A ‘CONSENSUS’ draft of the much-awaited corporate rehabilitation law protecting the interests of both creditors and debtors is expected to be finalised by the end of this financial year, say Securities and Exchange Commission of Pakistan officials.

“Internal and external consultations on the proposed law are under way, and once the draft law is finalised, it will be sent to the parliament for approval and subsequent enactment by June,” an SECP official told Dawn on the condition of anonymity.

But the divergence of views expressed by the stakeholders — bankers and businessmen — on the need and content of the proposed law is feared to delay the finalisation of the draft proposals even further.

A bill — the Corporate Rehabilitation Bill 2015 — moved by PPP Senator Saleem Mandviwala is already pending before the Senate’s Standing Committee on Finance.

However, the committee, after a discussion on the private member’s bill, had allowed the top corporate regulator eight months to finalise its own draft of the law in consultation with the stakeholders.

If the SECP fails to present its draft law, the Senate is likely to take up the private bill for legislation. SECP officials say the Pakistan Business Council (PBC) — a conglomerate of the country’s top companies, including multinationals — is opposed to the bill introduced by Mandviwala.

Efforts for preparing a court-driven bankruptcy law on the pattern of a similar American law that comprehensively protects the financial interests of both the creditors and borrowers have been afoot since 2007.

But the first attempt to draft such a law — the Corporate Rehabilitation Bill — was made by the Banking Law Review Commission after reviewing the Banking Companies Ordinance. It was sent to the finance ministry in 2009.

SECP officials say ‘extremely divergent views’ were expressed by the stakeholders about the ‘scope and content’ of the draft when it was presented before them three years ago.

The existing banking and financial laws are considered by corporate borrowers to be too harsh

“The strongest opposition to the draft bill came from bankers who thought the court-driven corporate rehabilitation law would make the recovery of their money from a defaulter even more difficult. Reservations were also expressed over the competence of the judiciary to deal with financial matters,” said a senior SECP official.

Consequently, the apex regulator was tasked by the ministry to review the law in its entirety and further consult with stakeholders like the central bank, lenders, businessmen and legal experts.

“The draft law primarily had two components: a comprehensive corporate rehabilitation framework and an enabling provision for the establishment of corporate restructuring companies (CRCs). The stakeholders did not raise any objection on the proposed functions of the CRCs as envisaged in the draft bill,” the SECP official said.

He said the consensus on the corporate restructuring scheme allowed the regulator to separate the “non-controversial sections of the bill and consolidate them” in the shape of the Corporate Restructuring Companies Bill 2015 as a ‘first step’ towards introducing CRCs in Pakistan.

With regards to the disputed parts of the bill, the regulator has prepared a concept note and shared it with stakeholders in April. But no consensus has apparently emerged so far.

The SECP has sought the State Bank’s help to take up the matter with the Pakistan Banking Association (PBA) to get its feedback so that its proposals could be submitted to the Senate’s standing committee. No progress has been made so far. All efforts by Dawn to reach the PBA to obtain its comments failed.

A businessman associated with the Pakistan Business Council (PBC) told this writer that the council had already held two conferences in Lahore and Karachi this year to elicit the views of different sectors to firm up its stance and proposals on the bill.

“The corporate sector has long been demanding that the government put together a bankruptcy law to allow loss-making companies a mechanism to honourably wind up their businesses, on the pattern of the bankruptcy law in the US. But bankers are strongly opposed to it because the implementation of such a law will take their power to strip the debtors’ clothes away and will allow the courts to decide bankruptcy cases on merit,” he asserted on the condition of anonymity.

He also blamed the banks for the inordinate delay in the finalisation of the corporate rehabilitation bill, and claimed that the SBP is also protecting the interests of bankers rather than all the stakeholders involved.

The existing banking and financial laws are considered by corporate borrowers to be too harsh as they give bankers immense powers to recover their loans without distinguishing between wilful and circumstantial defaults.

“At present, the borrowers have to furnish personal guarantees for obtaining loans. It means that the banks have the power to auction even personal assets like houses, cars and clothes of a company’s directors to recover their loans, even in cases of limited companies,” said a businessman who had to sell his factory and personal assets many years ago to pay back his creditors.

“The present laws do not distinguish between a wilful default and a circumstantial default resulting from changing government policies or domestic and international business conditions,” he added.

Many businessmen say the loss-making companies try not to close down their operations and continue to accumulate losses in the process for fear that their creditors will tear them apart if they closed down their factories in the absence of a regulatory framework.

Nevertheless, bankers have a different story to tell.

“A significant number of businesses lie about losses to avoid repaying their loans. How can the directors of a loss-making company live in palatial homes, drive the latest models of the most expensive imported cars, frequently travel abroad and pay for the university expense of their children in Europe and America,” asked a senior banker who has worked with several banks during his 20-year career.

“Banks suspect that the implementation of a bankruptcy law or however you name it will take away whatever leverage they have over debtors for the recovery of their loans. The courts don’t have the kind of expertise to deal with such matters and the businessmen have the means to delay a decision with the help of lawyers,” he added on the condition of anonymity.

That is even more reason for a balanced bankruptcy/corporate rehabilitation law that protects the interests of both the creditors and the debtors and punishes wilful defaulters. Isn’t it?

Published in Dawn, Business & Finance weekly, September 28th, 2015

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