SECTION F - CIVIL/PENAL SANCTIONS

(a) Are there civil or penal/criminal sanctions in the legal system of this country in relation to the incurring and non-payment of debts by corporate debtors (for example, some type of sanction - such as the concept of 'insolvent trading' - to which the directors of the corporate debtor may be subject)?

No penal or criminal sanctions are imposed under the legal system of Pakistan for simple non-payment of debts, by corporate debtors. However, penal provisions will be applicable, and the chief executive and the relevant directors or officer, may be punished by imprisonment and/or fine in certain cases, mentioned in the Banking Act, including where the debtor dishonestly commits a breach of the security documents whereby the possession of the property charged to a banking company is retained by the debtor, or where the mortgagor of a properly mortgaged in favour of a banking company dishonestly parts with the possession of the mortgaged property without the permission of the banking company, or where a debtor knowingly makes a statement which is false in material respect in an application for a loan or finance and obtains the loan or finance on that basis or applies for such loan or finance towards a purpose other than the purpose for which the loan or advance was obtained, or where the debtor furnishes a false statement of stocks.
The Government of Pakistan has recently (on 16 November) promulgated a special Ordinance called "National Accountability Bureau Ordinance 1999" ("Accountability Ordinance"). One of the purpose for which the Accountability Ordinance has been issued is to penalise those person who have committed willful default in repayment of amounts due to banks, financial institutions, Government and other agencies. Willful default in repayment of outstanding dues to a bank or a financial institution is an offence under this Ordinance. An accused, if convicted, may be punished with imprisonment upto 14 years plus fine for this offence. The amount of fine may be equivalent to the amount wilfully not paid to any bank or financial institution. Thus, as mentioned above, although no penal or criminal sanctions are imposed under the legal system of Pakistan for simple non-payment of debts, the newly promulgated Accountability Ordinance prescribes harsh sanctions in respect of willful default in payment of debts due to banks or financial institutions.
In respect of a corporate debtor, the Companies Ordinance does provide sanctions for fraudulent and criminal offences antecedent to or in the course of winding up of a corporate debtor.
Moreover, the Companies Ordinance prescribes penalties if the Directors of a company obtain a loan without the sanction of the Board of Directors of the Company.

(b) What are these sanctions?

These sanctions are referred to in paragraph (a) of this Section.

As mentioned above in (a) of this Section, the Banking Act, makes provision for the following offences:

(i) Under Section 19(1), where a corporate debtor: (a) dishonestly commits a breach of the terms of a letter of hypothecation or trust receipt or such other istrument or document executed by him whereby the possession of the property offered as security for the loan or finances is not with a bank but is retained by or entrusted to the corporate debtor, for the purpose of effecting sale and depositing the same with the bank; or (b) subsequent to the creation of a mortgage in favour of a bank, dishonestly parts with the possession of the mortgaged property, is punishable with imprisonment for a term which may extend to one year and shall also be liable to fine, and be ordered by the Banking Court trying the offence to deliver up or refund the property or the value of the property so dealt with,

(ii) Under Section 19(2), where a corporate debtor knowingly makes a statement which is false in material respect in an application for a loan or finance and obtains the same on the basis thereof, or applies the amount of a loan or finance towards a purpose other than for which it was obtained, or provides a false statement of stocks in violation of an agreement with a bank, shall be guilty of an offence punishable with imprisonment for a term which may extend to one year, or with fine, or both.

(iii) Under Section 19(4), where a corporate debtor dishonestly issues a cheque which is dishonoured, this is punishable with imprisonment which may extend to one year, or with a fine or both.

In all the above mentioned offences, where the person guilty of an offence is a corporate debtor, under the Banking Act, the chief executive and any director or officer involved shall be deemed to be guilty of the offence and be liable to be proceeded against and punished accordingly.
The penal provisions governing unauthorised obtaining of loans as referred to in paragraph (a) above of this Section are contained in the Companies Ordinance. As further mentioned above in (a) of this Section, the Accountability Ordinance states that willful default in repayment of outstandings due to a bank or financial institution is an offence punishable with imprisonment upto 14 years plus fine. If the person guilty of such offence is a corporate debtor, such corporate debtor may be punished with fine upto the amount wilfully not paid to a bank or financial institution and for the recovery of the said amount the assets of the corporate debtor may be frozen. The Accountability Ordinance states that the amount of fine imposed on a person convicted under that Ordinance may be set-off against the assets frozen as above stated. Thus, any assets of a corporate debtor may be frozen and applied under the Accountability Ordinance towards recovery of the fine imposed on it.
In case of a willful default in repayment of dues to a bank or financial institution by a corporate debtor, the sponsors, chairman, chief executive, managing director, elected directors (by whether name called) and the guarantors of the corporate debtor may also be prosecuted under the Accountability Ordinance and may be sentenced to imprisonment upto 14 years or to a fine. Any fine imposed on such persons may be recovered by freezing of their assets and by setting-off the fine against such assets.

(c) Do any of these sanctions have the effect of encouraging the directors of a corporate debtor to seek protection for the corporate borrower under the insolvency law regime?

Pakistan law does not offer such protection. Furthermore, because the penalties mentioned in(b) above are applicable to the Chief Executive, Directors and other officers involved in committing the offences listed in Section 19 of the Banking Act, the commencement of insolvency/winding up proceedings will not absolve such officers.
Same is the case under the Accountability Ordinance. As mentioned above, the sponsors, chairman, chief executive, managing director, elected directors and guarantors of a corporate debtor may be sentenced to imprisonment and fine under this Ordinance. Accordingly, the commencement of insolvency or winding up proceedings of a corporate debtor will not save such persons from prosecution under the Accountability Ordinance. Furthermore, since fine may be imposed on a corporate debtor under the Accountability Ordinance and its assets may be frozen for recovery of such fine, the commencement of winding up proceedings in respect of such corporate debtor will not provide any protection.

(d) Does the presence of the possible application of any of these sanctions create a problem if a corporate debtor which is in financial difficulty or insolvent seeks to negotiate an informal work out with creditors?

The sanctions set out in the Banking Act are such that they are most likely to adversely affect the relationship of a corporate debtor with creditors. The provisions of the Accountability Ordinance are extremely coersive in nature. The complainant for prosecution will be a bank or banks under the Banking Act and the Accountability Ordinance. Therefore, unless there are compelling commercial reasons for the creditors to reach an informal work out with the corporate debtors, the likelihood of the creditors agreeing to work out may not be very bright.