The financial restructuring and rehabilitation plan of companies under the proposed Corporate Rehabilitation Act (CRA), 2009 might have consequences on the involved business entities going through restructuring. Giving a thorough review of the CRA, 2009, experts told Business Recorder on Thursday that the financial restructuring plan and its implementation under the proposed CRA might result in various related consequences.
These may include disposal of assets/business to third party; cancellation of shares of the company; reduction of capital of the company; issue of shares to a new company; demerger/splitting of a company and issue of any long term security instrument [TFC] to a lender and any other action; etc.
They pointed out that the rehabilitation of company results in transactions and events resulting in taxable event and charge for stamp duty. There are relevant provisions in the Act to cater for the same however in order to be effective corresponding provisions would have to be incorporated in the Income Tax Ordinance, 2001 and other taxation laws.
According to the experts, there had been no development in the corporate laws to cater for the need of rehabilitation of companies in Pakistan. There is a need for corporate law mechanism for restructuring of companies in financial difficulties without going through winding up procedures.
This new law enables implementation of any 'Restructuring Plan' for a company, including whole or part of the disposal of assets or properties binding on all the relevant parties viz debtor company; creditors - including banks etc; and shareholders /employees. From economic aspect, this may assist in undergoing a 'restructuring plan' of a company in financial difficulties without disturbing the business and operations.
From the lenders viewpoint, the new law provides an opportunity to realise the debts in commercially viable manner without going into the recovery proceeding in the ordinary course of law. This law will also facilitate the transfer of assets to the proposed Corporate Restructuring Company, they said.
Experts were of the view that the relief/ restructuring under this law can be sought by company in financial difficulties itself or by creditors involuntary. The voluntary relief is available on when the company is insolvent as per 'fair value of assets'. There is a need to remove this condition. On the other hand, all companies with financial difficulties be allowed to seek relief. Companies in financial difficulties may be defined under the proposed law.
Sources said that the law conceives different situations including continuity of control by the company; without mediation; with mediation and appointment of Administrator. These three conceivable situations to be further elaborated in the rules. Such details and differentiation is significant from operational viewpoint as in the first two situations there is continuity of present management control, enjoying certain benefits arising from the law. Furthermore 'mediation' procedure needs to be further elaborated under the new law.
Experts said that the law does not directly deal with the issue of valuation. This is a right approach under the draft of the CRA. However, there is concept of 'fair and equitable' in the new law. This definition requires a review.
There has to certain caveat that disposal of assets or business to the Corporate Restructuring Company [CRC] is made at a reasonable value so that CTC is not abused to part assets at an inflated prices. They said that the Resolution Trust Corporation - an entity to be formed preferably in the government sector to intervene and act as CRC. The objectives of the RTC are to facilitate the process and intervene in funding problems.