SECTION G - ATTITUDES TOWARD FINANCIAL DIFFICULTY AND INSOLVENCY.

[In this part we seek to discover underlaying attitudes to debt; financial difficulty; and insolvency as it affects both corporate borrowers and lenders. The response to this section may, therefore, be expected to be founded on general impressions].

G1. From the position of a corporate borrower.

(a) If a corporate debtor is in financial difficulty, is there an attitude of 'concealment' or 'denial' toward the admission or exposure of that financial difficulty?

As a general rule, a corporate debtor would conceal or deny, as the case may be, in order not to frighten its lenders.

(b) If so, is the reason for this based on cultural or other factors?

As mentioned above, the real purpose of concealment or denial will be for not upsetting other Lenders and customers. The lenders may, on receiving information of financial difficulty, consider this to be a case of material adverse change in the circumstance of the debtor. As a consequence, they may consider recalling the loans.

(c) Is is likely that a corporate debtor would:

(i) volunteer the fact of its financial difficulty to a lender or group of lenders; or Notwithstanding our answers at (a) and (b) above, some of the debtors may volunteer information if this would help them in any manner. However, if they feel that this would be threatening, they may not be forthcoming in voluntrying the information.

(ii) admit or concede it only if and when confronted by a lender or group of lenders? Yes, in the majority of cases.

(d) If a corporate debtor is in financial difficulty, is it likely that the corporate debtor would:

(i) do nothing; One answer is in the negative. The corporate debtors would, with some exceptions, definitely try to to improve their financial position.

(ii) seek expert assistance and advice; or This will most likely be the case. As a first step, the debtor may discuss the matter with its chartered accountants/management consultants.

(iii) accept the appointment by a lender of an outside expert/advisor? Possibility does exist.

(e) If it was agreed between a lender and a corporate debtor that an expert/advisor would be appointed, is it likely that a corporate debtor would give the expert/advisor unrestricted access to all relevant financial and other information regarding the corporate debtor?

If the financial difficulty is not the result of fraud, incompetence or bad management, but is the result of changed business climate, free access will most probably be allowed.

(f) In that situation, is it likely that the financial and other information regarding the corporate borrower would be:

(i) complete; and Corporate debtors are required to maintain books of accounts and have their accounts audited. Therefore, except in cases of fraud, the information should be complete.

(ii) accurate (particularly regarding the valuation of assets and the assessment of liabilities)?

Our answer at (i) above, applies to this question as well.

G2. From the position of lenders.

(a) Is it more common that the financial difficulty of a corporate borrower will be:

(i) volunteered by a corporate debtor; or As mentioned above, financial information may not always be volunteered (excluding certain exceptions).

(ii) discovered by a lender (and, if so, how)? Informations about financial difficulty may eventually come to the knowledge of the lenders from market rumours and, in particular, the financial statements made available to or that otherwise come into the possession of the lenders.

(b) If a lender becomes aware that a corporate debtor is in financial difficulty, is it likely that the lender would seek to investigate the financial crisis of the corporate debtor itself and employ an expert / advisor to investigate the financial position? It is most likely that the lender would seek to investigate the financial crisis itself. It is unlikely that the debtor would employ an expert/advisor to investigate the financial position.

(c) If so, is the expert/advisor likely to be:

(i) an independent professional; or

(ii) an 'in-house' employee of the lender? An in-house employee will be the first choice of the lender. However, for an in-depth study, and especially where "in house" expertise is not available, an independent professional may be employed if the debtor agrees.

(d) Is it likely that information regarding the financial position of a corporate borrower as discovered from the work of an expert/advisor would be:

(i) kept secret from other lender/s or creditors;

(ii) disclosed to other/selected lenders? It is most likely that the information will not be offered voluntarily. However, if requested by other lenders (which are banks operating in Pakistan), the information will most probably be accurately provided. Pakistan's Banking Companies Ordinance, 1962 authorises banks to share information. Secondly, banks are required to supply information to the State Bank of Pakistan about facilities provided by them to their customers. The State Bank may share this information, especially where there are any non-performing loans, with other Banks. Banks are required to maintain secrecy as regards their customers. Therefore, there is no general formal or informal mechanism for gathering of information. However, as mentioned above, Banks are authorised to obtain and furnish information to one another on confidential basis. Banks may also obtain credit information about any customer or potential customers from the State Bank of Pakistan.

(e) If there were 2 or more lenders (not in a syndicate) involved with the same corporate borrower, is it likely that they would:

(i) join together to share information and endeavour to work cut a common approach to the financial problems of the corporate borrower; or

(ii) act secretly and independently of one another? On balance, we are of the view that the lenders would share information and try to take a common approach. Nonetheless, this would also depend on the relationship between the creditors. However, we must state that there are instances of one or more lenders taking an independent approach.

(f) If there was a group of lenders (whether in a syndicate or not involved with the same corporate borrower, is it likely that one of them would offer or seek to be the leader on behalf of them all?

Our answer is in the affirmative. In a syndicate, it is common for a lead bank to assume the role of negotiation. In other cases this may also happen. However, the lender with larger stake may have different approach than the lender with smaller stakes. Therefore, divergences may develop.

(g) If so, is it likely that such a proposal would be agreed to by the other lenders?

This depends on lender to lender and the amount of the debt owed to each lender. Our answer at (f) above, covers this point as well.

(h) Is it likely that local lenders would have employees who are experienced in informal work outs?

This depends on the individual lender, but generally, our answer is in the affirmative. From branch managers upwards, employees do have a degree of experience and shall be able to handle informal work outs.

(i) If there was foreign bank lending involved, is it likely that domestic lenders would:

(i) combine with; or
(ii) act independently of the foreign lender/s? This will depend upon the respective amounts advanced by the lenders. If the domestic lenders have advanced substantial amounts, it is possible that they may take an independent approach. Domestic lenders may also take an independent approach, because of local and political influences.

(j) Is it likely that 'junior' or 'minor' lenders might seek to trade their debt?

Generally not likely. However, as a possibility, this cannot be ruled out.