The Corporate Rehabilitation Act of 2018 is aimed at rehabilitating financially distressed companies. It provides a framework to restructure and reorganise corporate debts while ensuring the continuity of businesses. It allows distressed companies to propose a rehabilitation plan which must be approved by a significant majority of creditors and stakeholders. The process is supervised by the High Court, ensuring transparency and fairness. Upon the initiation of rehabilitation proceedings, a moratorium is placed on creditors’ claims as a stopgap arrangement to block any legal enforcement actions against the company.

The Act was enacted after more than a decade of stalemate between the industry and financial institutions over the protections for revival of distressed businesses. Limited moratorium against enforcement actions; conversion of rehabilitation proceedings into winding up of the debtor on non-acceptance of the revival plan; and creditors’ ability to appoint administrator over the debtor’s business were the key compromises made in this Act.

As a result, the Act has not been able to serve the key objects for which it was enacted, that is, the revival of distressed businesses through Court-supervised mediatory process. The key issue is the imbalance between the rights of debtors and creditors. The financial institutions do not need this law as they follow another stricter legislation for the recovery of defaulted loans. The industry is reluctant to use this Act as it feels that it is harsh and provides no support for the success of a revival plan.

In the current economic scenario, this Act can help distressed businesses to use the mediatory process for the resolution of their financial disputes. The superior Courts of Pakistan have lately emphasised upon settlement of disputes through mediation in a number of judgments (ref: 2024 SCMR 947; 2023 SCMR 1856; 2007 SCMR 1095; 2024 CLD 1; 2024 LHC 1435; and PLD 2024 Sindh 408). However, to become an effective tool, the Corporate Rehabilitation Act requires a re-adjustment of the rights of creditors and debtors with a focus on strengthening the process of mediation and arbitration for the rescue and revival of distressed businesses.