The manufacturing base needs to be broadened to support the sagging economy. For this, the existing archaic legal corporate framework needs to be upgraded. The absence of an exit strategy for companies in distress may erode the industrial base.

There is an urgent need to put much-delayed bankruptcy law in place and institute advisory services to engineer a turnaround in ailing companies through restructuring.

The cost of failure of the manufacturing firms in these critical times may far exceed the benefits that it would draw by safeguarding the creditors’ stakes. The loss from shutdowns is many times higher than the collective worth of physical assets of such companies.

Reasons that drove the industry to the current pass are many. The private sector cannot be absolved entirely of the responsibility of not responding to the changing times by restructuring and readjusting their business concerns. In this 21st century, many companies are run under parental and not professional guidance.

However, there are factors currently beyond the control of the private sector such as energy deficit and the global recession that are pushing companies to the red zone.

Over a hundred, mostly textile companies, are reported to have closed down in Punjab and Sindh and more are reported to be in serious distress. About half of the total strength of the textile units are not servicing their bank debts in time.

If these distressed companies were located in a country where they had modern bankruptcy laws, the scenario would have been different. The relevant laws would have handled the situation in more efficient manner. In the US, Chapter 11 of bankruptcy laws help minimise the losses.

The bankruptcy law is designed to save a failing company without compromising the creditors’ interests. In the aftermath of the financial crisis 2008 and the recession that set in, a number of corporate giants in the US and Canada filed cases under Chapter 11. This includes Canadian telecom giant Nortel. The company said that the process would allow it to deal with its cost and debt burden, to effectively restructure its operations and to narrow its strategic focus in an effective manner. The bankruptcy law helps salvage entrepreneurship in distress companies.

A draft legislation on bankruptcy-- ‘Corporate Rehabilitation Act’-- is ready and lying with the ministry of finance for the last four years. The draft was prepared by the Banking Law Review Commission. Salman Ali Sheikh of the SECP lead the team that drafted the proposed law on the basis of an in-depth study on the subject in 2004.

The study found out that the current regime of filing liquidation is creditor-friendly that ends up hurting both, debtors as well as creditors--the debtors because his company is not given a fair chance of survival and creditors because they are not deprived of a chance to resolve the issue of non-performing loans amicably.

Forced by powerful interest groups or circumstances and on government directives, the central bank, in the past, had to intervene to help private firms break their debt cycle and move on. The recent example is that of very generous debt forgiveness scheme introduced in 2002 by the State Bank via BPD Circular 29 which allowed debtors to settle their outstanding liabilities through payment of the forced sale value of their secured assets.

Dr Sheikh confirmed to Dawn over telephone from Islamabad that the democratic government has shown some interest in the draft law. He said that the dismal corporate scene is probably the reason for the government’s new found interest in bankruptcy law. “Only last week Shaukat Tareen told me that the government is reviving the issue”, he said.

Business leaders feel that the entrepreneur is not treated fairly, forcing many to wrap up their troubled businesses.. “I closed down Amin Spinning in Mirpur Azad Kashmir. It was a sizeable plant with 20,000 spindles. I settled issues with the labour at great pains but settling all bank dues was beyond me, so I understand well what you are talking about”, Chaudhry Saeed, ex-president federation of Pakistan chamber of commerce and industry told Dawn from his home in Azad Kashmir over phone.

“Yes there is a need for insolvency laws but a part of the problem in businesses is the pattern of ownership. Many businesses are family owned and they tend to treat their enterprises not as commercial entities but their pets. Being passionate is good but getting emotionally involved with loss gathering outdated entities is stupid. In Pakistan, I felt, instead of doing what needs to be done, there is a tendency to wail too much and cling on to the dead”, a foreigner currently working with an NGO dealing with the private sector performance told Dawn.

A company tends to be most efficient if it enjoys the freedom to enter and exit the market. To break free of the recessionary trap, it is crucial that industry gets the institutional and legal support it deserves.