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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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