property sold, or sought to be sold by the bank, the Banking Court on the application of the bank or purchaser shall put the bank or the purchaser in possession of the mortgaged property in any manner deemed fit by it. However, for the reasons mentioned above, it is always prudent to apply to the Court to sell the property. Where a Plaint has been filed for recovery of any amount through the sale of any property pledged, mortgaged, hypothecated, assigned or otherwise charged as security for a loan or finance, or in relation to a finance lease, the Banking Court may at any stage of the proceedings: (a) restrain or injunct the sale, creation or transfer of an interest or charge or lease by disposal or disposition of such property by the borrower; or (b) attach such property; or (c) appoint one or more receivers of such property on such terms and conditions as it may deem fit.
In cases where a borrower has obtained financing through a finance lease, or has executed an agreement in connection with a mortgage, charge or pledge in terms whereof the bank is authorised to recover or take over possession of the property without filing a suit, at its option: (a) directly recover the same if the property is moveable; or (b) file a suit under the Banking Act and the Banking Court may pass an order at any time, after the passing of an interim decree, either authorising the bank to recover the property directly or with the assistance of the Banking Court.

Civil Suits under the Code of Civil Procedure ("CPC")

Civil Suits are instituted under the CPC by persons who would not fall within the broad ambit of a "banking company" under the Banking Act. The CPC contains a comprehensive procedure for the institution of Civil Suits through to enforcement of decrees, including a summary procedure for negotiable instruments such as bills of exchange and promissory notes. However, civil proceedings in Pakistan are slow and obtaining judgment with a further right to appeal can take up to 10 years.
For the sale of mortgaged property in case of default by a mortgagor/borrower, the Court passes an interim decree giving a right to the mortgagor/borrower to pay the amount due from him within 6 months and redeem the property. If the mortgagor/borrower does not make payment, the Court passes the final decree for sale of property. After this final decree is passed, the mortgagor/borrower losses the right to redeem the mortgaged property and the Court direct the sale of the mortggaed property for recovery of the amount due to the lender.

C4. Effectiveness of judicial system

(a) How effective is the judicial or court system for the purpose of enforcing secured property rights?

In terms of the wording of the law, the system appears to be effective. However, in practice delays and obstructions are faced. In case of the Banking Act, the period for disposal of proceedings is specified as 90 days. In practice, the system is slow as the defendant borrower may seek adjourments from the Banking Court under the Banking Act which may be granted subject to the defendant furnishing security in such amount as the Banking Court deems fit. In the case of Civil Suits filed under the CPC, as mentioned above, enforcement of a security may take several years. In the case of hypothecation of moveable assets, such assets tend to disappear. The defendants use all types of legal or irregular tactics for delaying the recovery. The overall position is not very cheerful.

C5. Effect of insolvency proceedings.

(a) What effect, if any, does the commencement of insolvency proceedings in respect of the corporate borrower (i.e. 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?

Commencement of insolvency proceedings against a corporate borrower in Pakistan means commencement of winding-up proceedings against such borrower in a High Court in Pakistan.
Where security enforcement proceedings have been commenced in a court of law against a corporate borrower at the same time as the insolvency procedure of winding up by a Court, then under Section 313 of the Companies Ordinance the Court may, where a winding up order has not been passed, restrain further proceedings by granting an injunction in any suit or proceedings against the company, upon such terms as the Court thinks fit. However, this is not a matter of concern as security enforcement proceedings may continue with the permission of the Court as stated below (which permission should always be forthcoming).

(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?

For a corporate borrower, a formal pronouncement of insolvency administration means passing of a winding-up order or appointment of a provincial manager in respect of such corporate borrower under the Companies Ordinance. Section 316 of the Companies Ordinance provides that where a winding up order has been made, leave of the Court which has passed the order is required before any suit or legal proceedings for enforcement can be proceeded with or commenced against the company. The Court (discussed in detail later in this Report) has jurisidction to entertain or dispose of any suit or proceedings against the company or have transferred to it the suit or proceedings, and dispose of same. However, this should not be a matter of concern as permission for enforcement proceedings to proceed should be forthcoming as a matter of rule.