(a) Are there civil or penal/criminal sanctions in the legal system of this economy 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)?

 

Only where fraudulent or criminal actions are involved.

(b) What are these sanctions?

 

Under the Ordinance where during the course of a winding up it appears that:

any officer of the company or past or present liquidator has misapplied any property or is in breach of trust in respect thereto the Court may on an application of a liquidator or creditor order such person to repay or restore the money with a surcharge as the Court deems appropriate (Sec.412).

any business of the company has been carried on with intent to defraud the creditors or for any fraudulent purpose, the Court may on an application by a liquidator or creditor or contributory declare any person who was knowingly party to the fraud as being personally liable without limitation for the debt or other liabilities of the company (Sec.413).

Liability under Sections 412 and 413 may be extended to persons who were directors at the relevant time (Sec.414).

Imprisonment of upto five years and fine of upto Rs. 20,000 is prescribed for officers of a company under liquidation for:

obtaining credit on false pretences or by means of other fraudulent actions or for disposing of or transferring the property of the company with intent to defraud creditors (Sec.415).

failing to keep proper books of account (Sec.416).

falsification of books (Sec.417).

being guilty of criminal acts (Sec.418).

intentionally giving false evidence (Sec.419).

failing to give full and complete information to the liquidator or for making complete disclosure to the liquidator or concealing facts and property from the liquidator or removing property of the company, falsifying or tampering with the record of the company or for making false representation to the creditors for the purpose of arriving at an arrangement (Sec.420).

Under Sec.19 of the Banking Companies Act , where a corporate debtor is guilty of a fraudulent act with respect to mortgaged/hypothecated property, or making of a false statement in an application for a loan or other financing or obstructing the execution of a decree or of issuing a cheque which is dishonoured, the chief executive of the corporate debtor by whatever name called and any director or officer involved is deemed guilty of the offence and liable to be proceeded against and punished. Penalty for these offences is imprisonment of upto one year or fine or both.

(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?

 

No such protection is available in the insolvency law regime.

(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 become applicable once formal application for recovery or winding up are initiated and therefore cannot stand in the way of an informal workout which would be initiated prior to any formal action being initiated.