Home ›› 04 Jan 2023 ›› Editorial
The term default should be distinguished from the terms insolvency and bankruptcy. Default essentially means a debtor has not paid a debt which they is required to have paid. Insolvency is a legal term meaning that a debtor is unable to pay his debts. Bankruptcy is a legal finding that imposes court supervision over the financial affairs of those who are insolvent or in default due to misfortune or mismanagement. A Strategic bankruptcy occurs when the borrower has enough wealth to pay her debts but she chooses not to do it.
Bankruptcy is a lawful rank of an insolvent individual or an organization, that is, one that unable to repay the liabilities was obliged to creditors and the period bankruptcy is thus not the identical as insolvency.
This is enforceable by a court. In most jurisdiction bankruptcy is enforced by a court alignment, often stared by the debtor. It is a legal proceeding involving a person or business that is unable to repay outstanding debts. The proceeding filing by a debtor is called voluntary bankruptcy or petition by a creditor to the court for declaration of debtor involuntary bankrupt. All of the debtor's assets are measured and evaluated, whereupon the assets are used to repay a portion of outstanding debt. Upon the successful completion of bankruptcy proceedings, the debtor is relieved of the debt obligations incurred prior to filing for bankruptcy.
An efficient and effective insolvency system is a critical component of every well-functioning market economy.
The state of bankruptcy is established through lawful proceeding where a lawful confirmation is made by bankruptcy enclosures asserting that an individual or company is insolvent and thus will not yield its obligations.
Bankruptcy permits an individual or enterprise to lawfully decrease, restructure or absolutely swap out their debts. The bankruptcy proceedings the business is compelled to absolutely close down all procedures and proceeds out of enterprise, trustee is then nominated to liquidate or deal the company’s assets and yield off the liabilities which may encompass the liabilities to creditors and investors. It boasts a second possibility to start all over afresh after certain period of bankruptcy declared by court.
The first bankruptcy law have been enacted in 1542. (34 and 35, Henry VIII, c.4 (1542) England.). Bankruptcy was originally planned as a remedy for creditors but not debtors. Bankruptcy law allowed a creditor to seize all of the assets of a trader who could not pay his debts. In addition to losing all of his property, the debtor also lost his freedom and was subject to imprisonment. The family of the debtor had to pay the debts to obtain the release of the debtor. As time progressed, however, so did the rights of debtors. Finally, by the early 19th century in England, debtors were often released from prison with their debts discharged. However, for many years, bankruptcy continued to be a remedy favouring creditors, involuntary in nature and largely penal in character. It was generally used only against traders.
The principal focus of modern insolvency legislation and business debt restructuring practices no longer rests on the elimination of insolvent entities but on the remodeling of the financial and organizational structure of debtors experiencing financial distress so as to permit the rehabilitation and continuation of their business.
Recent financial crises in Asia and West have also highlighted the importance of insolvency systems – a key element of creditor rights – to prevent and resolve corporate sector financial distress. The importance of creditor rights in influencing the development of financial systems and in affecting firm corporate governance and financing patterns came to lime light again.
An effective and efficient insolvency regimes as a means of encouraging economic development and investment, A growing realization that reorganization regimes are critical to corporate and economic recovery, the development of entrepreneurial activity, the preservation of employment and the availability of finance in the capital market. The passage of the modern Bankruptcy Act offered debtors greater protections and for the first time allowed them the option of voluntarily seeking bankruptcy relief.
The process encourages prudent lending and a sound credit culture by establishing a mechanism for the financial restructuring of firms whose going concern value exceeds liquidation value; an orderly exit mechanism for failed enterprises, terminating non-productive use of business assets and transferring them to more efficient market participants e.g., through liquidation; a final debt collection mechanism for creditors; and greater predictability in the enforcement of creditor rights to improve credit flows.
The philosophical aspect of it is to protect both debtor or creditor. The policy makers increasingly viewed debtors with pity, as well as a realization that punishments such as imprisonment often were useless to creditors. Thus, a law at first designed to punish the debtor evolved into a law protecting the debtor while encouraging the resolution of outstanding monetary obligations. It also refers to the legal process involved: the administration of an insolvent debtor's property by the court for the benefit of the debtor's creditors. The goal of modern bankruptcy is to allow the debtor to have a fresh start.
Bankruptcy law provides that individual debtors may keep certain exempt assets, such as a home, a car, and common household goods, thus maintaining a basic standard of living while working to repay creditors. Debtors are then better able to emerge productive members of society, albeit with significantly flawed credit records.
The bankruptcy not hamper the normal life of a debtor and not take over the car, one residential house, household properties, tools of trade, life insurance etc. The Section 9, the Bankruptcy Act, 1997 (Act No. X of 1997) of Bangladesh also exempted properties under section no- 32, Tools used by debtor Wearing apparels , household furnishing and accessories og himself, spouse and children. Debtor’s un-mortgaged dwelling house, subject not exceeding 2,500 sq ft. land area (one or more than one stories building) in the urban area or 5,000 sq ft land area ( one or more storied building) in any other area, subject to maximum value of Tk 3,00,000.
The Bankruptcy act 1997 contains the provision of declaring bankruptcy due to the acts of debtors are (a) if, in Bangladesh or elsewhere, he makes a transfer of all or substantially all the property kept in his name or in the name of his wife, son or daughter by benami to a third person for the benefit of his creditors generally; (b) if, in Bangladesh or elsewhere, he makes a transfer of his property or property kept in the name of his wife, son or daughter by benami or of any part thereof with intent to defeat or delay his creditors' demand with a intent to defeat or delay his creditors' demand, if he, without receiving reasonable value therefore, made such transfer at a time when he was unable to pay his debts. (c) if, in Bangladesh or elsewhere, he makes any transfer of his property or of any part thereof or mortgages, pledges, hypothecates or creates charge thereon, which would, under this Act or any other enactment for the time being in force, be void as a fraudulent preference if he were adjudged bankrupt; (d) if, with intent to defeat or delay his creditors' demand—(i) he departs or remains out of Bangladesh; (ii) he departs from his dwelling-house or usual place of business or otherwise absents himself; (iii) he secludes himself so as to deprive his creditors of the means of communicating with him; (iv) submits collusively or fraudulently to an adverse decree, judgment or order of any court or other authority; (e) if any of his property has been sold in execution of a decree of any court for the payment of money; (f) if he files plaint to the court for being adjudged bankrupt under the provisions of this Act; (g) if he gives notice to any of his creditors that he has suspended, or that he is about to suspend, the payment of his debts; (h) if he is imprisoned in execution of a decree of any court for the payment of debt; or (i) if one or more creditors, having a valid and matured debt against the debtor for an amount of not less than Tk. 5,00,000.00 has or have served on such debtor a formal demand under this Act requiring such debtor to pay the debt or to give security for it to the satisfaction of such creditor or creditors and, within 90 days after service of the demand, the debtor does not comply with the requirements of the demand.
The court under section 10 of Insolvency act of Bangladesh may declare a debtor to be a bankrupt. Any of the following acts of the debtor shall be an act of bankruptcy. A person shall be deemed to have transferred his property or any part thereof with intent to defeat or delay his creditors, if he, without receiving reasonable value there for, made such transfer at a time when he was unable to pay his debtors; If , in Bangladesh or elsewhere, he makes any transfer of his property of any part thereof or mortgages, pledges, hypothecates or creates charge thereon, which would, under this act or any other enactment for the time in force, be void as a fraudulent preference if he were adjudged bankrupt; If, with intent to defeat or delay his creditors. If he is imprisoned in execution of a decree of any court for the payment of debt; or more creditor, having a valid and matured debt against the debtor for an amount of not less then TK.5, 00,000.00 has served on such debtor a formal demand under this Act requiring such debtor to pay the debt or to give security for it to the satisfaction at such creditor or creditors and within 90 days after service of the demand, the debtor does not comply with the requirements of the demand.
The importance of insolvency law as a feature of any well-developed market based economy. Enacting effective insolvency laws and their procedural supports has been an important indicator of the operation of the rule of law in market-based societies. In Bangladesh bankruptcy is restricted to individuals while most of acts in other countries apply to individual and companies.
It permit debtors to determination their liabilities and to some span to release them from economic obligations he has despite of the liabilities have been paid in full or not and businesses proceed out of enterprise or reorganize themselves to retrieve from grave debts.
Bankruptcy has some pros and cons for everyone. Pros are lawful defense as of creditors, takes anxiety of almost all of debtor might get to sustain his or her house, might halt economic impairment, as well as make a likely new start. But, most of time the bankruptcy will be very cooperative for debtor if he or she can get a new start.
The bankruptcy process begins with a petition filed by the debtor or on behalf of creditors. Unfortunately, FI don’t apply to court for declaring any debtor bankrupt. They prefer to go to court for recovery of loan under Artho Rin Adalat act. Banks can sue debtors for recovering entire amount of loan, interest thereof and cost of the court. The court don’t consider the ability of borrower and only dispose of the case to pay the outstanding loan and interest or go to jail. FIs consider beneficial to file case under Artho Rin Adalat Act as the law the favorable for them.
In case of bankruptcy law the debtors can get relief of liability with the available assets. On the other hand debtors cannot apply for bankruptcy if there is a case pending for recovery of loan under Artho Rin Adalat.
The framers of the bankruptcy act had in mind that borrowers only divert the loan amount in home and other countries and transfer the property to avoid repayment. There is no consideration of non willful business failure or unforeseen incidences. The law specified the situation to apply the law limiting the scope of jurisdictions. Those offences are within the scope of other criminal acts.
The act should amend for bankruptcy of corporate as well as individual and applicable for any unpaid debt due to business failure of environmental and personal nature and also willful and non willful defaults.
The bankruptcy act 1997 remains in the book of law without application and unable to contribute in financial litigations unless all stakeholders particularly the FIs take initiative to use the law for settlement of the debts.
The writer is Legal Economist & Non-Government Adviser, Bangladesh Competition Commission. He can be contacted at [email protected]
