CORPORATE REHABILITATION ACT (CRA) – BACKGROUND, CONCEPTS AND LEGAL ARCHITECTURE. Salman Ali Shaikh January 2009. INSOLVENCY SYSTEMS AND RISK MANAGEMENT: CONCEPTUAL ISSUES.
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CORPORATE REHABILITATION ACT (CRA) – BACKGROUND, CONCEPTS AND LEGAL ARCHITECTURE
Salman Ali Shaikh
Non-Performing Loans (NPL’s) of the Banking System (Rs. in Billion – i.e., in Column 2).
NOTE: There are concerns about data integrity owing to conceptual and methodology – related issues – e.g., two regulators, NPL at CIRC, facility-based classification, accounting implications of Recovery Act 1997/ Recovery Act 2001, etc. While the figures of NPL in the banking sector are probably reliable, the overall figures for the “financial sector” are significantly higher, and are not quantified (at present).
1. Admission of failure:
Periodic recourse to these “one-time amnesty” and “incentive”
schemes is a de facto public admission that in the areas of
insolvency, corporate rescue, etc., the legal system has effectively
2. Heavy guzzler of provisions:
In the late 1990s, smart banks/ bankers were making aggressive
one-shot settlements with borrowers at values ranging from P+25%
to P+50% - at a time when Pakistan’s economy was very weak. It
is a pity that now (with high GNP growth rates) distressed assets
are being settled at values as low as P-75% to P-25%!!!.
3. The problem with the FSV concept:
It is an arbitrary figure which assumes that all NPL is on a
liquidation basis (i.e. not a going concern). The amount of
provisions used (i.e., write-off’s generated) could have been
substantially reduced by using the concept of sustainable debt. The
methodology for using this concept was available – i.e., HBL’s EDR
(excess debt recovery) product/ scheme (P+25%) – presented to the
GoP in 1999.
4. The mechanics of determining FSV:
Under SBP’s guidelines, FSV is determined by evaluators, an
“unregulated profession” (capacity building issue). Enormous
power has been granted to evaluators. Anecdotal evidence
suggests that these powers have been abused/ misused.
5. “Sickness worthy of revival”:
Not all companies are worth reviving – e.g., inefficient, obsolete
technology, etc. In fact, owing to competitive disadvantages,
sometimes entire industries can be considered to be “unworthy” –
e.g., textile products in North Asia, sugar in Pakistan, etc. Amnesty
schemes (that are not based on financial data) cannot make such
6. Amnesty schemes protect inefficient managements:
Very often the root cause of sickness is the management. In such
cases, a change of management can convert sick entities into
7. Moral hazard:
Such schemes promote the “default culture” and have a cumulative
effect that can last for decades.
“War is too important a subject to be left to the generals.”
Winston Churchill, 1943
“Insolvency is too complex a subject to be left to the judges.”