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

 

The Pakistan insolvency law is based on a mixed philosophy with an emphasis on distribution.

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

Yes.

(c) Briefly describe the relevant elements, and if applicable, any penal sanctions available.

 

Distributive- the main emphasis of the Pakistan corporate insolvency regime is on distribution, the object being to apportion liability and settle as much of the debt as possible (Sec.349). The Banking Companies Act also lays emphasis on recovery of debt and distribution.

Rehabilitative- Parts IX and X of the Ordinance provide for rehabilitation. This may be effected by appointment of a manager or receiver (Sec.137), arrangement and reconstruction (Sec.284), appointment of an administrator (Sec.295) or declaration of the corporate borrower as a sick unit (Sec.296).

Penal- there is also an element of penal action where fraudulent acts have led to insolvency. In such cases penal sanctions such as imprisonment and fines are applicable.The following sections of the Ordinance set out offences which are antecedent to or arise in the course of winding up:

Sec.412-power of court to assess damages against delinquent directors.

Sec.413 - liability for fraudulent conduct of business.

Sec.415- fraud by officers of company in liquidation.

Sec.416-liability where proper accounts not kept.

Sec.417- penalty for falsification of books.

Sec.418-prosecution of delinquent directors.

Sec.419-penalty for false evidence.

Section 19 of the Banking Companies Act sets out the following offences which are subject to penalty under the Act:

(1)(a) dishonest breach of the terms of letter of hypothecation or trust receipt.

(b)creation of a further charge or dispossession of a property once it has already been charged in favour of a banking company.

(2) making a materially false statement in an application for loan or finance.

(3)resistance or obstruction of execution of a decree.

(4)dishonest issuance a cheque which is dishonoured.

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

 

Insolvency law in Pakistan is classified primarily in Commercial law but also in Civil law and with the enactment of the Banking Companies Act also in the Banking law.

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

 

High Court and Banking Tribunals headed by a District judge or a judge of the High Court and Civil Courts.

(c) Are any limitations placed on the jurisdiction of any of these bodies?

 

Jurisdiction of Banking Tribunals is limited to cases by and against banks and DFIs.

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

 

The following insolvency procedures are available in the Pakistan legal framework for administration of corporate debtors:

Under the Ordinance:

(1)Winding Up by the Court (Secs.275 and 305 (e))

(A) Winding Up by the Court under Sec.275 pursuant to an order granted on a complaint for fraud or mismanagement (Sec.290)

(B) Winding Up by Court under Sec.305.

(2) Reconstruction (Sec.284),

(3) Appointment of a receiver or manager (Sec.137),

(4) Appointment of an administrator (Sec.295),

(5) Declaration of a company as a sick unit and order for rehabilitation (Sec.296)

Under the Banking Companies Act:

Recovery under Section 9 of the Act.

The Code of Civil Procedure, 1908.

Suit for recovery.

It may be pointed out that there is a carve out for banking and insurance companies, the insolvency procedures for which are set out in the Banking Companies Ordinance , 1962 and the Insurance Act, 1938 respectively.

The salient features of these procedures are given below:

Banking Companies Ordinance, 1962

Part III of this 1962 Ordinance lays down special provisions affecting insolvency procedures against banking companies. These are:

(a) the grant by the High Court of a stay of proceedings against a banking company on an application by such company accompanied by a report of the SBP showing that in the opinion of the SBP the banking company will be able to pay its debts if the stay is granted. (Sec.45 of the 1962 Ordinance).

(b) restriction on compromise or arrangement between banking companies and creditors unless the same is certified by the SBP as being workable and not detrimental to the interests of the depositors. (Sec.46 of the 1962 Ordinance).

(c)application by the SBP under Section 47 of the 1962 Ordinance to the Federal Government for an order of moratorium in respect of the banking company and order of moratorium by the Federal Government staying the commencement or continuance of all actions against the banking company for a fixed period of time, not to exceed six months.(Sec.47 (2) of the 1962 Ordinance). During the period of moratorium the SBP may in the interest of depositors, pubic interest,, better management of the banking company prepare a scheme for the reconstruction of the banking company or for the amalgamation of the banking company with another banking company. (Sec.47 (4) of the 1962 Ordinance).

(d) procedure for amalgamation (Sec.48 of the 1962 Ordinance).

(e) Winding up by the High Court where the banking company is unable to pay its debts or an application for winding up is filed by the SBP.(Sec.49 of the 1962 Ordinance).

(f) appointment of Court Liquidator (Sec.50 of the 1962 Ordinance).

(g) Notice to preferential claimants (Sec.55 of the 1962 Ordinance).

(h) preferential payments to depositors (Sec.58 of the 1962 Ordinance).

Insurance Act, 1938

Sections 53 to 61 of the 1938 Act lay down special provisions affecting insolvency procedures against insurance companies. These are:

Sec.53- Winding up may be ordered by the Court in accordance with the Companies Ordinance , 1984 on the following additional grounds:

(a) if with the sanction of the court a petition is presented by shareholders not less than one-tenth in number of the entire number of shareholders and holding not less than one-tenth of the whole share capital or by not less than fifty policy holders of policies held for at least three years and of a total value of not less than Rs. fifty thousand.

(b) application of winding up by the Controller of Insurance.

Sec.54- Bar on voluntary winding up.

Sec.55-valuation of liabilities.

Sec.56-value of the assets and liabilities of the insurer in respect of life insurance to be ascertained separately from the value of any other assets and liabilities and not to be applied to the discharge of any liabilities other than those for life insurance.

Sec.58-scheme for partial winding up of insurance companies.

Sec.59- return of deposits.

Sec.60-notice of policy values.

Sec.61-power of court to reduce the amounts of the insurance contracts.

(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 is initiated where a company is unable to pay its debts normally by a creditor either directly under Section 305 or through the Authority under Sec.275 by virtue of an order under Sec.90. Winding up may be initiated through a special resolution by the company under Section 358 (b), but this is not an insolvency procedure. The procedure is administered by a liquidator singly or together with a committee of inspection. In some cases where the Court feels that although the facts would justify the making of a winding up order, the making of such order would unfairly prejudice the creditors, the Court may make such order for regulating the affairs of the company as it thinks fit including an order for change in management. The aim of the procedure is to liquidate and to distribute the assets to the creditors such that the interests of the creditors as also those of the employees and tax authorities are safeguarded.

Reconstruction can be initiated under Section 284 of the Companies Ordinance on application to the Court by any creditor or the company or a member or in the case of a company being wound up by the liquidator. The aim of the procedure is to reorganise the company and to protect the interest of the creditors.

Appointment of a receiver or manager can be initiated by an application to the court where a financing document provides for such appointment.The aim of the procedure is the take over of the assets of the company for settling the debt. A receiver may also be appointed under Sec.16 of the Banking Companies Act by the court itself where the plaint relates to recovery of any amount through a sale of charged property.

Appointment of an administrator can be initiated through a representation to the Securities and Exchange Commission of Pakistan (SECP) by a creditor(s) having an interest equivalent to sixty percent of the paid up capital of the company (Sec.295). The aim of the procedure is to prevent mismanagement.

The Federal Government may declare a company owning an industrial unit which is facing financial problems a sick company and order a plan for its rehabilitation(Sec.296). The aim of the procedure is rehabilitation of the company.

Recovery under the Banking Companies Act can be initiated by instituting a suit in the Banking Court set up under Sec.9 of the said Act. The aim of the procedure is to recover loans.

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

 

The Companies Ordinance 1984 for winding up, arrangement or management, appointment of receivers/administrators, and rehabilitation.

Banking Companies (Recovery of Loans, Advances, Credits and Finances) Act, 1997.

The Code of Civil Procedure, 1904 for recovery of loans.

(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?

 

A lender would normally attempt to negotiate an informal administration before initiating any formal proceedings. However, such attempts are usually not successful.

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

 

Winding up through the court can be commenced on an application by the Registrar pursuant to an order under Sec.90 passed on a complaint by creditors having interest equivalent in amount to atleast 20% of the paid up capital of the company or under Sec.305 by the company, any creditor or contributory (Sec.309).

Reconstruction can be commenced on an application by a creditor or the company or a member.

Appointment of a receiver or manager can be obtained by any person under any powers contained in any instrument i.e by a creditor by virtue of a financing document. A receiver may also be appointed under Sec.16 of the Banking Companies Act by the court itself where the plaint relates to recovery of any amount through a sale of charged property.

An administrator can be appointed upon representation by a creditor having interest equivalent to sixty percent of the paid up capital of the company.

A company may be declared a sick unit and its rehabilitation ordered by the Federal Government.

Suit for recovery under the Banking Companies Act can be filed by any banking company, creditor, secured or unsecured, or customer.

Suit for recovery through the courts can be filed by any creditor, secured or unsecured.

(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.)

 

(1) Winding up can be commenced pursuant to an order under Sec.90 passed on a complaint by creditors having interest equivalent in amount to atleast 20% of the paid up capital of the company or under Sec.305 if a creditor to whom the company is indebted in a sum exceeding one per cent of its paid up capital or Rs. 50,000, whichever is less has raised a demand and the demand is not met for thirty days after receipt of demand, or if a decree or order of Court in favour of a creditor is not satisfied or if it is proved to the satisfaction of the Court that the company is unable to pay its debts. Voluntary winding (Sec.358) up can be commenced when the company through a special resolution decides to wind up the company but is unable to file a declaration that it is insolvent.Voluntary winding up is not strictly an insolvency procedure.

(2) Sanction for reconstruction or arrangement or compromise can be obtained where a majority in number representing three fourth in value of the creditors or class of creditors or members vote for reconstruction or arrangement or compromise (Sec.284 (2)).

(3) Appointment of a receiver or manager can be through order of a court in a debenture holders' action or under any powers contained in any instrument or under Sec.16 of the Banking Companies Act or under Order XL of the Civil Procedure Code.

(4) Administrator can be appointed through a representation by a member(s) or a creditor(s) having interest equivalent to sixty percent of the paid up capital of the company on grounds of mismanagement or negative financial state of the company.

(5) Company may be declared a sick unit and subjected to rehabilitation by the Federal Government where company is facing financial problems.

(6) Recovery proceedings under the Banking Act can be filed by a banking company when there is default in payment.

(7) Recovery proceedings before the Court can be filed by any creditor when there is default in payment or for a material breach of the financing agreements which breach would normally include provisions relating to the ability of the corporate debtor to meet its financing obligations to a lender.

(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 organization.)

 

Application for winding up is to be made by way of a petition to the Court (Sec.309).

Reconstruction, arrangement or compromise may be entered into by application to the Court (Sec.284).

Appointment of receiver or manager may be commenced by application to the Court or directly where power to so appoint is conferred by agreement.

Appointment of administrator is through a representation to the SECP (Sec.295).

Declaration of a company as a sick unit is made by the Federal Government suo moto (Sec.296).

Recovery under the Banking Act can be commenced by instituting a suit in the Banking Court.

Recovery through the Court can be commenced by instituting a suit in the Civil Court.

(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?

 

Winding up -appointment of liquidator - Prescribed period under the Ordinance is about three to three and a half months. However, in practice this period is very often not adhered to.

Recovery suit under the Banking Act- leave to defend to be granted within twenty one days of an application to defend and suit to be disposed within ninety days after leave to defend has been granted. An appeal may be preferred against a decree of the Banking Court within thirty days of the decree and the same must be decided within ninety days of the date of admission. In practice the time limitations are not adhered to.

Recovery through a civil suit- upto three years in the first instance.

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

 

In theory time limits are prescribed by law; however, in practice these limits are not adhered to and there are delays.

(a) In relation to each type of insolvency procedure available in the legal system of this economy, what is the effect on the corporate debtor, its constituent parts and its business relationships of 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 organization is a party;

- remedies available to persons in contractual (non-debt) relationships with the debtor);

A. Under the Ordinance

Winding Up

The powers of management of the debtor: From the date of commencement of the winding up, the official liquidator or the liquidator is deemed to have taken the place of the directors, chief executive and managing agents of the company as the case may be (Sec.402 ) and all the powers of the directors and chief executive and other officers cease except for the purpose of passing a resolution for winding up and appointment of liquidator (Sec.378). The debtor therefore relinquishes the powers of management upon appointment of the liquidator.

- the interests of owners/shareholders of the debtor

Under Sec.406 every transfer of shares and alteration in the status of a member made after the commencement of winding up shall, unless approved by the liquidator, be void. Shareholders also relinquish their right to bind the company through special resolution

- contracts to which the debtor is a party;

Contracts will continue, but under Sec.407, the liquidator has the power with the leave of the Court to disclaim onerous contracts.

Legal proceedings to which the debtor is a party: Upon a winding up order being issued no suit or other legal proceeding shall be proceeded with or commenced against the company except by leave of the Court and the Court which is winding up the company shall have jurisdiction to entertain or dispose of any suit proceeded by or against the company (Sec.316 of the Ordinance).

- remedies available to persons in contractual (non-debt) relationships with the debtor);

In a winding up the liquidator has the power to disclaim onerous contracts. This power must,however, be exercised within twelve months of the commencement of winding up. (Sec.407).

Reconstruction, arrangement or compromise

An application for reconstruction, arrangement or compromise under Sec.284 does not have any formal effect on the powers of the management, the rights of the shareholders or owners, contracts or remedies available to persons who have a contractual relationship with the company. However, under Sec.284(5) the Court may at any time after an application has been made to it for arrangement or compromise stay the commencement or continuation of any suit or proceeding against the company. However, once a scheme is approved by the Court, depending on the nature of the scheme the Court may make provision for the following matters:

(a) the transfer to the transferee company of the whole or any part of the undertaking, properties 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 are to be allotted 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) the provisions to be made for any persons who dissent from the compromise or arrangement;

(f) such incidental, consequential and supplemental matters as are necessary for giving effect to the reconstruction or arrangement.

Appointment of receiver or manager

The appointment of a receiver or manager will affect the powers of the management to the extent of the mandate conferred on the receiver by his instrument of appointment and in particular with reference to powers over the property or assets of the company. The appointment of a receiver or manager has no effect on legal proceedings by or against the debtor company, contracts to which the debtor company is a party or remedies available to persons in contractual relationship with the debtor company.

Appointment of administrator

The powers of management of the debtor

From the date of appointment of an administrator under Sec.295, the management of the affairs of the company shall vest in him and all the directors and persons in whom management vested prior to his appointment shall cease to function and hold office.

-the interests of owners/shareholders of the debtor

The interests of owners/shareholders are not affected by the appointment of an administrator.

-contracts to which the debtor is a party

Where it appears to the administrator that any purchase or sales agency contract has been executed or employment given to benefit any director or other person in whom the management vested or his nominees to the detriment of the company the administrator may with the written approval of the SECP terminate such contract or employment.

Legal proceedings to which the debtor is a party

Appointment of an administrator does not affect legal proceedings by or against the debtor company.

- remedies available to persons in contractual (non-debt) relationships with the debtor);

The appointment of an administrator does not have any effect on remedies available to persons in contractual relationships with the debtor company. However, no suit or prosecution lies against the Administrator for acts done in good faith in pursuance of his functions.

Declaration of a company as a sick unit

Declaration of a company as a sick unit does not have any formal effect on the management powers, legal proceedings by or against the company, contracts or remedies therefor. However, once a rehabilitation plan is approved, the same may provide for the following:

(a) reduction of capital;

(b) alteration of share capital and variation in the rights and obligations of shareholders;

(c) alteration of loan structure, debt rescheduling etc.;

(d) acquisition or transfer of shares of persons who are or have been sponsors or otherwise managing the affairs of the company;

(e) issue of further capital;

(f) removal and appointment of directors or other officers of the company;

(g) amendment, modification or cancellation of any existing contract;

(h) alteration of the Memorandum and Articles of Association or of accounting policy and procedure.

B. Under the Banking Companies Act

Recovery proceedings under the Banking Companies Act do not impact on the management or running of the company and have no formal effect on legal proceedings by or against the debtor company, rights of shareholders or owners, contracts or remedies available to persons in a contractual relationship with the debtor company unless an order affecting any one of these is passed by the Banking Court.

C. Under the Civil Law

Recovery proceedings in any civil court do not impact on the management or running of the company and have no formal effect on legal proceedings by or against the debtor company, rights of shareholders or owners, contracts or remedies available to persons in a contractual relationship with the debtor company unless an order affecting any one of these is passed by the Court.

(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?

 

This depends on the discretion of the Court before whom the proceedings are pending. If an insolvency procedure is pending any second procedure is likely to be clubbed with the first procedure.