SECTION DD-EQUIPMENT LEASING

(a) To what extent is this type of business "finance" technique practised in this country?

This mode of financing was introduced as far back as 1985 when the first leasing company, namely National Development Leasing Corporation, was established. Presently, there are about thirty-three (33) leasing companies and about nineteen (19) other entities [including Modarabas (closed-end Islamic mutual funds] and investment bank engaged in equipment and/or other leasing business in Pakistan. According to our information about 9% to 10% of the total capital equipment financing in the private sector is provided by leasing companies.

(b) If default is made what are the rights of the owner of the property to recover the leased property?

These rights are set out in the Lease Agreements. It is standard to provide that in the event of a default, the lessor may, after notice, take possession of the leased property and dispose of it. This is supported by the Banking Act, which provides that in cases where a borrower has obtained finance through a finance lease, a bank may without filing a suit directly recover the same if the property is movable. However, it is always difficult to reposses. Therefore, as a general rule, proceedings are filed in the Banking Court for recovery of the leased property or the lease amount for the unexpired period of the lease together with liquidated damages and costs and expenses.

(c) Does the exercise of these rights require court process?

An answer to this question is contained at (b) above. In the event of hindrance by the borrowers recourse would be to the Banking Courts under the Banking Act, under which the leasing company would file a suit in terms of the procedure discussed earlier in this Report. In fact, under the Banking Act, the Banking Court may pass an order either authorising the leasing company to recover the leased property directly or with the assistance of the Banking Court.

(d) How effective in actual practise is the process of recovery (list any relevant impediments, such as the right of access to the place where the equipment is situated, the right to physically take the equipment away from that place; and so forth)?

In actual practice, the process of recovery is not effective. The right of access and physical take-over exists in terms of all lease agreements, but non-cooperation and/or hostile opposition by the lessees can and does cause impediments including difficulty of access or physical removal. Therefore, unless the lessees concerned co-operate, the leasing companies prefer to file legal action in the Banking Court under the Banking Act.

(e) What effect does the commencement of insolvency proceedings in respect of the corporate debtor have on the recovery of leased property?

Since the title remains with the leasing companies, the commencement of winding-up of a corporate debtor does not, from legal stand point, affect the rights of the leasing company concerned.
Therefore, it should be possible to effect recovery directly pursuant to the lease agreements. But where intervention of the court has been sought and winding up proceedings are pending, then under the Companies Ordinance, such suit or legal proceedings shall not be proceeded with except with the leave of the court in which winding up proceedings have been commenced and subject to such terms as the court may impose. Moreover, any such suit or legal proceedings may be transferred to and disposed of by the court in which winding up proceedings are taking place. However, as mentioned above, this should not be a matter of concern as the concerned court should grant permission, as a matter of general rule, for recovery proceedings to proceed.

(f) Is it usual for an equipment lease to be supported by guarantees (sureties) for payment of lease charges, default penalties; and so forth?

Yes. Under the State Bank of Pakistan Prudential Regulations for NBFI's guarantees are required to cover the lease facility extended to a borrower.