Knowledge Base

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Business Formation, Regulation and Corporate Matters

What is meant by Corporate Reorganization or Restructuring, why is it needed and what is the procedure in Pakistan?

Corporate reorganization allows companies to renegotiate their liabilities and restructure its capital and reserves in order to achieve financial viability. Foreign investors and entrepreneurs will naturally have an interest in knowing whether Pakistan company laws on winding up process and corporate restructuring will protect their interests, since worst case scenarios of failed investments must always be looked at.

Importantly, the Companies Act, 2017 removed the role of the High Courts in corporate reorganizations, with the role and powers now exercisable by the SECP as regulator, which should be encouraging for foreign investors as the time-consuming Court process is avoided.

Under the Act, the reorganization and restructuring of companies can happen for different reasons. In some cases, creditors seek to recover debts owed and apply to the SECP for reorganization and restructuring of debtor-companies which are not in good financial condition, in order to secure their financial interest. This can occur during winding up proceedings (when stayed by the High Court and if the scheme is eventually approved by the parties) or where creditors and debtor-companies reach agreement before things go too far. In other cases, companies voluntarily apply to the SECP for confirmation of restructuring, which may be done to increase overall profitability, competitiveness of the post-reorganization entities and to achieve economies of scale. In all cases, however, a scheme of arrangement for the corporate restructuring of the Company (or Companies) must be approved by at least 75% of the class of creditors or shareholders at a meeting held as directed by the SECP (meaning that all corporate reorganizations in Pakistan are essentially voluntary).

Mandatory filings and documents are required for this process, with furnishing of material facts of the Company relating to financial position, auditor’s report, latest accounts, affidavits, and the details of any SECP investigations into the affairs of the Company.

Once the scheme is approved and filed with the SECP, this scheme is binding on the company, creditors, shareholders, liquidators and contributories. The SECP must authorize the scheme but generally will not go against the collective agreement of the parties involved – there is usually little complication if the scheme is unanimously approved by all parties concerned. Still, the SECP is required to determine whether all provisions of law are complied with and the scheme is in the interest of the shareholders and creditors (among other factors). The SECP is authorized to enforce schemes of arrangements against the parties.

A New Law for Rehabilitation of Debtor Companies

Recently, the Corporate Rehabilitation Act 2018 (“CRA”) introduced an alternative route to restructuring / reorganization of companies in financial distress, allowing them to restructure debts in order to return to return to productivity. This also avoids the time consuming processes under the Companies Act, 2017 for court-supervised winding-up or SECP-sanctioned corporate reorganization. Efforts in the past have been made largely on creditor friendly recovery laws which resulted in an imbalance of legal remedies for rehabilitation of debtors.

The CRA provides an equal opportunity to certain classes of debtor companies as well as their creditors to try and get a rehabilitation plan approved by a high court(s), through the involvement of professional insolvency mediators. Either side may file a petition in the High Court calling for an order of mediation, along with the rehabilitation plan and the statement of affairs of the debtor company. This leads to Court appointment of SECP-approved insolvency expert(s) to act as mediator for acceptance of the plan of rehabilitation proposed by either the debtor company itself or the qualifying creditors.

In certain cases, qualifying creditors can file petitions before the High Court for appointment of an administrator to manage the affairs of the Company and continue the rehabilitation process under the law. The administrator may adopt or modify a plan of rehabilitation or recommend winding up of the Company. This is why the CRA has provisions for conversion of petitions to winding up petitions under the Companies Act, 2017.

Ultimately, the Court may confirm the plan of rehabilitation and help implement it or dismiss the case, in which case the petition may be converted into a winding up petition (on application).