Thousands of small to big businesses fail worldwide every day. This is anything but unusual. Companies suffer losses, file for bankruptcies and their sponsors move on with their life. The very next day their sponsors might be looking for new financing for yet another project and actually obtain it without any fuss.
“In the United States, the companies filing for bankruptcies are given a specified period for revival and banks as well as other creditors forget about their loans. The banks even provide fresh funding to help the company revive,” says Adil Mahmood, the chairman of the All Pakistan Textile Association (Apta).
“If the company still fails to revive, the creditors take over the company and liquidate it to recover their loans,” he said.
In Pakistan the situation is quite the opposite. . “If your business fails, it sticks with you as a stigma, for the rest of your life. It is considered a crime here, and your life stops,” said a textile manufacturer, who asked not to be named.
“The moment you decide to close your project, you are doomed forever. Everyone rises to question your honesty, and labels you as a swindler. The next moment you find yourself and your family dragged into long-drawn court battles. Bankers gather outside your home to tear away even the clothes from your body,” he complained. “By the time the dust settles, you are left on your own – almost a pauper who is shunned by the banks like a criminal.”
The shabby treatment, insist the industrialists, meted out to businessmen once they are forced to close a mill or a company mostly keeps them from declaring bankruptcy and forces them to accumulate losses and default on their bank loans and other debts. “No bankruptcy law exists in Pakistan, which allows businessmen to exit from a business with dignity and honour,” said an official of the All Pakistan Textile Mills Association (Aptma).
“If you close down your company, its liabilities move along with you for the rest of your life. And once your name is placed on Credit Information Bureau, you can’t get a credit card or lease a car, let alone obtain funding for a new project,” Adil pointed out.
“Even in this time and age there are criminal banking recovery laws. A simple default comes under the definition of willful default triggering criminal repercussions, including NAB Ordinance, if the bank so wishes. All of the banks negotiations start with the standard threats of criminal prosecution and reporting to the NAB without any consideration to the reasons for the default,” said Nasir Vohra, a Karachi-based chartered accountant.
Nasir said the mortgaged assets could be auctioned within two months of default under S.15(2) of the Financial Institutions (Recovery of Finances) Ordinance, 2001 without the intervention of any court. “Whether the outstanding claim is correct or disputed is of no consequence. The basic right of the borrower to dispute the amounts claimed as due has been effectively taken away,” he said.
“An investor can lose his capital injected into the company and then get sued for his personal assets like his personal house etc, which he may have had even before the loan was taken and then after that he could still be prosecuted. The entire concept of the limited liability company has been defeated. Professional directors refuse to come onto the Board of Directors as they are afraid that their assets could be seized and they could be thrown in prison in case the company defaults. No wonder that professional management has not taken roots,” Nasir, who has drafted a bankruptcy law on the pattern of the American law, said.
“Bankruptcies in Pakistan are treated so nastily because no one follows the meaning of the concept of a public or a private limited company. A limited company means it has limited liabilities,” Aptma-Punjab chairman Akber Sheikh underlined.
“But bankers in Pakistan insist on obtaining personal guarantees from all directors of a company before advancing credit for a project. It gives them a leverage to recover their loans by selling the personal properties of the directors as well as of their families. That is why sponsors are reluctant to file bankruptcies and close the mills and move with their lives.” He said the banks should be stopped from invoking personal guarantees and instead told to sell a defaulting unit for recovering their loans as was done around the world in case of closure of a limited company.
Adil said, the banks force sponsors to give personal guarantees in spite of the fact that the central bank did not require it. “But the central bank does not stop the banks from doing so on the pretext that it is a matter between two private parties – creditor and borrower,” he said.
He pointed out that sponsors of several companies in the textile sector, which settled their financial liabilities with the banks under the central bank’s circular BPD-29 three years ago, were still facing criminal charges. “They have sold their mills but continue to face police investigations in cases registered by private creditors (suppliers).”
The textile industry which is reeling under the increased cost of doing business because of rising interest rates, hiking utility prices and myriad of other factors and accruing losses, wants government to lay down some strategy, on the pattern of the US bankruptcies laws, in order to allow the loss-making mills close down and their sponsors to exit from the business honourably. But no progress has so far been made.
“In the absence of an exit strategy, a big number of mills have already accumulated huge losses and defaulting on their private and bank debts. If nothing is done to allow them dignified exit, the government would have to once again come up with yet another BPD-29 style incentive for cleaning up the banks’ balance-sheets,” said a knitwear exporter on condition of anonymity.
Adil said, the banks were reluctant to write off bad loans because the central bank’s circular number six issued in June last year. The order prohibits the banks from writing off loans where forced sale value of securities held by them is more than the recoverable outstanding amount. If the banks wrote off loans in such cases, they would be answerable to the State Bank. If they didn’t they risked gathering bad loans on their balance-sheets, he said. “If the government wants to promote investment in the manufacturing sector, it would have to remove the criminal provisions from the banking recovery laws and give powers to settlement committees like the Committee for Restructuring of Sick Industrial Units. Otherwise we should forget any substantial investment in the industry in the future,” he warned.
Thousands of small to big businesses fail worldwide every day. This is anything but unusual. Companies suffer losses, file for bankruptcies and their sponsors move on with their life. The very next day their sponsors might be looking for new financing for yet another project and actually obtain it without any fuss.
