Bankruptcy in Bangladesh: Legal Framework and Procedures

Introduction

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Bankruptcy is a legal process designed to provide relief for individuals and entities unable to pay their debts. In Bangladesh, the primary legislation governing this is the Bankruptcy Act, 1997. This Act aims to ensure an orderly process where a debtor’s assets are distributed fairly among creditors, while also offering the debtor protection from legal action by creditors and, ultimately, a fresh start from overwhelming debt. However, it’s noted that the 1997 Act is considered somewhat outdated and may not effectively address modern corporate insolvency complexities.

This guide provides a general and simple overview based on the Bankruptcy Act, 1997 and supplementary information.

Who Can Be Declared Bankrupt?

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The Bankruptcy Act, 1997 applies to:

• Individuals or other entities domiciled or having their principal place of business in Bangladesh.
• Those who resided, had a dwelling, or place of business in Bangladesh within the year before proceedings started.
• Those carrying on business in Bangladesh through an agent.

Certain entities are excluded, such as government organisations, Parliament, judicial bodies, charitable/religious bodies, and certain statutory/autonomous bodies. Some commentary suggests the Act primarily functions for individuals rather than corporations.

Initiating Bankruptcy Proceedings: The Plaint

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Bankruptcy proceedings formally begin with the filing of a “Plaint” (similar to a petition) in the Bankruptcy Court (the District Court). Filing can be triggered by an “Act of Bankruptcy”.

Acts of Bankruptcy

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A debtor commits an act of bankruptcy if they, for example:

• Transfer property to a third party for the benefit of creditors generally.
• Transfer property with the intent to defeat or delay creditors.
• Create a fraudulent preference (transferring property/creating charges that favour one creditor over others).
• Abscond, leave Bangladesh, or seclude themselves to avoid creditors.
• Have property sold under a court decree for payment of money.
• File a plaint to be declared bankrupt themselves.
• Notify creditors they have suspended or will suspend debt payments.
• Fail to comply with a formal demand for an unsecured debt of at least Tk. 5,00,000 within 90 days of the demand being served.

Filing the Plaint

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• By Creditors: One or more “eligible creditors” (owed a total of at least Tk. 5,00,000) can file if the debtor committed an act of bankruptcy within the last year, and the creditors have a prima facie case.
• By Debtor: A debtor can file if they state they are unable to pay their debts AND their debts amount to at least Tk. 20,000, OR they are under arrest/imprisonment for debt, OR their property is under attachment for debt. Debtors are often reluctant to self-declare due to social stigma.

The Bankruptcy Procedure

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The general flow of bankruptcy proceedings under the Act is as follows:

• Admission & Hearing: The Court admits the plaint, sets a hearing date within 60 days, and notifies creditors. The hearing involves proving the right to file, service of notice, and the act of bankruptcy.
• Interim Measures: Before the final adjudication, the court can take protective steps:
  • Appoint an interim Receiver to take immediate possession of the debtor’s property.
  • Order the debtor to provide security for appearance.
  • Order attachment of the debtor’s property (except exempted property).
  • Issue arrest warrants if the debtor absconds, hides assets, or fails to comply with orders.
• Debtor’s Duties: The debtor must fully cooperate by producing books of accounts, providing inventories of property and lists of creditors/debtors, submitting to examination, and executing necessary documents.
• Order of Adjudication: If the court is satisfied that the conditions are met and doesn’t dismiss the plaint (e.g., if the debtor cannot prove ability to pay debts), it issues an “Order of Adjudication” formally declaring the debtor bankrupt. This order is published in the official Gazette.

Effects of Adjudication and Debtor Protections

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• Vesting of Property: Upon adjudication, all the bankrupt’s property, except “exempted property”, automatically vests in the appointed Receiver (or the Court if no Receiver is appointed). This property pool is called the “Estate” and becomes divisible among creditors.
• Stay on Legal Actions: Once adjudication occurs, creditors are generally barred from initiating or continuing lawsuits or other legal remedies against the bankrupt’s property (including exempted property) regarding provable debts, unless they get specific permission (leave) from the Bankruptcy Court. This is a key protection for the debtor, similar to the “automatic stay” in other jurisdictions.
• Protection for Exempted Property: For individual debtors, certain assets are legally protected from creditors and do not form part of the Estate. These include:
  • Tools used by the debtor for their work.
  • Wearing apparel, household furniture, and similar necessities for the debtor and their family. (The total value of tools and household items is capped at Tk. 3,00,000).
  • The debtor’s un-mortgaged dwelling place/homestead, subject to size limits (e.g., 2500 sq ft in urban areas).
• Protection Order: An individual bankrupt can apply to the court for an order protecting them from arrest or detention for any debt covered by the bankruptcy. The court can grant this protection after hearing creditors.
• Release from Arrest: The court can order the release of a debtor who is already under arrest or imprisoned for non-payment of a money decree when bankruptcy proceedings are initiated.
• Secured Creditors: While the stay applies generally, the Act states it doesn’t affect a secured creditor’s right to realise their security. However, the Act outlines a process where the secured property vests in the Receiver, who determines its value and either sells it (paying the secured creditor first) or, in some cases, transfers the property to the creditor.

Administration of the Estate

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• Receiver: The court appoints a Receiver (often an Official Receiver from a government-approved list) to manage the Estate. The Receiver’s duties include taking possession of assets, investigating the debtor’s affairs, collecting debts owed to the bankrupt, selling Estate assets, and distributing the proceeds to creditors according to legal priorities.
• Creditors’ Committee: If there are many creditors, a committee (up to 5 members) may be formed to advise the Receiver.
• Proof and Schedule of Debts: Creditors must formally submit proof of their debts. The court determines valid debts and amounts and creates a schedule.
• Distribution Priority: The realised funds are paid out in a strict order:
  1. Costs of administration and Receiver’s fees.
  2. Taxes and similar government debts.
  3. Wages/salaries owed to employees (up to Tk. 2,000 each, for services within 6 months before the plaint).
  4. Bank debts.
  5. Unsecured claims. (There’s a provision attempting to ensure unsecured creditors receive at least 50% of what bank creditors receive if funds are insufficient for both).
  6. Subordinated claims.
  7. Any surplus, after paying debts in full, goes towards interest, and then back to the debtor.

Alternatives to Liquidation

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• Composition or Scheme of Arrangement: After adjudication, a debtor can propose a composition (an agreement to pay a certain percentage of debts) or a scheme to arrange their affairs. This requires approval by creditors representing two-thirds in value of the proven debts and approval by the court. If approved, the bankruptcy adjudication may be annulled.
• Reorganisation (for non-individuals): An “eligible debtor” (not an individual) can apply for debt reorganisation by submitting a plan. This also requires approval from creditors (two-thirds in value) and the court. The debtor may continue to manage the business under the Receiver’s supervision as a “special manager”. This aims to rehabilitate the business rather than liquidate it, similar to Chapter 11 in the US.

Discharge (For Individual Bankrupts)

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• Purpose: Discharge releases the individual bankrupt from personal liability for most debts that were provable in the bankruptcy, allowing a financial fresh start.
• Procedure: The court considers discharge after adjudication. If the bankruptcy was due to misfortune without moral turpitude, discharge may be granted quickly. Otherwise, the bankrupt may need to apply separately. The court reviews the Receiver’s report on the debtor’s conduct and affairs.
• Grounds for Refusal/Suspension/Conditions: The court can refuse discharge, suspend it, or grant it conditionally if the bankrupt:
  • Committed bankruptcy offenses.
  • Failed to keep proper books of account.
  • Continued trading after knowing they were insolvent.
  • Contracted debts without reasonable expectation of repayment.
  • Contributed to bankruptcy through rash speculation or extravagance.
  • Gave undue preference to a creditor shortly before bankruptcy.
  • Assets are not equal to 50% of unsecured liabilities (unless due to circumstances beyond their control).
• Non-Dischargeable Debts: Discharge does not release the bankrupt from certain debts, including:
  • Debts due to the Government (unless specified otherwise).
  • Debts incurred through fraud or fraudulent breach of trust.
  • Liabilities related to court-ordered maintenance (e.g., family support).
  • In other jurisdictions, student loans and certain taxes are often non-dischargeable.
• Undischarged Bankrupt: If discharge is refused or not applied for, the debtor remains an “undischarged bankrupt”. They face ongoing obligations (like accounting for subsequently acquired property) and legal disqualifications.

Consequences & Disqualifications for Undischarged Bankrupts

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An undischarged bankrupt is disqualified from:

• Being elected to Parliament or local authorities.
• Holding office as a Judge, Magistrate, or other public service role.
• Being appointed as a Receiver.
• Obtaining loans from banks or financial institutions. These disqualifications are removed upon annulment of the bankruptcy or granting of discharge.

Appeals and Review

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• Appeals: Certain key decisions and orders of the Bankruptcy Court (like the adjudication order, orders annulling adjudication, decisions on debt priority, reorganisation orders, discharge orders) can be appealed to the High Court Division. Strict time limits and procedures apply, including potential deposit requirements for the debtor.
• Review: For orders not subject to appeal, an aggrieved party can apply to the original court or Receiver for a review within 30 days, based on specific grounds like a clear mistake or discovery of new material evidence.

For assistance with navigating bankruptcy proceedings or understanding insolvency options in Bangladesh, please reach out to:

• Osman Goni
  • Phone: +8801715569498
  • Email: [email protected]