(a) Is the system of ownership rights in respect of both land and other property reasonably stable and certain in this economy?

 

Ownership rights in respect of both land and other property are reasonably stable and certain.

(b) In particular:

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

 

Yes, the system of land ownership and rights is sufficiently developed to encourage lending on the security of land.

(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?

 

The system of ownership and rights in relation to movable property is well developed and in particular a corporate borrower may grant a floating charge over all or any class of its present and future assets.

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

 

A variety of mechanisms for taking security exist in Pakistan. These include legal mortgages over land, equitable mortgages. Additionally corporate borrowers grant floating or fixed charges over movable assets. Various other security mechanisms such as liens, pledges, hypothecations and securing deposit accounts in favour of a lender are also common.

 

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

 

Mortgages over land and fixed and floating charges and pledges are the most common form of security.

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

 

A system of registration for mortgages and charges exists for companies under the Ordinance. Section 121 lists the charges that must be registered in accordance with the provisions of the Ordinance with the Registrar within twenty one days of the date of their creation. These are:

(a) a mortgage or charge for the purpose of securing any issue of debentures;

(b) a mortgage or charge on uncalled share capital of the company;

(c) a mortgage or charge on any immovable property wherever situate or any interest therein;

(d) a mortgage or charge on any book debts of the company;

(e) a mortgage or charge , not being a pledge, on any movable property of the company;

(f) a floating charge on the undertaking or property of the company including stock-in-trade;

(g) a mortgage or charge on a ship or any share in a ship;

(h) a mortgage or charge on goodwill, on a patent or licence under a patent, on a trade mark, or on a copyright or a licence under copyright;

(i) a mortgage or charge or other interest based on agreement for the issue of participation term certificate;

(j) a mortgage or charge or other interest based on a musharika agreement;

(k) a mortgage or charge or other interest based on a hire-purchase or leasing agreement for acquisition of fixed assets.

Section 122 provides that where a company acquires property which is subject to charge, the particulars of such charge must be filed with the Registrar within twenty one days of the acquisition of such property.

There is no law in existence for registration of mortgages and charges by societies/ trusts and statutory corporations.

 

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

 

Priorities are regulated by the order in which the mortgages/charges are registered and by the agreements with the lenders. Certain class of debtors have priority under the winding up proceedings under the Ordinance.

(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?

 

It would be usual for a secured lender to attempt a negotiated settlement with a corporate borrower in difficulty before resorting to legal enforcement.

(b) What mechanisms are available to security holders to enforce their securities under the legal system of this economy (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. Possession of the secured property can be taken over under a legal mortgage or by virtue of a Power of Attorney or pursuant to a Hypothecation Agreement. A receiver may be appointed by virtue of powers contained in any instrument or by order of court (Sec.137) or under Section 69A of the Transfer of Property Act, 1882 or under Section 16 of the Banking Companies (Recovery of loans, advances, credits and finances) Act 1997 (the Banking Companies Act). Winding Up can be initiated under the Ordinance (Sec.305). A suit for foreclosure may be filed under Section 67 of the Transfer of Property Act 1882.

(c) Do these methods include that a secured creditor may 'self-enforce' the security (ie, without the need for an order of a court or the consent of a regulatory authority)?

 

A secured creditor may self-enforce the security in the case of a legal mortgage or through exercise of powers conferred under Powers of Attorney given by the borrower or through contract. However, where a winding up order has been passed leave of court will be required.

(d) In practice, which method(s) of enforcement are most commonly employed by security holders?

 

In general the most common method of enforcement is through recovery proceedings under the Banking Companies Act, and through civil suits for recovery in other cases.

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

 

Under Section 9 of the Banking Companies Act, a banking company, borrower or customer may institute a suit by filing a plaint supported by a statement of account. A summons is then issued to the defendant and upon an application by the defendant leave to defend is granted. The court may pass an interim decree in respect of part of the claim which appears to the court to be payable (Sec.11). Where the plaint relates to recovery of amount through sale of any property which has been mortgaged, pledged, hypothecated or otherwise charged as security the court may restrain or injunct the sale, attach the property or appoint one or more receivers.(Sec.16). Civil Suit for recovery can be filed by any creditor before a civil court where subject to the normal process for a suit the court will pass a decree for recovery which may be enforced by way of attachment and auction of secured property (Order XXI, Civil Procedure Code).

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

 

In principle it is considered to be effective in that time frames for final adjudication are prescribed. However, in practice the system is very slow and also corrupt.

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

 

In a compulsory winding up, any time after the commencement of the insolvency proceedings the court may upon an application by the company or its creditors or contributories restrain further proceedings in any suit or proceedigns against the company upon such terms as the court thinks fit. (Sec.313). This section does not affect the ability of a secured creditor to enforce security rights without intervention of the court. Commencement of voluntary winding up does not affect the process of security enforcement.

(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?

 

Leave of court is required for enforcement and under Section 316 once a winding up order has been passed or provisional manager appointed no suit or other legal proceedings shall be proceeded with or commenced against the company except by leave of the court and subject to such terms as the court may impose. Moreover any proceedings by or against the company pending in any court other than the one hearing the winding up petition shall be transferred to such court. Enforcement through out of court methods is not affected by Section 316.