Corporate Rehabilitation in Pakistan Feisal Hussain Naqvi 11/27/2018

The story till last year In order to maximise NPL recovery, Pakistani governments introduced several creditor friendly laws First effective bank recovery law in 1997 Revised and tightened in 2001 New recovery law with criminal provisions (NAB) Up to 14 years in jail Strict liability and presumption of guilt Fine equal to defaulted amount No bail Asset recovery vehicle set up (CIRC) 11/27/2018

All stick and no carrot makes Jack a dull boy Despite all the laws, NPL increased further NAB law failed to result in recoveries due to court decisions CIRC turned into a (lousy) auction house Businessmen stopped borrowing Hence decision taken to set up a more debtor friendly insolvency regime English, US and Indian models considered US model adopted primarily because: no shareholder-management divide in Pakistan Availability of judicial precedents 11/27/2018

The CRA last year Comprehensive law I.e. covered both liquidation and rehabilitation Deliberately copied large portions of the US Bankruptcy Code Super-priority loans Automatic stay Government debt given same priority as unsecured debt Compressed timelines Included UNCITRAL model cross-border provisions Provided support to judges through an “Advisory Committee” 11/27/2018

The CRA this year Work on CRA slowed by transition to democracy Upon re-examination, major changes made No longer a comprehensive law Mandatory mediation Institutional capacity building CIRC replaced with private vulture capital companies Modified automatic stay Automatic discharge of personal guarantors 11/27/2018

Comprehensive vs. limited law CRA originally covered both liquidation and rehabilitation Revised CRA only covers rehabilitation because: Previous caselaw and legal structure is minimally disturbed Previously almost 1/3rd of Company Law being rewritten Entire debate about whether a particular company is “insolvent” becomes redundant Debtors will now come into rehabilitation out of their own choice Rehabilitation available as of right but with strong anti-fraud provisions Failure of rehab means mandatory liquidation 11/27/2018

Mandatory Mediation All cases will be referred to mediation upon filing Mediator must be qualified to serve as an administrator Aim is to familiarise parties with new law, their rights and probable range of outcomes Timelines not affected by mediation Plan deadline can be extended only by mutual consent Debate now over timing of mediation I.e. whether mediation should be prior to – or after – advisory committee report General practice is to have mediation before court takes cognizance of matter 11/27/2018

Institutional Capacity Building Self-evident fact that Pakistan lacks qualified personnel Problem exacerbated by complexity of law Solution is to set up specific independent body – Institute of Administrators Institute will train, regulate and license mediators, administrators and liquidators Institute will also arrange specialised training for judges Idea is to build a pool of qualified personnel who can serve system in all capacities 11/27/2018

Other changes CIRC replaced with enabling provision for “vulture capital” companies Modified Automatic Stay Unlike US version, stay will expire after four months But, stay will remain valid against execution proceedings Again, idea is to increase pressure on debtors Automatic Discharge of Guarantors Under US law, personal guarantors are not discharged by insolvency of principal But, if same rule was applied in Pakistan, would remove incentive for rehabilitation Under SBP regulations, all directors and major shareholders must give personal guarantees 11/27/2018