Revival of corporate sector: Proposed Corporate Rehabilitation Act offers comprehensive framework

For revival of corporate sector, the proposed Corporate Rehabilitation Act, 2016 has provided a comprehensive framework for the rehabilitation of companies in financial distress which are ready to submit their rehabilitation plan. It is learnt that the SECP has circulated the draft of the Corporate Rehabilitation Act, 2016 to stakeholders for comments.
The "Rehabilitation Plan" under the draft law means a plan that provides for the rehabilitation of the Applicant Business Debtor (company) so as to enable discharge of its liabilities and, without restricting the generality of such plan, may include the restructuring or writing down or conversion into equity or any other security of the liabilities of the Applicant Business Debtor.
Under the draft procedure, a Business Debtor may make an Application for Rehabilitation to its Regulated Secured Creditors with or without the restructuring of its liabilities, pursuant to a Declaration of Insolvency made at a duly convened meeting by Members holding at least three fourths of the issued capital of the Business Debtor. (ii) An Application for Rehabilitation may also be entertained by the Regulated Secured Creditors of a Business Debtor provided that such application is initiated by Regulated Secured Creditors holding at least thirty per cent of the Secured Debt of the Business Debtor held by such creditors. (iii) An Application for Rehabilitation under either section 3(i) or 3(ii) shall be addressed and sent to each Regulated Secured Creditor of the Business Debtor. Such application shall nominate the Regulated Secured Creditor holding the largest secured debt by value as the convenor of the creditors' meetings required by section 4(i) and 4(ii) of the Act and such convenor shall be responsible for the issuance of the notice for the creditors' meetings required by the said sections of the Act. Issuance of notice for the creditors' meetings by any Regulated Secured creditor shall not be called in question on the ground that the issuer was not the largest Regulated Secured creditor by value of the Business Debtor.
Under the draft law, "Business Debtor" means a company incorporated under the Companies Ordinance, 1984 or a predecessor law that is engaged in any lawful business and that has obtained finance facilities from any Regulated Creditor.
It said that after consideration of an Application for Rehabilitation the Regulated Secured Creditors may, in a meeting of which notice shall be issued to all such creditors , and which shall be held within one month of the receipt of the Application for Rehabilitation, issue a Declaration of Intent to Rehabilitate if, prima facie and without any representation that a rehabilitation plan will in fact be agreed upon, it appears to Regulated Secured Creditors holding a majority by value of the Regulated Secured Debt of the Applicant Business Debtor that a viable restructuring of the assets and liabilities of the Applicant Business Debtor might be possible. (ii) Within twenty one days of the issuance of a Declaration of Intent to Rehabilitate the Regulated Secured Creditors shall in a meeting of which notice shall be issued to all such creditors, acting through duly authorised representatives, appoint by resolution supported by Regulated Secured Creditors holding a majority by value of the Regulated Secured Debt of the Applicant Business Debtor a person having experience, in the opinion of the Regulated Secured Creditors, of restructuring of the assets and liabilities of Business Debtors in financial distress as the Creditors' Agent. (iii) The Creditors' Agent shall cause a Statement of Affairs and Prospects of the Applicant Business Debtor to be prepared as may be prescribed and cause valuation of all assets of the Applicant Business Debtor by an Approved Valuator who shall prepare a Valuation Report within such time period as may be prescribed.
The Creditors' Agent shall also make a determination of the value of all claims against the Applicant Business Debtor. Based on the valuation of assets, the Creditors' Agent shall prepare a Distress Sale Distributions Report detailing the Expected Payouts to different claimants, taking into account the Priority Claims, in the event of a sale of the assets of the Applicant Business Debtor. (iv) For the purpose of preparation of the Statement of Affairs and Prospects of the Applicant Business Debtor and the valuation of assets the Creditors' Agent shall have authority to seek such records pertaining to the Applicant Business Debtor as may be considered necessary and may pose any question relating to the affairs of the Applicant Business Debtor to any director, member, employee or external auditor of the Applicant Business Debtor.
In the event of the amount of any claim by any person against the Applicant Business Debtor as determined by the Creditors' Agent being disputed during the course of settlement of a Rehabilitation Plan by such claimant or the Applicant Business Debtor, including disputes pending adjudication before any court or other dispute resolution forum whatsoever, the dispute shall be referred to an Arbitrator or panel of Arbitrators appointed with the consent of the disputing parties. In the event of such consent as regards the Arbitrator or panel of Arbitrators not being achieved within forty five days of a Declaration of Intent to Rehabilitate the Chairman of the Securities and Exchange Commission of Pakistan shall appoint an Arbitrator or panel of Arbitrators from a list of Approved Arbitrators to be maintained by the State Bank of Pakistan. The Arbitrator or panel of Arbitrators so appointed shall render a decision after hearing all concerned and examining all relevant evidence within forty five days of being appointed. The decision rendered by the Arbitrator or panel of Arbitrators in the form of an award shall be used for all purposes relatable to the Rehabilitation Plan and its settlement and shall constitute final determination of the liability of the Applicant Business Debtor as regards the claim determined by the award. Proceedings before the Arbitrator or panel of Arbitrators shall be regulated by such rules, if any, as may be prescribed and shall not be subject to the Qanun e Shahadat Order, 1984. (vi) All Approved Arbitrators shall be placed on the list of Approved Arbitrators maintained by the State Bank of Pakistan for a non-renewable period of five years and shall be nominated for such placement by the Chief Justice of Pakistan. (vii) Approved Arbitrators shall be persons of acknowledged ability and integrity in the fields of law, accountancy or banking with professional or judicial experience of at least fifteen years.
It said that the creditors' Agent may also apply to the Court for an injunction against any creditor of the Applicant Business Debtor restraining such creditor from taking any measure for the recovery of an existing claim, including discontinuance of supply of electricity, gas or water on account of a claim in existence on the date of the filing of the application for injunction by the Creditors' Agent before the Court. Provided that no injunction may be obtained against the commencement or continuation of any dispute resolution proceedings, including judicial, arbitral or regulatory proceedings. Such proceedings shall be subject to the provisions of section 4(v) of the Act. 6. (i) A Rehabilitation Plan shall be settled with the consent of the Applicant Business Debtor and Secured Creditors holding at least three fourths in value of the Secured Debt of the Applicant Business Debtor as well as Unsecured Creditors, other than Related Creditors, holding at least half in value of the unsecured Expected Payouts. (ii) The consent of the Applicant Business Debtor shall be obtained through a special resolution passed at a duly convened extraordinary general meeting of the Applicant Business Debtor.
It said that the Court shall, prior to granting approval to a Rehabilitation Plan, invite and decide objections, if any, from all affected persons, other than the Regulated Secured Creditors. The Court shall also confirm, set aside or modify, on such grounds as are available for interference in an award rendered by an arbitrator under the Arbitration Act 1940 or any successor statute, after providing opportunity of hearing to all persons who were parties before the Arbitrator or panel of Arbitrators, any decision rendered by an Arbitrator or panel of Arbitrators with respect to a disputed claim. Any objection by any affected person or the Applicant Business Debtor to the valuation of any asset of the Applicant Business Debtor made before the Court may be referred by the Court to the Valuations Appellate Panel provided good cause for such referral is made out. The decision of the Valuations Appellate Panel shall be final for the purpose of consideration by the Court of the Rehabilitation Plan. The Valuations Appellate Panel shall be set up by the Securities and Exchange Commission of Pakistan with the consent of Regulated Secured Creditors holding at least half in value of the Regulated Secured Debt of the Applicant Business Debtor.
In the event of any objection being upheld by the Court the Rehabilitation Plan shall be reverted to the Applicant Business Debtor and the Regulated Secured Creditors for appropriate modification and refilling before the Court. In the event of an amount determined by an Arbitrator or panel of Arbitrators in accordance with section 4(v) being altered by the Court the Rehabilitation Plan shall be reverted to the Applicant Business Debtor and the Regulated Secured Creditors only if the alteration affects the consent granted by at least three fourths of the Regulated Secured Creditors to the settlement of the Rehabilitation Plan or otherwise adversely affects the viability of the Rehabilitation Plan. The Modified Rehabilitation Plan shall require consent in accordance with section 6 of the Act.
The Court may, if satisfied that any objections raised have been met, approve the Rehabilitation Plan or the Modified Rehabilitation Plan which shall become effective with respect to the Applicant Business Debtor and all of its creditors from the date of approval by the Court. (ix) The approval by the Court of the Rehabilitation Plan shall result in the said plan becoming effective, including as regards the transfer and vesting or determination of all assets, properties, liabilities, claims and obligations as specified in the Rehabilitation Plan, draft law added.