1 corporate rehabilitation act (cra) – background, concepts and legal architecture salman ali...

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CORPORATE REHABILITATION ACT (CRA) – BACKGROUND, CONCEPTS AND

LEGAL ARCHITECTURE

Salman Ali ShaikhJanuary 2009

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INSOLVENCY SYSTEMS AND RISK INSOLVENCY SYSTEMS AND RISK MANAGEMENT: CONCEPTUAL ISSUESMANAGEMENT: CONCEPTUAL ISSUES

The creation of an effective insolvency regime is a successful The creation of an effective insolvency regime is a successful interplay of three key elements: design, legislation and interplay of three key elements: design, legislation and implementation.implementation.

The government needs to understand that it is the ultimate risk The government needs to understand that it is the ultimate risk manager (David Ross: Harvard Business School).manager (David Ross: Harvard Business School).

The development of a modern insolvency system gives the The development of a modern insolvency system gives the government the ability to manage risk by reducing and/ or allocating government the ability to manage risk by reducing and/ or allocating risk to different segments of the market and society. The CRA gives risk to different segments of the market and society. The CRA gives the GoP a very powerful tool in terms of economic policy.the GoP a very powerful tool in terms of economic policy.

The creation of a transparent system with predictable outcomes The creation of a transparent system with predictable outcomes greatly enhances long-term capital formation and promotes FDI (e.g., greatly enhances long-term capital formation and promotes FDI (e.g., China).China).

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INSOLVENCY SYSTEMS AND RISK INSOLVENCY SYSTEMS AND RISK MANAGEMENT: CONCEPTUAL ISSUES (MANAGEMENT: CONCEPTUAL ISSUES (Cont’d)Cont’d)

Universal “best practices” (e.g., UNICTRAL: Legislative Guide on Universal “best practices” (e.g., UNICTRAL: Legislative Guide on Insolvency Law) are never best everywhere – they are “best” only in Insolvency Law) are never best everywhere – they are “best” only in specifiable circumstances. However, they do provide a very useful road specifiable circumstances. However, they do provide a very useful road map.map.

Due consideration needs to be given to the structure (present and Due consideration needs to be given to the structure (present and desired) of the national economy, legal and “cultural” impediments, etc.desired) of the national economy, legal and “cultural” impediments, etc.

Economic cycle issues – i.e., when the liquidation values of companies Economic cycle issues – i.e., when the liquidation values of companies are greater than the going-concern value, you do not need an are greater than the going-concern value, you do not need an insolvency system. You merely need to tighten your recovery laws, insolvency system. You merely need to tighten your recovery laws, systems and procedures.systems and procedures.

The need for a corporate rehabilitation law in Pakistan. Urgently needed The need for a corporate rehabilitation law in Pakistan. Urgently needed because corporate debt has been growing (at 10% - 12% p.a.) and because corporate debt has been growing (at 10% - 12% p.a.) and liquidation values have been declining at the same rate for the past liquidation values have been declining at the same rate for the past several years.several years.

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The compound effect of these two simultaneous processes does not The compound effect of these two simultaneous processes does not need a graph to visualize. The liquidity gap (going-concern basis) need a graph to visualize. The liquidity gap (going-concern basis) doubles every 6-7 years.doubles every 6-7 years.

3 key elements re-stated: design, legislation and implementation. Two 3 key elements re-stated: design, legislation and implementation. Two elements (design & implementation) have been lacking in all the legal elements (design & implementation) have been lacking in all the legal enactments since 1997.enactments since 1997.

The proposed CRA is an attempt to correct all imbalances created by The proposed CRA is an attempt to correct all imbalances created by these enactments.these enactments.

The fourth key element in insolvency is time. In insolvency the The fourth key element in insolvency is time. In insolvency the consequences of a few “mistakes” (errors of judgement) are minor consequences of a few “mistakes” (errors of judgement) are minor compared to the costs of delay.compared to the costs of delay.

Therefore, a significant part of this presentation will focus on the design Therefore, a significant part of this presentation will focus on the design (i.e. the legal architecture) of the proposed CRA.(i.e. the legal architecture) of the proposed CRA.

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Enacting a law is relatively easy. Making it work (i.e., implementation) is Enacting a law is relatively easy. Making it work (i.e., implementation) is often very difficult.often very difficult.

Political will is crucial. Specialized laws need a state-of-the-art enabling Political will is crucial. Specialized laws need a state-of-the-art enabling environment to deliver results. Capacity-building and institution-environment to deliver results. Capacity-building and institution-strengthening.strengthening.

During the designing process we had to ask ourselves three very basic During the designing process we had to ask ourselves three very basic questions.questions.

Where are we??Where are we?? Where do we want to be??Where do we want to be?? How do we get there??How do we get there??

Basically the desired outcome(s) should determine the design of the Basically the desired outcome(s) should determine the design of the law.law.

““The function must determine the form” (Walter Gropius: Bauhaus The function must determine the form” (Walter Gropius: Bauhaus school of architecture).school of architecture).

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GROUND ZERO: WHERE ARE WE???GROUND ZERO: WHERE ARE WE???

Since 1997, there have been random mood swings on a national basis Since 1997, there have been random mood swings on a national basis between the desire for “recovery” (of bank debt) and the aspiration to between the desire for “recovery” (of bank debt) and the aspiration to “revive” (sick industry).“revive” (sick industry).

However, in terms of legislation, “recovery” became an obsession.However, in terms of legislation, “recovery” became an obsession.

The (essential) balance between debtors and creditors rights were The (essential) balance between debtors and creditors rights were sacrificed for this cause.sacrificed for this cause.

The CRA has been designed to achieve both objectives while The CRA has been designed to achieve both objectives while maintaining a balance between debtors and creditors rights.maintaining a balance between debtors and creditors rights.

Successive waves of creditor-friendly laws were enacted – e.g., the Successive waves of creditor-friendly laws were enacted – e.g., the Recovery Act 1997, NAB Ordinance 1999, CIRC Act 2000 and the Recovery Act 1997, NAB Ordinance 1999, CIRC Act 2000 and the Recovery Act 2001.Recovery Act 2001.

Inspite of this onslaught, NPL continued to remain at high levels.Inspite of this onslaught, NPL continued to remain at high levels.

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GROUND ZERO: WHERE ARE WE??? (GROUND ZERO: WHERE ARE WE??? (Cont’d)Cont’d)

NOTENOTE: There are concerns about data integrity owing to conceptual and methodology – related issues – e.g., two regulators, NPL at CIRC, : There are concerns about data integrity owing to conceptual and methodology – related issues – e.g., two regulators, NPL at CIRC, facility-based classification, accounting implications of Recovery Act 1997/ Recovery Act 2001, etc. While the figures of NPL in the banking facility-based classification, accounting implications of Recovery Act 1997/ Recovery Act 2001, etc. While the figures of NPL in the banking sector are probably reliable, the overall figures for the “financial sector” are significantly higher, and are not quantified (at present).sector are probably reliable, the overall figures for the “financial sector” are significantly higher, and are not quantified (at present).

Non-Performing Loans (NPL’s) of the Banking System (Rs. in Billion – i.e., Non-Performing Loans (NPL’s) of the Banking System (Rs. in Billion – i.e., in Column 2).in Column 2).

YearYear NPL’sNPL’s NPL’s to LoansNPL’s to Loans Provisions to NPL’sProvisions to NPL’s

19971997 173.0173.0 23.5%23.5% 46.6%46.6%

19981998 183.0183.0 23.1%23.1% 58.6%58.6%

19991999 230.7230.7 25.9%25.9% 48.6%48.6%

20002000 240.1240.1 23.5%23.5% 55.0%55.0%

20012001 244.1244.1 23.4%23.4% 54.7%54.7%

20022002 231.5231.5 21.8%21.8% 60.6%60.6%

20032003 211.3211.3 17.0%17.0% 63.9%63.9%

20042004 199.7199.7 11.6%11.6% 70.4%70.4%

20052005 177.4177.4 8.3%8.3% 76.7%76.7%

20062006 175.5175.5 6.9%6.9% 77.8%77.8%

20072007(Provisional) 205.7205.7 7.5%7.5% 79.2%79.2%

Source: State Bank of PakistanSource: State Bank of Pakistan

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Trend Non Performing Loans

0

50

100

150

200

250

300

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

PKR(

billi

on)

NPL

Effect of SBPs BPD circular No.29 of 2002

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Provisions and NPL's Over Years

0.00%10.00%20.00%30.00%40.00%50.00%60.00%70.00%80.00%90.00%

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

NP Ls to Loans

P rovisions toNP Ls

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In 2002, in recognition of the failure of CIRC, NAB and CIRSU to make In 2002, in recognition of the failure of CIRC, NAB and CIRSU to make a significant contribution on the NPL front an “administrative” (i.e., an a significant contribution on the NPL front an “administrative” (i.e., an amnesty scheme) insolvency solution was resorted to.amnesty scheme) insolvency solution was resorted to.

The SBP issued “guidelines” (effectively a directive) whereby banks The SBP issued “guidelines” (effectively a directive) whereby banks were “actively encouraged” to settle NPL with borrowers at the FSV were “actively encouraged” to settle NPL with borrowers at the FSV (forced sale value) of the under-lying collateral.(forced sale value) of the under-lying collateral.

This step (taken out of desperation/ frustration) has had the desired This step (taken out of desperation/ frustration) has had the desired results – obviously!!!.results – obviously!!!.

Administrative insolvency and similar “one size fits all” solutions have Administrative insolvency and similar “one size fits all” solutions have the advantage of being fast-track.the advantage of being fast-track.

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Final (“hard”) numbers relating to SBP’s FSV scheme have been Final (“hard”) numbers relating to SBP’s FSV scheme have been requested. However, as per preliminary figures, around Rs. 125 billion requested. However, as per preliminary figures, around Rs. 125 billion of NPL had been settled at the cost of Rs. 75 billion in terms of write-of NPL had been settled at the cost of Rs. 75 billion in terms of write-off’s (provisions used) – a very low write-off efficiency ratio.off’s (provisions used) – a very low write-off efficiency ratio.

The costs (quantitative and qualitative) of these positive outcomes are The costs (quantitative and qualitative) of these positive outcomes are high. Some of these “costs” are as follows:-high. Some of these “costs” are as follows:-

1. 1. Admission of failure:Admission of failure:

Periodic recourse to these “one-time amnesty” and “incentive”Periodic recourse to these “one-time amnesty” and “incentive”

schemes is a de facto public admission that in the areas ofschemes is a de facto public admission that in the areas of

insolvency, corporate rescue, etc., the legal system has effectivelyinsolvency, corporate rescue, etc., the legal system has effectively

collapsed.collapsed.

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2. 2. Heavy guzzler of provisions:Heavy guzzler of provisions: In the late 1990s, smart banks/ bankers were making aggressiveIn the late 1990s, smart banks/ bankers were making aggressive one-shot settlements with borrowers at values ranging from P+25%one-shot settlements with borrowers at values ranging from P+25%

to P+50% - at a time when Pakistan’s economy was very weak. Itto P+50% - at a time when Pakistan’s economy was very weak. It is a pity that now (with high GNP growth rates) distressed assetsis a pity that now (with high GNP growth rates) distressed assets are being settled at values as low as P-75% to P-25%!!!.are being settled at values as low as P-75% to P-25%!!!.

3. 3. The problem with the FSV concept:The problem with the FSV concept: It is an arbitrary figure which assumes that all NPL is on aIt is an arbitrary figure which assumes that all NPL is on a liquidation basis (i.e. not a going concern). The amount ofliquidation basis (i.e. not a going concern). The amount of provisions used (i.e., write-off’s generated) could have beenprovisions used (i.e., write-off’s generated) could have been substantially reduced by using the concept of sustainable debt. Thesubstantially reduced by using the concept of sustainable debt. The methodology for using this concept was available – i.e., HBL’s EDRmethodology for using this concept was available – i.e., HBL’s EDR (excess debt recovery) product/ scheme (P+25%) – presented to the(excess debt recovery) product/ scheme (P+25%) – presented to the GoP in 1999.GoP in 1999.

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4. 4. The mechanics of determining FSV:The mechanics of determining FSV:

Under SBP’s guidelines, FSV is determined by evaluators, an Under SBP’s guidelines, FSV is determined by evaluators, an

“ “unregulated profession” (capacity building issue). Enormousunregulated profession” (capacity building issue). Enormous

power has been granted to evaluators. Anecdotal evidencepower has been granted to evaluators. Anecdotal evidence

suggests that these powers have been abused/ misused.suggests that these powers have been abused/ misused.

5. “5. “Sickness worthy of revival”:Sickness worthy of revival”:

Not all companies are worth reviving – e.g., inefficient, obsoleteNot all companies are worth reviving – e.g., inefficient, obsolete

technology, etc. In fact, owing to competitive disadvantages, technology, etc. In fact, owing to competitive disadvantages,

sometimes entire industries can be considered to be “unworthy” –sometimes entire industries can be considered to be “unworthy” –

e.g., textile products in North Asia, sugar in Pakistan, etc. Amnestye.g., textile products in North Asia, sugar in Pakistan, etc. Amnesty

schemes (that are not based on financial data) cannot make suchschemes (that are not based on financial data) cannot make such

distinctions.distinctions.

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6. 6. Amnesty schemes protect inefficient managements:Amnesty schemes protect inefficient managements:

Very often the root cause of sickness is the management. In such Very often the root cause of sickness is the management. In such

cases, a change of management can convert sick entities intocases, a change of management can convert sick entities into

healthy companies.healthy companies.

7. 7. Moral hazard:Moral hazard:

Such schemes promote the “default culture” and have a cumulative Such schemes promote the “default culture” and have a cumulative

effect that can last for decades. effect that can last for decades.

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CORPORATE REHABILITATION ACT: THE CORPORATE REHABILITATION ACT: THE OPERATING ENVIRONMENTOPERATING ENVIRONMENT

By 2003, it had become clear that the “hard” approach towards the By 2003, it had become clear that the “hard” approach towards the NPL problem was not working.NPL problem was not working.

The two recovery laws were being administered by incompetent The two recovery laws were being administered by incompetent “specialized” banking courts. Both these laws are conceptually “specialized” banking courts. Both these laws are conceptually unsound as they permit accrual on NPL (non-accrual loans). unsound as they permit accrual on NPL (non-accrual loans).

CIRC had failed to develop any appetite and/ or capacity for debt re-CIRC had failed to develop any appetite and/ or capacity for debt re-structuring and chose to act purely as an auction house. “CIRC has structuring and chose to act purely as an auction house. “CIRC has had a very limited success in clearing up balance sheets of the had a very limited success in clearing up balance sheets of the financial institutions” (World Bank Report – 2003). Fortunately, CIRC financial institutions” (World Bank Report – 2003). Fortunately, CIRC has a mandated “expiry date”. Any extension granted would defy logic has a mandated “expiry date”. Any extension granted would defy logic and common sense.and common sense.

NAB had effectively abdicated the NPL field owing to its initial failures, NAB had effectively abdicated the NPL field owing to its initial failures, inappropriate staffing and inherent defects in its law.inappropriate staffing and inherent defects in its law.

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CORPORATE REHABILITATION ACT: THE CORPORATE REHABILITATION ACT: THE OPERATING ENVIRONMENT (OPERATING ENVIRONMENT (Cont’d)Cont’d)

CIRSU (Committee for the Rehabilitation of Sick Industrial Units) was CIRSU (Committee for the Rehabilitation of Sick Industrial Units) was created through a notification by the MoF in 2000. It has chosen to act created through a notification by the MoF in 2000. It has chosen to act as an “arbitration window”, and has not developed any capacity to as an “arbitration window”, and has not developed any capacity to undertake deep (i.e., operational) restructuring. Typically a debt is re-undertake deep (i.e., operational) restructuring. Typically a debt is re-scheduled (often cosmetically) and “revival” is declared. The MoF scheduled (often cosmetically) and “revival” is declared. The MoF should actively consider its closure.should actively consider its closure.

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CORPORATE REHABILITATION ACT: LEGAL CORPORATE REHABILITATION ACT: LEGAL ARCHITECTUREARCHITECTURE We considered three alternative models, while drafting the CRA, We considered three alternative models, while drafting the CRA,

namely:-namely:-

An empowered administrative body (the Indian model).An empowered administrative body (the Indian model). Judicial administration (the English model).Judicial administration (the English model). Chapter 11 (the American model).Chapter 11 (the American model).

The need to have a system with elements of both re-organisation and The need to have a system with elements of both re-organisation and liquidation was a key concern. Re-organisation without effective liquidation was a key concern. Re-organisation without effective liquidation creates a very unbalanced insolvency system. “If liquidation creates a very unbalanced insolvency system. “If liquidation provisions are not credible, then bankruptcy law doesn’t liquidation provisions are not credible, then bankruptcy law doesn’t do its work; if re-organisation provisions are not practicable, then do its work; if re-organisation provisions are not practicable, then companies are liquidated unnecessarily. Uncertainty results in either companies are liquidated unnecessarily. Uncertainty results in either case”.case”.

The merits of creditor–in-possession models versus debtor-in-The merits of creditor–in-possession models versus debtor-in-possession models were also debated. We opted for the latter, for possession models were also debated. We opted for the latter, for value-maximization reasons.value-maximization reasons.

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CORPORATE REHABILITATION ACT: LEGAL CORPORATE REHABILITATION ACT: LEGAL ARCHITECTURE (ARCHITECTURE (Cont’d)Cont’d)

The lack of judicial expertise, the total absence of relevant The lack of judicial expertise, the total absence of relevant professional bodies (e.g., administrators, receivers, liquidators, professional bodies (e.g., administrators, receivers, liquidators, evaluators, etc.,), and “insolvency desires” created by the GoP’s evaluators, etc.,), and “insolvency desires” created by the GoP’s amnesty schemes were viewed as key risks by us. Appropriate risk amnesty schemes were viewed as key risks by us. Appropriate risk management measures have been built into the CRA. Several management measures have been built into the CRA. Several innovative ideas were developed by us after examining 10-12 non-innovative ideas were developed by us after examining 10-12 non-OECD jurisdictions. The Mexican insolvency law (and related OECD jurisdictions. The Mexican insolvency law (and related institutions/ structures) were particularly useful.institutions/ structures) were particularly useful.

Administrative models. We have been down this road before (i.e., the Administrative models. We have been down this road before (i.e., the H.U. Beg Committee) – it does not work.H.U. Beg Committee) – it does not work.

In India, under the SICA (Sick Industrial Companies Act) of 1984, a In India, under the SICA (Sick Industrial Companies Act) of 1984, a Board of Industrial and Financial Restructuring (BIFR) was created. Board of Industrial and Financial Restructuring (BIFR) was created. BIFR’s decision-making processes proved to be more cumbersome BIFR’s decision-making processes proved to be more cumbersome (and slower) than the courts. SICA, BIFR and all related structures are (and slower) than the courts. SICA, BIFR and all related structures are being disbanded.being disbanded.

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To be effective, an insolvency process requires the pro-active To be effective, an insolvency process requires the pro-active participation of both the “interested” parties – i.e., debtors and participation of both the “interested” parties – i.e., debtors and creditors.creditors.

In the administrative model, this key feature is missing. A group of In the administrative model, this key feature is missing. A group of “disinterested” bureaucrats cannot be considered to be credible “disinterested” bureaucrats cannot be considered to be credible stake-holders in an insolvency process.stake-holders in an insolvency process.

The English model:The English model:

A widespread suspicion about the underlying motives of debtors led A widespread suspicion about the underlying motives of debtors led to consideration of the English Model, involving “debtor-eviction”. The to consideration of the English Model, involving “debtor-eviction”. The perceived advantage was “contested entry”, which was seen as a perceived advantage was “contested entry”, which was seen as a method to remove the possibility of countless frivolous insolvency method to remove the possibility of countless frivolous insolvency petitions. A further advantage was management by a judicial petitions. A further advantage was management by a judicial administrator who would also prepare the rehabilitation plan for the administrator who would also prepare the rehabilitation plan for the court.court.

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The key hurdle in adopting this model is Pakistan’s lack of competent The key hurdle in adopting this model is Pakistan’s lack of competent administrators who could perform such functions under the law. administrators who could perform such functions under the law.

Another hurdle was that a contested entry system would add an extra Another hurdle was that a contested entry system would add an extra layer of litigation, causing unnecessary delays to the process.layer of litigation, causing unnecessary delays to the process.

The Australian CVA (Corporate Voluntary Administration) was also The Australian CVA (Corporate Voluntary Administration) was also looked at. CVA also has the same implementation issues as stated looked at. CVA also has the same implementation issues as stated above.above.

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The American model (Chapter 11).The American model (Chapter 11).

We have adopted the American model with significant modifications. We have adopted the American model with significant modifications. Our CRA has the following salient features:-Our CRA has the following salient features:-

Entry into rehabilitation proceedings is a right. However, debtors must Entry into rehabilitation proceedings is a right. However, debtors must consider such a step carefully because of the provision for automatic consider such a step carefully because of the provision for automatic conversion into liquidation in the event that no rehabilitation plan is conversion into liquidation in the event that no rehabilitation plan is approved. Various quantitative tests for entry were considered, but were approved. Various quantitative tests for entry were considered, but were discarded owing to the widespread use of “cooked” financial discarded owing to the widespread use of “cooked” financial statements.statements.

The process is entirely stakeholder driven. Both the debtor and the The process is entirely stakeholder driven. Both the debtor and the creditor(s) can file plans. creditor(s) can file plans.

The entire process has been compressed with finite time-frames. For The entire process has been compressed with finite time-frames. For example, the debtor has a maximum of one month after entry into example, the debtor has a maximum of one month after entry into rehabilitation proceedings to file a plan. In fact, there are fairly stringent rehabilitation proceedings to file a plan. In fact, there are fairly stringent time-frames throughout the whole process.time-frames throughout the whole process.

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The American model (Chapter 11) – Cont’dThe American model (Chapter 11) – Cont’d

In Pakistan, taxes, levies and government dues enjoy substantial legal In Pakistan, taxes, levies and government dues enjoy substantial legal protection. Income tax, sales tax, and customs officers can “re-open” cases protection. Income tax, sales tax, and customs officers can “re-open” cases several fiscal years later. In fact, bankers have often engineered several fiscal years later. In fact, bankers have often engineered rehabilitation via a change of management or the induction of a new rehabilitation via a change of management or the induction of a new entrepreneur only to be thwarted by extortionist claims for back taxes. In the entrepreneur only to be thwarted by extortionist claims for back taxes. In the CRA, all such taxes and levies are classified as unsecured debts. The idea is CRA, all such taxes and levies are classified as unsecured debts. The idea is to move some of the costs of the inevitable losses away from the banking to move some of the costs of the inevitable losses away from the banking system.system.

Treatment of stakeholder rights and priorities. The current system of giving Treatment of stakeholder rights and priorities. The current system of giving priority to un-secured creditors (e.g., state dues, taxes, wages, provincial priority to un-secured creditors (e.g., state dues, taxes, wages, provincial levies, utility bills, etc.) is archaic and not sustainable and will have to be levies, utility bills, etc.) is archaic and not sustainable and will have to be removed (IBRD/ UNICTRAL Insolvency Principle 16).removed (IBRD/ UNICTRAL Insolvency Principle 16).

In the United States, the cram-down feature is a threat designed to force In the United States, the cram-down feature is a threat designed to force consensus on a rehabilitation plan. In Pakistan’s context, we expect fairly consensus on a rehabilitation plan. In Pakistan’s context, we expect fairly active use of this provision – at least, in the first few years before case law active use of this provision – at least, in the first few years before case law emerges and the whole system develops maturity.emerges and the whole system develops maturity.

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NON-SPECIALISED JUDGES WILL DELIVER NON-SPECIALISED JUDGES WILL DELIVER POOR QUALITY JUDGEMENTS: HOW TO PLUG POOR QUALITY JUDGEMENTS: HOW TO PLUG THE KNOWLEDGE GAP?? THE KNOWLEDGE GAP??

““War is too important a subject to be left to the War is too important a subject to be left to the generals.”generals.”

Winston Churchill, 1943Winston Churchill, 1943

““Insolvency is too complex a subject to be left to the Insolvency is too complex a subject to be left to the judges.”judges.”

Salman, 1999Salman, 1999

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NON-SPECIALISED JUDGES WILL DELIVER NON-SPECIALISED JUDGES WILL DELIVER POOR QUALITY JUDGEMENTS: HOW TO PLUG POOR QUALITY JUDGEMENTS: HOW TO PLUG THE KNOWLEDGE GAP?? (THE KNOWLEDGE GAP?? (Cont’d)Cont’d)

The ideal legal structure would be specialized judges. Not possible in The ideal legal structure would be specialized judges. Not possible in Pakistan.Pakistan.

Likewise, a federal court structure would be preferable (e.g., Korea) as Likewise, a federal court structure would be preferable (e.g., Korea) as corporate groups operate in 2-3 different legal jurisdictions. Not corporate groups operate in 2-3 different legal jurisdictions. Not possible.possible.

We had to ensure that two key ingredients are present (i,e., speed and We had to ensure that two key ingredients are present (i,e., speed and predictability) inspite of the above limitations.predictability) inspite of the above limitations.

We have achieved this by building into the CRA a multi-disciplinary We have achieved this by building into the CRA a multi-disciplinary vision - the judiciary is only one component.vision - the judiciary is only one component.

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NON-SPECIALISED JUDGES WILL DELIVER NON-SPECIALISED JUDGES WILL DELIVER POOR QUALITY JUDGEMENTS: HOW TO PLUG POOR QUALITY JUDGEMENTS: HOW TO PLUG THE KNOWLEDGE GAP?? (THE KNOWLEDGE GAP?? (Cont’d)Cont’d)

We have recognised the limitations of Pakistan’s “weak judicial capacity” We have recognised the limitations of Pakistan’s “weak judicial capacity” (where no specialised judges sit in the superior courts) by inserting a provision, (where no specialised judges sit in the superior courts) by inserting a provision, which establishes a three-man Advisory Committee (comprising bankers, which establishes a three-man Advisory Committee (comprising bankers, corporate finance specialists, etc.) to assist the insolvency judge/ court. This corporate finance specialists, etc.) to assist the insolvency judge/ court. This committee should be an excellent resource for judges that are unsure about the committee should be an excellent resource for judges that are unsure about the correct treatment of complex financial issues. Furthermore, they should be able correct treatment of complex financial issues. Furthermore, they should be able to offer lucid advice in the likely event of several competing plans being to offer lucid advice in the likely event of several competing plans being submitted – particularly when the new cram-down feature is being exercised.submitted – particularly when the new cram-down feature is being exercised.

In reality, the Advisory Committee will be the tail that wags the dog.In reality, the Advisory Committee will be the tail that wags the dog.

If appropriately selected, they will be the real decision-makers with the judge If appropriately selected, they will be the real decision-makers with the judge ratifying and “sanctifying” the decision. This concept is called “pre-packaged” ratifying and “sanctifying” the decision. This concept is called “pre-packaged” insolvency – it has been used in several jurisdictions to fast-track legal insolvency – it has been used in several jurisdictions to fast-track legal proceedings.proceedings.

On capacity-building issues, we have drawn extensively from Mexico On capacity-building issues, we have drawn extensively from Mexico (Insolvency Law of 2000) where several “ground realities” are similar to (Insolvency Law of 2000) where several “ground realities” are similar to Pakistan.Pakistan.

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THE RISK MANAGER MUST GET OFF THE THE RISK MANAGER MUST GET OFF THE FENCEFENCE

As stated earlier, the government is the ultimate risk manager.As stated earlier, the government is the ultimate risk manager.

The vast majority of the comments received from MoF relate to costs.The vast majority of the comments received from MoF relate to costs.

It is unfair to pose these questions to the author(s) of the CRA.It is unfair to pose these questions to the author(s) of the CRA.

I have tried to demonstrate that the current system and structures are I have tried to demonstrate that the current system and structures are not workable. They cannot be tweaked.not workable. They cannot be tweaked.

The GoP must choose between two divergent paths.The GoP must choose between two divergent paths.

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THE RISK MANAGER MUST GET OFF THE THE RISK MANAGER MUST GET OFF THE FENCE FENCE (Cont’d)(Cont’d)

Choice 1: to invest in a modern insolvency system by adopting the Choice 1: to invest in a modern insolvency system by adopting the CRA and closing all other “insolvency windows” – i.e., CIRC, CIRSU, CRA and closing all other “insolvency windows” – i.e., CIRC, CIRSU, NAB, etc.NAB, etc.

The cost is several billion rupees.The cost is several billion rupees.

Choice 2: no change.Choice 2: no change.

The cost is un-predictability plus billions of rupees spent on ad-hoc The cost is un-predictability plus billions of rupees spent on ad-hoc measures – i.e., periodic financial sector re-capitalisation and measures – i.e., periodic financial sector re-capitalisation and corporate bail-out schemes.corporate bail-out schemes.

Whichever path is adopted, getting off the fence would be a useful Whichever path is adopted, getting off the fence would be a useful starting point.starting point.

1 corporate rehabilitation act (cra) – background, concepts and legal architecture salman ali...

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