Insolvency Law Reforms - Report on Pakistan

SECTION I - INSOLVENCY LAW REGIME [Note: It would be helpful in this section if, where it is relevant to the answer, the relevant sections or articles of the insolvency law were identified]

I1. Underlying philosohy:

(a) What is the underlying philosophy of the insolvency law of this country? (For example is it distributive, rehabilitative or penal)?

Prior to elaborating on the philosophy underpinning the insolvency law of Pakistan, we would at the outset state that the previous as indeed subsequent sections of the Report focus on matters related to a 'corporate' debtor (i.e. a 'company', which under Pakistan law would be regulated by the Companies Ordinance) and so our review is restricted to the insolvency law regime under the Companies Ordinance. It should be noted that in Pakistan, corporate bodies are exempt from insolvency proceedings under the insolvency laws of Pakistan. For this reason, insolvent companies are wound-up under the Companies Ordinance. However, the insolvency rules set out in the insolvency laws are applicable in the case of winding-up of insolvent companies as regards, rights of secured and unsecured creditors and to debts provable etc.
The Companies Ordinance provides for several methods by which an insolvent company may be dealt with. These are as follows: (a) winding up of the company; (b) Compromises, Arrangements and Reconstruction; (c) Management by Administrator; and (d) Rehabilitation of companies owning sick industrial units. The aforementioned methods are described in detail later on in this Report, and it is evident that the underlying philsophy of insolvency law relating to a corporate debtor under the Companies Ordinance is a combination of distribution, rehabilitation and penal, to the extent that the insolvency of the company is a result of fraudulent acts.
In the context of the foregoing, as referred to above, we would also invite your attention to two further pieces of legislation: The Provincial Insolvency Act, 1920 ("Provincial Insolvency Act") and the Insolvency (Karachi Division) Act, 1909 ("Insolvency Act"). The Provincial Insolvency Act relates to the law of insolvency as administered by the courts of Pakistan having jurisdiction outside the Karachi Division, whilst, the Insolvency Act relates to insolvency for the Karachi Division. These statutes become relevant under the insolvency procedure of winding up, at the stage of proof of debts in respect of insolvent companies. These provisions of these statutes are elaborated upon under Section L of the Report.

(b) Are there elements of more than one philosophy present in the insolvency law of this country?

Yes. Please see (a) above.

Winding up under the Companies Ordinance

Under the winding up provisions of the Companies Ordinance, the primary element is for the dissolution of the corporate debtor and the distribution of the funds and assets of the entity as applicable between creditors of the corporate debtor, and dealing debts owed by the corporate debtor including those accruing to employees in the form of wages, salaries and other remuneration due and outstanding. However, an official liquidator or liquidator appointed for the purposes of winding-up the affairs of the corporate debtor until dissolution also has the power to make any compromise or arrangement with creditors.

Compromise, Arrangement and Reconstruction under the Companies Ordinance

Under the compromise and arrangement provisions of the Companies Ordinance, provisions are made for rehabilitation of a company (even a company being wound up) sanctioned by a court where a company and its creditors or the company and its members agree to a compromise or arrangement, which could include re-organisation and restructuring of debts and reorganisation of the share capital of the company. The provisions also provide for the reconstruction and amalgamation of company's under a 'scheme of arrangement' sanctioned by the Court, whereby the whole or any part of an undertaking, property or liabilities of any company concerned in the scheme is to be transferred to another company.

Management by Administrator

Under the provisions relating to the management of a company by an administrator, the creditor or creditors of a company may make a representation and make a request to the SEC to appoint an administrator to manage the affairs of the company. The details of this type insolvency regime is elaborated upon later in the relevant sections of the Report, but the primary purpose could be for rehabilitating a company which is having insolvency problems.

Rehabilitation of companies owning sick industrial units

The provisions relating to this aspect specifically apply to a company owning an industrial unit which is facing financial or operational problems and is declared by the Federal Government to be a sick company. The main purpose of the related provisions are for the rehabilitation of a company owning a sick industrial unit with penal sanctions being imposed on whosoever fails to give effect to, carry out or implement a rehabilitation plan approved by the Federal Government for the rehabilitation.

I2. Jurisdiction in insolvency matters:

(a) In which judicial category is insolvency law classified in the legal system of this country? (For example civil, commercial or administrative).

Where judicial involvement is prescribed, the Civil Courts have jurisidction in respect of company related matters. Section 7 of the Companies Ordinance provides that the Court having jurisdiction shall be the High Court (hereafter referred to as the "High Court" or "Court") having jurisdiction in the place at which the company's registered office is situated. Section 7 also further provides that the Federal Government may however empower any Civil Court to exercise all or any jurisdiction conferred by the Companies Ordinance on the Court. A High Court is the highest Court in a province.

(b) Which Courts, tribunals or administrative bodies in this country are competent to exercise jurisdiction in insolvency matters?

In the case of winding up and Compromise, Arrangements and Reconstructions, under the Companies Ordinance, the High Courts exercise jurisdiction in relation to matters thereto. In the case of Management by Administrator, the SEC and the Federal Government have jurisdiction over matters related thereto. In the case of Rehabilitation of companies owning sick units, the Federal Government has jurisdiction in respect of such companies.

No specific limitations are placed on the jurisdiction of the High Court, the SEC or the Federal Government. However, these bodies can only act within the powers conferred upon them by the Companies Ordinance for the purposes of ordering: (i) the winding up a company, (ii) a Compromise, Arrangement or Reconstruction of a company, (iii) Management of a company by an Administrator and (iv) the Rehabilitation of a company owning a sick industrial unit.

I3. Types of insolvency procedures

(a) What types of insolvency procedure are available in the legal system of this country for the administration of corporate debtor in financial difficulty? (For example bankruptcy, liquidation (winding up), receivership, restructuring or other forms of administration).

Under the Companies Ordinance, detailed procedures are set out for each type of insolvency related mechanism discussed above. In the case of Winding up, Sections 305 to 449 deal with the procedure and matters related to this type of winding-up (insolvency) procedure. In the case of Compromise, Arrangement and Reconstruction, the procedure and matters related thereto are dealt with in Section 284 to 289 of the Companies Ordinance. In the case of Management by Administrator, the procedure and matters related thereto are governed by Section 295 of the Companies Ordinance, and in the case of Rehabilitation of companies owning sick industrial units, by Section 296 of the Companies Ordinance.

(b) Briefly describe the main features of each type of insolvency procedure for corporate debtors: including, for example the manner in which each procedure is initiated and administered, and the aims of each procedure.

Winding Up (Sections 305 to 449 of the Companies Ordinance)

At the outset, Winding up of a company under the Companies Ordinance may be either (i) by the Court; or (ii) voluntary; or (iii) subject to the supervision of the court.

Winding up by the Court

The provisions for winding up by a court are contained in Sections 305 to 357 of the Companies Ordinance. Section 305 contains the circumstances in which a company may be wound up by the court, including in material part for the purposes of this Report, "if the company is unable to pay its debts" (the circumstances in which a company is considered as unable to pay its debts are described below). Section 309 provides for the manner in which such winding up proceedings are to be commenced. An application is made to the Court by presenting a petition for the winding up of the company, either by the company, or by any creditor(s) or by any contributory(ies). A contributory is defined by Section 300 to mean "every person liable to contribute to the assets of a company in the event of its being wound up and includes the holder of any shares, which are fully paid up". Under Section 311, a winding up of a company by the Court is deemed to commence at the time of presentation of the petition for the winding up. Sections 312 to 314 deal with the powers of the Court hearing the application, including the power to grant injunctions and refusal to make a winding up order. Where a Court makes an order for winding up of a company, it forthwith causes intimation thereof to be sent to the 'Official Liquidator' appointed by it and to the Registrar of Companys.
Under Section 326, the winding up proceedings are to be completed by the Official Liquidator within a period of one year from the date of commencement of winding up. The Official Liquidator conducts the proceedings in winding up the company and under Section 330 takes into his custody or under his control all the company's property. Under Section 331 when a winding up order has been made by the Court, the Official Liquidator is required to summon separate meetings of the creditors and contributories of the company for the purposes of determining whether or not an application is to be made to the Court for the appointment of a "Committee of Inspection" to act with the Official Liquidator. Section 331 provides that where the winding up order has been made on the ground that the company is unable to pay its debts, it is not necessary for the Official Liquidator to summon a meeting of the Contributories.
The aims of this procedure are evident from the powers of the Official Liquidator under the Companies Ordinance, who conducts the winding up of a company. Section 333 of the Companies Ordinance sets out a comprehensive list of powers of the Official Liquidator, who exercises such powers either with the sanction of the Court or the Committee of Inspection (if appointed by the Court). Among these powers discussed in full later in this Report, the Official Liquidator in winding up the Company may: (i) institute or defend any suit, action, prosecution or other legal proceedings, civil or criminal in the name of and on behalf of the company; (ii) carry on the business of the company so far as may be necessary for the beneficial winding up of the company; (iii) to pay any classes of creditors in full, (iv) to compromise all calls and liabilities and all claims and (v) to sell movable and immovable property and things in action of the company.

Voluntary Winding up

The provisions for voluntary winding up are provided for in Section 358 to 395 of the Companies Ordinance. There are two types of Voluntary Winding up: (i) Members Voluntary Winding up, specific provisions for which are contained in Sections 363 to 371 and (ii) Creditors Voluntary Winding up, specific provisions for which are contained in Sections 372 to 382. A "Members' voluntary winding up" is not relevant for this Report, because that type of winding up can only be resorted to for solvent companies. Under Section 358 of the Companies Ordinance, a company may be wound up voluntarily: (a) when the period (if any) fixed for the duration of the company by the articles expires, or the event (if any) occurs, on the occurrence of which the articles provide that the company is to be dissolved and the company in general meeting has passed a resolution requiring the company to be wound up voluntarily or (b) if the company resolves by special resolution that the company be wound up voluntarly. Under Section 359, a voluntary winding up shall be deemed to commence at the time of the passing of the resolution for voluntarily winding up. Thus, where a company is insolvent and is unable to pay its debts, the company resolves by special resolution to dissolve the company, then the procedure for winding-up under the voluntary winding up provisions may be instituted. However, for insolvent companies, this will be a case of creditors voluntary winding-up. It should be noted that under the Companies Ordinance, a "special resolution" is defined to mean "a resolution which has been passed by a majority of not less than three fourths of such members entitled to vote as are present in person or by proxy at a general meeting of which not less than twenty one days notice specifying the intention to propose the resolution as a special resolution has been given".
Section 372 to 382 of the Companies Ordinance provide for a "creditors voluntary winding up". Under Section 373, the company is required to cause a meeting of the creditors of the company to be summoned for the day, or the day next following the day, on which there is to be held a general meeting of the members of the company at which the resolution for voluntary winding up is to be proposed.
Section 375 provides for the appointment of a liquidator and stipulates that the creditors and the company at their respective meetings nominate a person, who has given his written consent to act as such, to be a 'Liquidator' for the purpose of winding up the affairs and distributing the assets of the company. If the creditors and the company nominate different persons, the person nominated by the creditors shall be the Liquidator. Section 376 also provides for the appointment of a "Committee of Inspection" and stipulates that the creditors at their meeting or at any subsequent meeting, may, if they think fit, appoint a "Committee of Inspection" consisting of not more than five persons. The Section goes on to provide for the manner and method by which the Committee of Inspection is to be appointed.
Regarding the aims of the procedure, Section 385 of the Companies Ordinance provides that subject to the provisions of the Ordinance as to preferential payment (and rights of secured lenders), the property of a company shall on its winding up be applied in the satisfaction of its liability pari passu', and subject such application shall, unless the Articles of Association provide otherwise, be distributed among the members according to their right and interests in the company. In so doing, Section 387 lays down the powers and duties of Liquidator in a voluntary winding up, which also evidences the aims of the procedure: (a) in the case of a creditors voluntary winding up, either the Court (where asked to intervene by the company or a creditor(s) or a contributory), or the Committee of Inspection (or if more) of a meeting of the creditors, the liquidator may exercise any of the powers under Section 333 of the Companies Ordinance, briefly discussed above in relation to winding up by the Court; (b) the liquidator shall pay the debts of the company and shall adjust the rights of the contributories among themselves; and (c) the liquidator shall within 30 days of the coming into his hands of any funds sufficient to distribute amongst the creditors or contributories after providing for expenses of the winding up or for other preferential payment as provided for in the Companies Ordinance, distribute the same in accordance with the provisions of the Ordinance. The Section also provides that the winding up proceedings shall be completed by the liquidator within a period of one year from the date of commencement of winding up. Due to delays in court proceedings and recovery of moneys/debts owed to the company, it does not in fact happen and winding-up takes a much longer period.

Winding up subject to Supervision of Court (High Court)

Provisions for this winding up procedure are contained in Sections 396 to 401 of the Companies Ordinance. This procedure is in essence an extension of voluntary winding up and Section 396 provides that when a company has passed a resolution for voluntary winding up, the High Court may of its own motion or on the application of any person entitled to apply to the Court for winding up of a company, make an order that the voluntary winding up shall continue, but subject to the supervision of the High Court. Thus, where a company is insolvent and voluntary winding up proceedings are commenced, the High Court may on its own motion or on by the application of any person, step into the winding up of a company and supervise the same. In fact, Section 397 provides that a petition for the continuance of a voluntary winding up subject to the supervision of the Court shall, for the purpose of giving jurisdiction to the Court over suits and other legal proceedings, be deemed to be a petition for winding up by the Court. The Court may intervene on its own motion or on application to ensure that a voluntary winding up for the distribution of the property of a company to satisfy its liabilities proceeds, efficiently, especially where suits and other legal proceedings may be pending against an insolvent company by its creditors, in which case such suits and legal proceedings are stayed and may be transferred to and disposed off by the Court (which has jurisdiction and in which the winding up proceedings are taking place). Accordingly, in the following Sections of this Report, we focus only on the procedure for Winding up by the Court and Voluntary winding up.

Compromise, Arrangements and Reconstruction under the Companies Ordinance

Where a corporate debtor is insolvent, provision for compromises, arrangements and reconstruction are provided for Sections 284 to 289 of the Companies Ordinance. Section 284 provides that where a compromise, or arrangement is proposed between a company and its creditors or any class of them, the Court may, on the application in a summary way of the company or of any creditor or member of the company or, in the case of a company being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members of the company or class of members, as the case may be, to be called, held and conducted in such manner as the court directs. The Section further provides that if the majority in number representing three-fourths in value of the creditors or class of creditors or members, as the case may be, present and voting (even by proxy), agree to any compromise or arrangement, the compromise or arrangement shall if sanctioned by the Court be binding on all creditors or the class of creditors or on all the members or class of members, as the case may be, and also on the company, or in the case of a company in the course of being wound up, on the Official Liquidator or Liquidator and contributories of the company. For the purpose of Section 284, the term "company" means any company liable to be wound up and the term "arrangement", as already discussed earlier, is broad, and could include rescheduling, restructuring of a company's debts or conversion thereof into shares. Section 285 of the Companies Ordinance provides for the power of the Court to enforce compromises and arrangements, and states that a court may make such orders or give such directions in regard to any matter or make such modifications in the compromise or arrangement as it may consider necessary for the proper working thereof. Importantly, Section 287 of the Companies Ordinance makes provision for facilitating reconstruction and amalgamation of companies. It stiplates that where it is shown to the Court that the compromise or arrangement has been proposed for the purpose of or in connection with a scheme for the reconstruction of a company or companies or the amalgamation of two or more companies or the division of any company into two or more companies and that under the scheme the whole or any part of the undertaking, property or liabilities of any company concerned in that scheme (the "transferor company") is to be transferred to another company, (the "transferee company"), the Court either by the order sanctioning the compromise or arrangement, or by any subsequent order (where such subsequent order may be required for this purpose), make provision for all or any of the following matters: (a) transfer to the transferee company of the whole or any part of the undertaking and of the property or liabilities of any transferor company; (b) the allotment or appropriation by the transferee company of any shares, debentures, policies or other like interests in that company which under the compromise arrangement are to be alloted or appropriated by that company to or for any person; (c) the continuation by or against the transferee company of any legal proceedings pending by or against any transferor company; (d) the dissolution, without winding up of any transferor company; (e) such incidental and consequential matters as are necessary to secure that the reconstruction or amalgmation is fully and effectively carried out. The provisions of Section 284 to 289 are commonly used in Pakistan for the purposes of mergers and acquisitions. However, where a corporate borrower is insolvent and may not have sufficient assets to distribute between its creditors and contributories, resort may be had under these provisions with the aim of reconstructing the company into a viable and profitable entity. These provisions may also be used in order to prevent an impending insolvency but are not usually used in Pakistan for this purpose.

Management by Administrator under the Companies Ordinance:

This procedure is contained in Section 295 of the Compaies Ordinance. Under this section, a creditor or creditors having an interest equivalent to not less than 60% of the paid up capital of a company may represent to the SEC that: (a) the affairs or business of the company are or is being or have or has been conducted or managed in a manner likely to be prejudical to the interest of the company; (b) its members or creditors or any director of the company is or has been guilty of breach, misfeasance or other misconduct towards the company or towards any of its members or creditors or directors; (c) the affairs or business of the company are or is being or have been conducted or managed with intent to defraud its members or creditors or any other person or for a fraudulent a unlawful purpose, or in an oppressive manner of any of such persons or for purposes aforesaid; or (c) the affairs of the company have been so conducted or managed as to deprive the members thereof of a reasonable return; or (d) any industrial project or unit to be set up or belonging to the company has not been completed or has not commenced operations or has not been operating smoothly or its production or performance has so deteriorated that: (i) the market value of its shares as quoted on the stock exchange or the net worth of its share has fallen by more than 75% of its par value; or (ii) the debt equity ratio has deteriorated beyond 9:1; or (iii) current ratio has deteriorated beyond 0.5:1; or (e) any industrial unit owned by the company is not in operation for over a period of two years or has been in operation intermittently or partially during the preceding two years; or the accumulated losses of the company exceed 60% of its paid up capital; and (g) the company has made default in repayment of debt amounting to one million rupees or more as adjudicated by a court of competent jurisdiction or tribunal. Upon such representation, the SEC may after giving the company an opportunity of being heard, by order in writing appoint an "Administrator" within 60 days of receipt of the representation from a panel maintained by the SEC to manage the affairs of the company. As in the previous section, the purpose of management of a company's affairs by an Administrator is to enable the rehabilitation of the entity where it is insolvent and to otherwise attempt remedying its affairs prior to potential/likely commencement of winding up proceedings.

Rehabilitation of companies owning sick industrial units under the Companies Ordinance:
Provision for this is made under Section 296 of the Companies Ordinance. This Section applies to a company owning an industrial unit which is facing financial or operational problems and is declared a sick company by the Federal Government. After a company is declared a sick unit as abovesaid, any institution, authority, committee or person authorised by the Federal Government may draw up a plan for the rehabilitation, reconstruction and reorganisation of such company. The Federal Government of Pakistan has constituted a Task Force for this purpose. Section 296 provides for a comprehensive list of matters that may be included in the rehabilitation plan including the alteration of loan structure, debt rescheduling or conversion into shares carrying special rights or other relief and modification in the terms and conditions in respect of outstanding debts and liabilities of the company or any part of such loan, debts or liabilities or variations in the rights of creditors including any security pertaining thereto. The rehabilitation plan is submitted to the Federal Government which, unless it decides otherwise, publishes it in the Official Gazette for ascertaining views of shareholders, creditors and other persons concerned, within specified periods.
On the approval of the rehabilitation plan by the Federal Government, its provisions become final and take effect and are to be implemented. The plan is valid, binding and enforceable in all respects notwithstanding anything in the Companies Ordinance or any other law or the Memorandum or Articles of Association of the company or in any agreement executed or any resolution passed by the company.
The procedure under Section 296 of the Companies Ordinance is a method of rehabilitating a company, even where it is insolvent company and unable to pay its debts.Nonetheless, it should be noted that Section 296 has been brought into force very recently. There are no precedents. Recently, a set of Rules called the Companies (Rehabilitation of Sick Industrial Units) Rules 1999 have been framed, which deal with the establishment of a task force for reviving sick units. These Rules are discussed in Section Q below.

(c) Identify the relevant legislation governing each type of insolvency procedure available for corporate debtors. The Companies Ordinance 1984.

I4. Commencement of insolvency procedures:

(a) Is it usual or customary in respect of a corporate debtor which is insolvent to attempt to negotiate an informal administration before formal insolvency procedures are commenced?

It is usual for the sponsors/directors of a corporate debtor to avoid a potential winding up.

(b) In relation to each type of insolvency procedure available in the legal system of this country, who may commence the procedure? (For example the corporate debtor, secured creditors, unsecured creditors, directors, shareholders, the State).

Winding up under the Companies Ordinance

A petition for winding up of a company by the Court can be presented under Section 309 by either: (a) the company; or (b) any creditor or creditors (including any contingent or prospective creditor or creditors); or (c) by any contributory or contributories; or (d) by all or any of the said parties, together or separately; (e) or by the Registrar of Company; or (f) by the SEC or any person authorised by the SEC in that behalf.
In the case of a creditors voluntary winding up, voluntary winding up under Section 358 and 359 commences upon the passing of a special resolution of the company and passing of a creditors' resolution under Section 373 on the same day on which the special resolution of the shareholders is passed or on the next following date. .

Compromises, Arrangement and Reconstruction under the Companies Ordinance

Under Section 284, the power to compromise lies with the creditors and/or members of a company. The application to the Court for the purpose of calling the meeting for the purposes of a compromise or arrangement compromise or may be made by: (a) the company; or (b) a creditor; or (c) a member; or (d) in the case of company being would up, the liquidator.

Management by Administrator under the Companies Ordinance

Under Section 295(1), a creditor or creditors having an interest equivalent in amount to not less than 60% of the paid up capital of a company may make a representation to the SEC concerning the affairs of a company and request the SEC to take action by appointing an Administrator to manage the affairs a company. Rehabilitation of companies owning sick industrial units under the Companies Ordinance

Under Section 296, the Federal Government is empowered to declare a company owning a sick industrial unit as a sick company and approve a rehabilitation plan.

(c) On what basis may each type of insolvency procedure be commenced, or what requirements must be satisfied before the procedure may be commenced? (For example non-payment of debts; balance sheet/cash flow insolvency; trading losses; resolution by directors to enter insolvency procedure).

Winding up under the Companies Ordinance

In the case of a winding up by the Court, we have previously discussed that under the relevant part of Section 305 of the Companies Ordinance, a company may be wound up by the Court "if the company is unable to pay its debts". Section 306 provides the circumstances for when a company is unable to pay its debts, and a company is deemed to be unable to pay its debts when: (a) if a creditor, by assignment or otherwise, to whom the company is indebted in a sum exceeding one percent of its paid up capital or fifty thousand rupees, whichever is less, than due, has served on the company, by causing the same to be delivered by registered post or otherwise, at its registered office, a demand under his hand requiring the company to pay the sum so due and the company has for 30 days thereafter neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor, or (b) if execution or other process issued on a decree or order of any court or any other competent authority in favour of a creditor of a company is returned unsatisfied in whole or in part; or (c) if it is proved to the satisfaction of the Court that the company is unable to pay its debts, and, in determining whether a company is unable to pay its debts, the Court takes into account the contingent and prospective liabilities of the company. Regarding a creditors voluntary winding-up, there is no prescribed basis for commencing this type of insolvency. However, it is obvious that this type of action will be taken where the company and the creditors propose to co-operate in the winding-up of a company so as to make it smooth and free from confrontation. All that is required is that a special resolution for winding up be passed by the company and resolution of the creditors, as described above. Indeed, the examples quoted above can be used on a basis for resolving to wind up a company.

Compromises, Arrangement and Reconstruction under the Companies Ordinance

No prescribed basis is provided for in order to commence such proceedings. A company, its members and creditors would resort to this line of action where a scheme can be put into motion with the approval of the Court for the benefit of all parties, including the creditors. The examples quoted above can be used as a basis for initiating this procedure, or when liquidation proceedings have already been commenced against a company. However, where a compromise is proposed an application is required to be made to the Court in a summary way by: (a) the company; or (b) creditor; or (c) member or (d) liquidator of a company, whereafter the Court may order a meeting of the creditors or members to be called. If a majority in number representing three-fourths in value of the creditors or members agree to any compromise or arrangement, the compromise or arrangement will only if sanctioned by the Court, be binding on all the creditors or on all the members and also on the company, or, in the case of a company in the course of being wound up, on the liquidator, as the case may be and contributories of the company.

Management by Administrator under the Companies Ordinance

Under Section 295 a creditor or creditors having interest equivalent in amount to not less than 60% of the paid up capital of a company have to represent to the SEC that one or more of the matters contained in Section 295(a) - (g), described in detail earlier has occurred in order for the SEC to consider appointing an Administrator.

Rehabilitation of companies owning sick industrial units under the Companies Ordinance

In order for the provisions of Section 296 to apply, the industrial unit owned by the company must be facing financial or operational problems and has to be declared a sick company by the Federal Government.

(d) How is each type of insolvency procedure commenced? (For example by application to the Court, by administrative act, by written notice to the business organisation).

Winding up under the Companies Ordinance

As already discussed, where winding up is commenced by the Court, an application for winding up, is to be made by the way of a petition to the Court. In the case of creditors voluntary winding up, winding up is commenced through special resolution for voluntary winding up, followed by the resolution of creditors appointing liquidators.

Compromises, Arrangement and Reconstructions under the Companies Ordinance

As already discussed, these are entered into by application to the Court.

Management of Administrator under the Companies Ordinance

As already discussed, appointment of an administrator is through a representation to the SEC. Rehabilitation of companies owning sick units under the Companies Ordinance As already discussed, declaration of a company as a sick unit is made by the Federal Government.

(e) What is the usual time period between the commencement of formal insolvency proceedings and the declaration or imposition of a formal administration on the corporate debtor?

The answer is restricted to the insolvency procedure of winding up.

In the case of winding up of a company by the Court, under Section 9 of the Companies Ordinance, all matters coming before the Court under the Ordinance are to be disposed of, and judgment to be pronounced as expeditiously as possible, but not later than 90 days from the date of presentation of a petition or application to the Court, and, except in extraordinary circumstances to be recorded, the Court is to hear the case on a day to day basis. Under Section 312 of the Companies Ordinance, a petition for winding up of a company is required to come up for regular hearing, be proceeded with and decided within the 90 days time frame laid down by Section 9. Thus, the Court is required to refuse or make an order for winding within 90 days of the commencement of winding up proceedings. Following the order for winding up, liquidator is appointed to conduct the winding up of a company. Although the said 90 days period is prescribed, a formal order of winding-up and appointment of a liquidator may take a much longer period because of delays in the legal system.

(f) How effective is the judicial or court system (or administrative system) in relation to the handling of formal insolvency proceedings?

In practice, time limits prescribed by law may not be adhered to, and there are delays. However, Courts orders are implemented and given effect to.

I5. Effect of insolvency procedures:

(a) In relation to each type of insolvency procedure available in the legal system of this country, what is the effect on the corporate debtor, its constituent parts and its business relationships on initiation of the relevant insolvency procedure?

(For example how does initiation of the insolvency procedure affect:

- the powers of management of the debtor;
- the interests of owners/shareholders of the debtor;
- contracts to which the debtor is a party;
- legal proceedings to which the organisation is a party;
- remedies available to persons in contractual (non-debt) relationships with the debtor);

Winding up under the Companies Ordinance

Under Section 402, which is applicable to every mode of winding up, it is provided that from the date of commencement of the winding up of a company, the liquidator shall be deemed to have taken the place of the directors, chief executive and managing agents of the company. Thus, the Chief Executive and the Board of Directors will be superseded and the power of management will vest in the liquidator.
Specifically, under Section 330, in the case of winding up of a company by the Court, the liquidator appointed by the Court for the winding-up of the company takes into his custody or under his control all the books and papers, property, effects and actionable claims belonging to or to which the company is or appears to be entitled. Section 333 also comprehensively provides for the powers of the liquidator, one such power being to carry on the business of the company so far as may be necessary for the beneficial winding up of the company.

The interests of shareholders in a company being wound up are protected in so far as the assets of the company are to be distributed among the shareholders/members after all debts of the company have been paid off. However, under Section 298 of the Companies Ordinance, in the event of a company being wound up, every past and present member is liable to contribute (subject to limit on such contribution described below) to the assets of the company to an amount sufficient for payment of its debts and liabilities and the costs, charges and expenses of the winding up and for the adjustment of the rights of the contributories among themselves. Whilst the shareholders of company are liable to contribute for the purposes of paying off the company's debts and liabilities, Section 298 also does qualify the liability, such as: (i) a past member shall not be liable to contribute if he has ceased to be a member for one year or earlier before the commencement of winding up, and (ii) in the case of a company limited by shares, no contributions shall be required from any past or present member exceeding the amount, if any, unpaid on the shares in respect of which he is liable as a member/shareholder etc. In Pakistan, only fully paid-up shares can be issued. Therefore, the shareholders will in fact have no liability to make any contribution.

Regarding contracts of which the company is a party, Section 407 of the Companies Ordinance provides for the disclaimer of property and states that where any part of the property of a company comprises unprofitable contracts, the liquidator may with leave of a Court, at any time within (12) months after the commencement of the winding up, disclaim the property. Apart from being able to disclaim unprofitable contracts, the Official liqudiator may also disclaim land burdened with onerous covenants, shares or stock in companies and any other property of the company that is unsaleable or not readily saleable by reason of requiring the performance of any onerous act or the payment of any sum of money.
As to contracts, these would be binding and are to be performed. However, Section 407 provides that the Court may on the application of any person who is entitled to the benefit of a subject to the burden of a contract made with the company, make an order rescinding the contract with an order for damages and any damages payable by the company to any such person, may be proved by him as a debt in the winding up. ? As to legal proceedings, under Section 316 of the Companies Ordinance, where a winding up order has been made by a Court, no suit or other legal proceedings shall be proceeded with or commenced against the company except by leave of the Court. In addition any suit or proceedings by or against the company which is pending in any Court other than in which the winding up of the company is proceeding, may be transferred to and disposed of by the Court in which winding up proceedings are pending.

In the case of a Voluntary Winding up, under Section 391 of the Companies Ordinance, the liquidator or any contributory or creditor may apply to the Court to exercise as respects the enforcing of calls, the staying of proceedings or any other matter or any of the powers which the Court might exercise if the company were being wound up by the Court. Alternatively, if a petition is made for continuation of a voluntary winding up subject to supervision of the Court, then under Section 397 of the Companies Ordinance, the Court has jurisdiction over suits and other legal proceedings as if in a petition for winding up by the Court and the provisions of Section 316 will apply.

Compromises, Arrangement, and Reconstruction under the Companies Ordinance

Regarding the effect of this type of insolvency procedure on the company really depends on the terms of the compromise or arrangement and the order of the Court in respect thereof.
Under Section 287 of the Companies Ordinance, where an application is made to the Court under Section 284 for the sanctioning of a compromise or arrangement and it is shown that the compromise or arrangement is for the reconstruction of a company or companies or the amalgamation of any two or more companies or the division of any company into two or more companies, and that uner the scheme the whole or any part of the undertaking, property or liabilities of the company (the "transferor company") are to be transferred to another company (the "transferee company"), the Court may either by the order sanctioning the compromise or arrangement or by any subsequent order: (a) transfer to the transferee company of the whole or any part of the undertaking and of the property or liabilities of any transferor company; (b) the allotment or appropriation by the transferor company of any shares, debentures, policies or other like interest in that company which under the compromise or arrangement are to be alloted or appropriated by that company to or for any person; (c) the continuation by or against any the transferee company of any legal proceedings pending by or against any transferor company; (d) the dissolution, without winding up, of any transferor company; (e) the provision to be made for any person who, within such time and in such manner as the Court directs, divest from the compromise on arrangement; and (f) such incidental , consequential and supplemental matters as are necessary to secure that the reconstruction or amalgamation is fully and effectively carried out. The Section also provides that where an order provides for the transfer of property or liabilities, the same is by virtue of the order transferred to and becomes the property and liabilities of the transferee. Contracts are also similarly transferred.

Management by Administrator under the Companies Ordinance

Under Section 295, upon the appointment of an Administrator, the management of the affairs of the company vest in him and he exercises all powers of directors or other persons in whom the management of the company is vested and all such directors and persons shall stand divested of management and powers, and cease to function or hold office.
The Section also provides that where it appears to the Administrator that any purchase or sales agency contract has been entered into, or any employment given, patently to the benefit of any director or other person in whom the management vested or his nominees and to the detriment of the interest of the general members, the Administrator may, with the previous approval in writing of the SEC, terminate such contract or employment. Further, no person is entitled to compensation or damages for termination of any office, contract or employment as abovesaid. Subject to the above, all other affairs of the company will continue to be run in the usual manner, and contracts will remain binding and the cases by and against the company will continue.

Rehabilitation of Companies owning sick industrial units under the Companies Ordinance

Pursuant to Section 296 of the Companies Ordinance, a rehabilitation plan may provide for all or any of the following:
(a) reduction of capital of the company or reconstruction, compromise, amalgamation and other arrangement; (b) the alteration of share capital and variation in rights and oblilgations of shareholders or any class of shareholders; (c) alteration of loan structure, debt scheduling or conversion into shares carrying special rights or other relief and modification in the terms and conditions in respect of outstanding debts and liabilities of the company; (d) acquisition or transfer of shares to persons who are or have been sponsors or otherwise managing the affairs of the companyon specified terms and conditions; (e) issue of further capital including shares carrying special rightrs and obligations relating to voting powers, dividends, redemption or treatment on winding up; (f) removal and appointment of directors (including the chief executive) or other officers of the company; or (g) amendment, modification or cancellation of any existing contract; or (h) alteration of the Memorandum or Articles of Association or changes in the accounting procedure. Section 296 also provides that any provision in the Memorandum or Articles of Association of such a company, agreements, documents or resolutions are void to the extent that they are repugnant to the provisions of Section 296 or the rehabilitation plan. Thus, all the matters referred in the question will be dealt with in the plan approved by the Government.

(b) If another insolvency procedure has already been initiated in relation to the corporate debtor, how does the initiation of a second procedure affect the first? If an insolvency (winding-up application) procedure is pending, any second procedure is likely to be clubbed with the first procedure.