Corporate Rehabilitation
in Pakistan
Feisal Hussain Naqvi
7/27/2016
1
The story till last year
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In order to maximise NPL recovery, Pakistani
governments introduced several creditor friendly laws
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First effective bank recovery law in 1997
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New recovery law with criminal provisions (NAB)
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Revised and tightened in 2001
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)
2
All stick and no carrot
makes Jack a dull boy
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Despite all the laws, NPL increased further
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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:
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no shareholder-management divide in Pakistan
Availability of judicial precedents
3
The CRA last year
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Comprehensive law
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Deliberately copied large portions of the US
Bankruptcy Code
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I.e. covered both liquidation and rehabilitation
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”
4
The CRA this year
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Work on CRA slowed by transition to democracy
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Upon re-examination, major changes made
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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
5
Comprehensive vs. limited law
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CRA originally covered both liquidation and rehabilitation
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Revised CRA only covers rehabilitation because:
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Previous caselaw and legal structure is minimally
disturbed
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Entire debate about whether a particular company is
“insolvent” becomes redundant
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Previously almost 1/3rd of Company Law being rewritten
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
6
Mandatory Mediation
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All cases will be referred to mediation upon filing
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Timelines not affected by mediation
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Mediator must be qualified to serve as an administrator
Aim is to familiarise parties with new law, their rights
and probable range of outcomes
Plan deadline can be extended only by mutual consent
Debate now over timing of mediation
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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
7
Institutional Capacity Building
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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
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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
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Other changes
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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
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