According to S. A. Shaikh, writing in 2004 for the Organization for Economic Cooperation and Development, Pakistan's insolvency regime is founded on two principle laws that derive from British and British-Indian Law: the Companies Ordinance of 1984 and the 2001 Recovery of Finances Ordinance. In addition, reform legislation has been drafted, called the Corporate Rehabilitation Act, which seeks to modernize the system and strike a balance between creditor rights and the needs of debtors by providing workable options other than liquidation. However, this draft legislation has yet to be passed by the Parliament. Further, in the year 2000, a specialized organization, the Corporate and Industrial Restructuring Corporation, was created to deal with banks that were dealing with an excess of non-performing loans, with the hope that this non-court option would ultimately prove better than the auction process. This experience was disappointing and the organization was allowed to lapse according to the sunset provisions of its enabling legislation. Pakistan's insolvency regime is, on the whole, less costly and more efficient than is the experience of the rest of the region, and returns to the creditor are higher, according to the World Bank. There is, however, insufficient publicly available information regarding Pakistan's compliance with the Principles and Guidelines for Effective Insolvency and Creditor Rights Systems developed by the World Bank.

General Overview

According to S. A. Shaikh, writing in 2004 for the Organization for Economic Cooperation and Development (OECD) and the Forum on Asian Insolvency Reform (FAIR), there are two principal laws that form the bedrock of the Pakistani corporate insolvency regime. These are the Companies Ordinance of 1984 and the 2001 Recovery of Finances Ordinance. In addition, Shaikh discusses the Corporate Rehabilitation Act (CRA), an attempt at legislative reform which was aimed at modernizing the system and establishing a balance between the interests of creditors and debtors. The CRA was drafted by the Banking Laws Review Commission, the result of nearly two years of debate, but at the time of Shaikh's writing it had not yet been presented to parliament for a vote, and it appeared unlikely that this would happen any time soon. The CRA sought to create options other than liquidation for troubled firms whose failure was the result of external forces beyond the company's control. A year earlier, Shaikh had written an article for the OECD that discussed the creation in 2000 of the Corporate and Industrial Restructuring Corporation (CIRC). This agency was intended to participate in the rehabilitation of public sector banks suffering under a burden of non-performing loans, and was expected to "extract better value from distressed assets than the banks operating under the auction process" (p. 7). However, a lack of professionally trained staff, inadequate procedures, and a rigid bureaucracy rendered the CIRC experience disappointing. The Corporation was wound up in 2006, per the provisions of a sunset clause built into its enabling legislation. In a 2008 article co-authored by Shaikh and Faqvi, it is disclosed that the CRA remains on the drawing board, as the legislature has yet to take it up for deliberations.

The 2007 Country Commercial Guide for Pakistan, produced by the U.S. Department of Commerce (DoC) through the U.S. Foreign and Commercial Service and the Department of State, notes that Pakistani commercial law is based on British contract law. Bankruptcy law, provisions of which are included in the Companies Ordinance, follows the model of its British counterpart. According to the DoC, "in general, the court appoints a liquidator to sell off and account for the property of the bankrupt, but the process can take years." In his 2004 article, Shaikh discusses the general principles underpinning the constitution of Pakistani courts. Judges serving on the High Court and the Supreme court are appointed, as required by the Pakistani Constitution. The Chief Justice of Pakistan appoints Supreme Court judges. The Provincial Chief Justice appoints judges to his or her province's High Court. Provincial High Courts are under the administrative jurisdiction of the High Court's Chief Justice. Shaikh notes that it is very uncommon for a judge to be removed from the bench. An undated report by Kahn and Shah for the Asian Development Bank and posted on the Insolvency Asia website notes that commercial insolvencies generally fall under the jurisdiction of the civil courts, falling to the judicial oversight of the High Court in the locality where the debtor company's registered offices are situated. The Companies Ordinance allows for both voluntary and court supervised winding-up procedures as well as compromises and reconstruction arrangements.

The International Bank for Reconstruction and Development (IBRD) and the World Bank (WB) jointly published a "Country Profile" for Pakistan in 2008, offering a forecast of the business climate for 2009 across a number of dimensions, including business closings. In addition to the full report, the IBRD and WB offer an "at-a-glance" summary sheet that offers a snapshot of the ease of closing a business in Pakistan, basing their evaluation on three key indicators: the time required, expressed in years; the cost of the procedure, as a percentage of the debtor estate; and the recovery rate, in terms of cents on the dollar. For Pakistan, it takes an average of 2.8 years, costs 4% of the debtor estate, and results in an average recovery rate of 39.2 cents on the dollar. These figures are somewhat more favorable than the regional averages, which are 5.0 years, 6.5%, and 19.9 cents on the dollar. However, although the cost of the business-closing process is more advantageous in Pakistan than the average experience of member states of the OECD, for whom the process costs 8.4% of the debtor estate (nearly double the Pakistani cost), the OECD figures are much more favorable on the other two factors: 1.7 years to complete the process and a recovery rate of 68.6 cents on the dollar. For 2009, Pakistan ranks 58 out of 181 surveyed countries, moving up one rank from the previous year but maintaining its position in the upper third, globally. The IBRD&WB full report notes that Pakistan's scores on the three key indicators has held steady over the past three years, whereas the return to creditors has fallen rather sharply, on average, across the region.