THE revival and rehabilitation of potentially viable companies was virtually suspended because the institutional arrangements and legal processes for it were inadequate and time consuming.

After prolonged and extensive consultation with relevant stakeholders, the Security and Exchange Commission of Pakistan came up with a proposed reform of corporate insolvency laws.

As a result, the Corporate Restructuring Companies Bill, 2016 received the assent of the Senate last week. The Act provides a comprehensive legal framework for revival and rehabilitation of financially distressed companies.

Similar efforts were made in the past. A centralised and autonomous non-performing loan management company - Corporate and Industrial Restructuring Corporation (CIRC) was set up more than a decade ago. Broadly, the CIRC law enabled carrying out an effective NPL (non-performing loan) acquisition and recovery programme which resulted in the acquisition of 254 of the most problematic NPLs of Rs50bn, and the revival of 140 sick industrial units which were sold to new entrepreneurs.

The rules deal with the licensing, incorporation, functions and power and transfer of non-performing assets to the corporate restructuring company

However, the CIRC statutory life expired on September 22, 2006.

With experience gained, a Corporate Rehabilitation Act (CRA) was drafted in 2004 but it was not well received by the financial sector, fearing it would forestall their recovery efforts against delinquent debtors.

In 2013, the SECP held various roundtable sessions in Lahore and Karachi with the relevant stakeholders to solicit their views on the draft CRA. The stakeholders proposed a new draft law for the rehabilitation of companies.

On the recommendations of the stakeholders, an SECP official said, the CRA was bifurcated into two independent laws — Corporate Restructuring Companies Bill, 2016 and Corporate Rehabilitation Law. The government is still working on the rehabilitation law which will be placed on the floor of the house soon, the official said.

The Restructuring Companies Act, 2016 seeks to declare corporate restructuring as a new form of business: forming new firms to make the financially distressed companies financially and operationally viable.

A public limited company licensed by the SECP under this Act can carry out the business of acquisition, management, restructuring and resolution of non-performing assets of financial institutions, and restructure, reorganise, revive and liquidate commercially or financially distressed companies and their businesses.

The functions and powers of the CRC have been clearly defined in the law.

According to a report of the Senate secretariat, the concept of corporate restructuring, or a company undertaking the business of corporate restructuring, was absent in Pakistan. There was no legal framework that governed the setting up of such companies.

The key features of the new law provides for the establishment, licensing and regulation of corporate restructuring companies and the manner in which they can carry on business.

The rules spell out the six sections (Sections 3-8) dealing with the licensing, incorporation, functions and powers and transfer of non–performing assets to the corporate restructuring company. The SECP has been empowered to get required information, and carry out special audit and inquiry.

The miscellaneous provisions in the Act provide a penalty for non-compliance; power to make rules and regulations; authority to issue directives, circulars, and to remove difficulty.

An official of the finance ministry said the CRC Act will also improve Pakistan’s ranking on World Bank’s ‘ease of doing business’ index.

The Act also provides a basic setup for the rehabilitation mechanism of sick units. However, no official data of sick units is available with the SECP.

According to SECP officials, since 1996 when the State Bank of Pakistan issued Sick Units Rehabilitation rules, no industrial unit was declared sick by the central bank. No case was sent by the banks to the SBP to declare a unit sick, the officials added.

The Act also sets out the incorporation method for the corporate restructuring companies, its powers, and functions, the method for transfer of non-performing assets, mode of legal proceedings, and the penalty if a company fails to adhere to the provisions of the law.

Published in Dawn, Business & Finance weekly, June 27th, 2016