Bankruptcy Laws In Pakistan

Bankruptcy Laws in Pakistan

Bankruptcy is a state in which an individual or business is short of money or the amount of money they
have is insufficient to cover their liabilities or obligation. It is declared by court after analyzing an
individual or business liabilities and assets. It is carried out with a purpose of giving a second chance to
individuals or businesses, who have failed to pay their obligations because of financial collapse, to pay it
and take a new start. It can be filed when an individual or business liabilities exceeds its operating cash
flow which means when they are unable to pay or cover their obligation. In order to file for bankruptcy
they have to make a sworn petition in the court which involves their debt, assets, income and expenses.
The second step is the court hearing of the statement. Basically there are two types of bankruptcy the first
one is the case where an individual or business liquidate their business in order to return the debt to
discharge all the liabilities which is known as liquidation and in the other type of bankruptcy does not
required liquidation of business rather they to an agreement with the debtors to pay a specific amount of
installments to discharge the liabilities which is known as reorganization.

In Pakistan it has become a role to eliminated financial distress companies from the country. There are
reasons behind it one of the main is Pakistan economy and the other one is weak maintenance of law and
order. Time have come to bring in 21st century laws into Pakistan regarding financial distress companies
and how to cope with them. In developed countries they do not disseminate financial companies but
rather give them a second chance to flourish again through the bankruptcy law. The main reason for doing
so is that they believe that it is better to keep it a live then to kill it because there are many social causes
attached with it, which is moral they have got and also kept very well. In other words the society needs
the companies as there are many benefit which society gets from companies in from of economic and
social benefits. If the companies go for liquidation those benefit which the society gets from companies
will also disappear that’s why the company value to keep operating is far more than its liquation. In
Pakistan they tried to revive the bankruptcy laws on national level but we haven’t seen any practical
changes or movements. Also in Pakistan there is a huge different in maintain a balance between the rights
of creditors and debtors which need an attention of law makers to be revived through the 21 st century
bankruptcy laws. On the other side if the defending of financial distress companies for social causes or by
the society exceeds its limit then there is a chance that banks will also come up with a strategy to secure
its loans, which will cause an increase in interest rates. So it’s quite a dilemma which needs to be solved.
The dilemma can be solved through a good bankruptcy law which will keep a good balance between these
two factors and will insure that both gets the maximum benefit and no one’s right is violated. And to keep
that balance between the rights of debtor and creditor Pakistan has made and applied many laws but
hasn’t succeed in it. In other words they have failed in keeping that balance for a decade. Some the steps
 Bankruptcy Laws In Pakistan

which Pakistan has taken for maintaining the balance include H.U. Beg Committee (of the early 1980's),
rescheduling of project financing loans in the 1990's, SBP's debt amnesty scheme of 1997 and SBP's BPD
Circular No 29 of 2002, but still they have failed in helping financial distress companies.

Bankruptcy Legal Action

It includes the taking over of the assets of bankrupt individual or business as per laws while filing for
petition and the distribution of assets values among the creditor from whom the individual or business
have taken loan and is now unable to pay back the loan because of being in financial distress situation.
The bankruptcy can be forced by creditors the a number of creditors files a petition against an individual
or business who is now unable to pay back the loan or it can be self-imposed by filing a petition regarding
the individual or business financial distress situation the bankruptcy is than imposed by court through
following the bankruptcy laws after analyzing the situation.

Conditions for Creditors to File Petition

A creditor is allowed to file petition only under the following condition:

1. When the creditor has amount to be recovered from debtor or when more creditor who also have
lend loan to same debtor come to be part of petition or the total amount of loan the creditor have
lead is equal to Rs. 500.
2. When there is payables reaming in the form of liquid amount which have to be recovered now or
in near future
3. The case on which the whole petition is build should has to be happened within the range of 3
months before the day of filing petition

In case if the creditor who is going to file petition is a secured one then in that case while filing for
petition for petition he has to mention that he is willingly leaving the security just for helping other
creditor with recovering their loan from debtors which is the one case. In other case he may considered
one the petition filing creditors so he will be given the amount he has lend to the debtor and needs to be
recovered and in this case he is treated as an unsecured one.

Conditions for Debtor to File Petition

A debtor is allowed to file petition only under the following condition:

1. Until his total amount of loan reaches Rs. 500

2. His is arrested or executed under the order of court to pay the loan he has taken from creditors
 Bankruptcy Laws In Pakistan

3. An order by court has been issued to do so and is currently covering things through his existing
property

A debtor against whom an order of bankruptcy action has been ordered according to bankruptcy law or
was canceled according to bankruptcy law regarding his inability of repayment of liabilities to the
creditors, cannot file a petition until he does not appear with a leave of court through which the order has
been canceled. Also the court is not allowed to give leave till they does not find a solid reason regarding
debtor to provide him with leave. If the evidence provided by the debtor is different, unique and solid as
compare to the evidence in petition then in that case the court can provide leave to debtor and cancel the
request made for the possession of debtor’s property and declaring him bankrupt.

The petition can be filed in any place, which have court, against debtor that place may be where debtor is
living, when he runs his business, where he is staying currently, where he is under arrest or in custody,
where he is being held by the government etc. There is no restriction on place and also court is not
allowed to ride objection on place until there is a specific reason as have been mentioned in the petition
earlier or at that place the justice system is objectionable or is not up to the mark.

Companies Ordinance 1984

Currently Pakistan is following company’s ordinance 1984 to deal with the bankrupt firms. As it include
laws for coping with financial distress or bankrupt companies and reformation. It include a total of 514
sections out of which 149 include laws of liquidation and only 6 section conclude how to reform a
financial distress companies. If we look at the comparison it concludes that there is almost nothing in the
ordinance regarding how to reform a bankrupt company and also these 6 sections does not include that
much detail about reformation of bankrupt companies.

Sections 284 & 296

It also provide two choices, under the reformation sections, on how to reform a bankrupt company. These
choices comes under the section 284 and section 296. The first one give a choice of coming up with a
strategy and then presenting in front of creditor but its approval is total based on creditors if it gets a vote
of maximum creditors then it will be approve and if it fails to do so then it will be disapproved. While the
other choice is to make a committee which will cop up with bankrupt companies. But both of these
options were unable to help bankrupt companies as since 1984 out of all the bankruptcy cases that have
been filed only 12 were such cases where companies have used the option of section 284. As for the other
choice which practically came into being almost after 16 years of its inclusion on the ordinance which
shows the unseriouseness regarding this issue. So the committee came into being in 2000 but still it was
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not that effective. It helped total of 388 financial distress companies out of which 196 were successfully
reformed by the committee. But still it has failed in going for deep reformation as per saying of World
Bank.

Banking Companies Act 1997

On the other hand form past till now the law makers have been trying to make the laws more creditors
favoring. To make this case happen their first attempt was in 1984 when they develop special banking
court. Later then in 1997 through banking companies’ act 1997 they probe the laws of banking court.
Under this law companies were restricted to go for reviving the loan amount they have taken from banks
and other institutions until they does not get a specific permission from court which will be based on
limited grounds. Also this law include the payment of interest on those loan which has gone default or are
about to default. Moreover, following the 1999 martial law which made more addition of such laws that
favor creditors.

NAB Ordinance

This Act was created during the government of military. It was the first time that such a law was
introduced. This law concludes that any failure in repayment of bank loans will be treated as a crime. The
punishment for such a crime is 14 years Gail. Which is the introduction of another law in favor of
creditors.

CIRC Ordinance 2000

In 2000 a new law was brought in by government which developed a new body named as Corporate and
Industrial Restructuring Corporation which come under the ordinance 2000, this CRIC was developed
from a purpose of coping with bankrupt companies and their liabilities.

Financial Institutions Ordinance 2001

It came into being under the ordinance of 2001 which brought some change to an Act by adding new law
and order which concludes that a bank can take over the secured assets of a company regardless of date
changes or delay in court hearing or proceedings.

Having all these laws that favors creditors in the best possible ways they were still unable to collects or
collect all the liabilities. And they also failed in getting any economic advantages through these laws
which were very favorable to the creditors.
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BDP Circular 29

This law was introduced in 2002, which clearly highlights the biggest lack of success in recovering the
loan. This is about the debt forgiveness which was introduced by SBP because they were failed miserably
in recovering of loans. This laws encouraged debtors to pay their loans by selling their companies secured
assets. The condition now which Pakistan is facing is such that their corporate debt rate is on a rapid
growth while the insolvency or liquidation values is falling rapidly. Through this law a huge amount of
loans were paid or replace by a very same amount of payments which is causing a huge problem. The
problem with this law is that it liquidate the assets on FSV (forced sale value) which is very low and does
cover all debt or some it does not even cover half of it. While in 90’s the banks were successfully settling
their debts with 25% to 50% additional amount over its principal. For government this case was the
reverse one and they were losing a huge amount of money in it.