What isBankruptcy

Historical
Background
Bankruptcy is a proceeding by which possession of the propertyof a debtoris taken
The word bankrupt has been derived
from two la tin words 'bancus'meaning
forthe benefitof his creditors,generallyby a Receiver appointed by the [Link] table
and 'ruptus'meaning broken,denoting
'thewreck or break-up of a trader's
[Link]
realization,
subjectto certainpriorities,
the propertyisdistributed
rateablyamong the ancient Rome, whenever a bUsinessman fellintofinancial
crisis,
his creditors
went to

creditors.
A bankruptcyproceeding isa proceedingin personam.
thelocalauthorityand lodged a complaint on [Link]
investigation,
the magistrate

There are two types of bankruptcy, bankruptcy of individuals and corporate decidedwhetheritwas possibleto repay the loanfrom the businessor the property of

bankruptcy. [Link] found possible,the magistratewould employ a thirdparty called

'curator
bononim /, meaning a 'trustee'
or a 'receiver'.
The trusteethen took control
In 1997 in Bangladesh theBankruptcyAct was enacted,which deals withbankruptcy
overthebusinessof thedebtorand conductedroutineworks.
of individuals
only

Continued... Continued...
In therewas evidence of existence of some forms of bankruptcy
medieval Britain,
in open market
Ifitwas foamed impossibleto bringback solvency,then the trustee
the firsttime modem statuteon insolvency was enacted

in
and would process. In 1542, for
Would break the table on which the debtor used to conduct business activitiesof the [Link] the
England, to protectthe creditorsfrom the fraudulent
proclaimthe financial crisisof the [Link] on the basis of the event of breaking
debtors were not in a position to repay
claims of the creditorswere proved,and the
By closing the business of the
one'sbusiness, the conceptof 'bancusruptus'originated. As a result,the jailsi n England were over
the [Link] debtorswere sentencedto jail.
debtor and by sellinghis propertyin auction, the trusteere-paidthe [Link] fateof bankruptcy law was
which turnedintoa national [Link] 1570, a complete
crowded,
the poor debtors,who had no property, was even worse. They along withtheirfamily
Regulations were made to re-pay the
VIll.
enacted during the reign of King Henry
were sold [Link] thattime the bankruptcy law was appliedonly to individuals
of the debtorsand various forms of physical
creditorsby selling the property
and businessmen,who were in financial
crisis. a
1705, by enacting
punishment, including cutting of ear,were also [Link]
or non cooperative debtors
new law,provisionsfor capitalpunishment forfraudulent
were introduced.
 Continued. Bankruptcylegislation
inlndiansub-continent
In American coloniesfrom the very beginningEnglish
Bankruptcylaw was applied.
and Bangladesh
IntheBritish-India,
therewas no comprehensivelaw
The presentAmerican bankruptcylaw is the resultof political on [Link] 1848 forthe firsttime
impact, as wel as, IndianInsolvencyAct was enacted,
based on the Englishbankruptcylaws. The basis ofthe
economic consideration.
American constitutionempowered the Congress withthe Indianinsolvencylaw istheRoman
principleof 'cessiobonaram [avoluntarysurrender of
goods by a debtorto his creditors.
Itdid nof amount to a dischargeof the debt
power to introduceuniformlaws on Bankruptcyin nineteenth
century. unlessthe
property ceded was sufficient
for the purpose,but it secured the debtor from personal
grfest.1

Later, two separatebankruptcy lawswere [Link] Provincial Insolvency Act (1907)

was followedby the Presidency-TownsInsolvencyAct (1909).The Act of 1907 was replaced

by the Provincial
InsolvencyAct (1920).

The provisionsof both the statuteswere similar,

though the Presidency-
Towns Act

contained provisions
for official
assignee,procedure of the courtand limitation
provisions,

in details.
Both thestatutes
excluded corporations
forinsolvencyproceedin.

Continued... Corporatebankruptcyand UN model law

Althoughthislecturemainly focuses on bankruptcy of individuals,isfeltthatwithout

it
Afiterindependence ofBangladesh,thePresidencyTowns Insolvency
Act (1909)was
making any briefreference to corporatebankruptcy, cross-borderbankruptcy and
renamed as the Insolvency(Dacca) Act (1909)and was made applicable withinthe
the United Nations model law on cross-borderinsolvency,this discussionwillremain
Mumicipal limitsof Dacca. While, the ProvincialInsolvencyAct (1920)was renamed
incomplete.
as theInsolvencyAct (1920) and was made applicableoutsidethe Municipallimitsof
Dacca.

In 1997 he BankruptcyAct" was enacted by consolidating

the earliertwo Acts,!A

and imder section119,both the Insolvency(Dacca) Act (1909)and the Insolvency

Now, we have one bankruptcy law which is applied all
Act (1920) were repealed.
over [Link] the same time BankruptcyRules 1997 have been framed. Again.,
in 1997 two separateBankrupicyCourts were established
in Dhaka and in Chittagong.
 i)
Corporatebankruptcy
ii)
Cross-border bankruptcy
This conceptoriginated
from corporatebankruptcy.
This refers to the financialcrisis of corporate entities,
rather than individual Now-a days, due tothe expansion
of international
trade and commerce
businessmen. Corporaterestructuringis a genuine treatmentof this oilment,which is throughout the world, the same
company
operates business more than one country,eitherthrough branches,
in
done eitherby a compromise / arrangement withthe creditors,or under thecompany agencies,
franchises,subsidiariesor [Link] of
law by reductionof share capitalor, by winding up (members' voluntarywindingup, these branches may fallinto
financialcrisis.
Very oftensituationsarisecomprising of any or
creditors'
voluntarywindingup or windingup by the court etc.). many of the following
issues;

Continued... UNCITRAL Model Law on Cross-Border

a)Ifa branch locatedin one countrybecomes insolvent,
of an enterprise should Insolvency
creditors
in thatcountrybe allowedtoinitiate
insolvencyproceedingswhilethe Inorder to harmonise the laws of corporate bankruptcy of one country with thatof the
enterpriseas awhole is still
solvent? other,the United Nations Commission on International
Trade Law (UNCITRAL) adopted the
Model Law on Cross-BorderInsolvency(1997).
b)Ifthe enterprise
as a whole issolvent,shouldtherebe separateproceedingsin the
variouscountries
where itsbranchesare located? The Preamble provides that he purpose of this
Law isto provide effectivemechanisms for

dealing withcases of cross border insolvency so astopromotethe objectivesof:

c) Alternatively,
shouldtherebe a single procedure,based in thecountrywhere the
a)Cooperationbetween the courts and other competent authorities
of this State and
head officeor place of incorporation
issituated?
foreign
Statesinvolvedin cases of cross-borderinsolvency;

d) Shouldtherebe a single liquidator orone foreach countrywhere

oradministrator,
b)Greaterlegalcertainty
fortradeand investment:
theenterprise
has a place of business or assets? theinterests;
thatprotects
administrationof cross-borderinsolvencies
c) Fair and efficient
e)Should theliquidator
or administrator
appointedin one countrybe able to
d) of all
creditorsand otherinterestedpersons,including
the debtor;
recaptureassets fraudulently
transferred
by thedebor toanothercountry?
of thevalueof the debtor'sassets;and
e) Protectionand maximization
 Continued...
) An Overviewofthe
of the rescue of financially
Facilitation oubledbusinesses,therebyprotectinginvestment BankruptcyAct 1997
and preservingemployment. The Bankruptcy Act came
intoforce on August 1997. In YunUs
Mia vs. Bangladesh
The Model Law appliesin the following
cases where: KrishiBank, (54 DLR (2002) 123 ]it
was heldthatthe
BankruptcyAct, 1997 isa special
a) assistance is sought law and if a man isdeclared
in a state by a foreign court or a bankrupt irtuallyhe meets socialdeath and
foreign representativein therefore
connectionwithaproceeding underthedomestic law of a state: the provisionsof Bankruptcy Act and
rulesthereundermust be strictlyconstruedand
followed.
b) ássistance is sought in a foreignstate in connectionwitha proceedingunder the
domesticlaw of a state: Again in KM Aktaruzzamnn vs. AgraniBank and Others
[57 D LR(2 005)57] it
was

c)a foreignproceedingand a proceedingunder thedomesticlaw of a statein respectof observed by the High Court Divisionthatthe Bankruptcy Act 1997 is a
speciallaw
the same debtorare takingplaceconcurrently;or which has createda specialliability
and therefore,
thisspeciallaw must be construed
very strictly.
d)creditorsor otherinterestedpersons in a foreignstatehave an interest
in requestingthe

commencement in,a
of, orparticipating proceedingunder thedomestic law of thestate.

Later,in 2004 the Legislative

Guide toenactmentof UNCITRAL Model Law on Insolvency
was adopted.

Objectsof law ofbankruptcy Continued...

A detailanalysis of the Bankruptcy Act would reveal that the Act has two broad
The BankruptcyAct has been designedtogiverelieftoa debtorfrom the pressure of
objectives:
his [Link] Act protects the debtor from arrest or detentionfor any [Link]
itsafeguards, as faras possible,theinterests
of creditors, the sale
by distributing
Firstly,
purpose of the law is to ascertain the debtsowed byadebtor,take possession of all
the creditors.
Iftherewere
proceeds of the property of the debtorequitablyamong no
assets and distribute
them amongst allhiscreditors
equitably.
bankruptcylaws, the debtormight have wastedhisproperties,or might have preferred

one [Link] the Receiver distributes

properties each creditor
ratably,

issure of gettingat leastsome thing.

Aftercompletionof of
distribution
Lastly,it also protects the interestsof debtors.
unpaid debts are
properties,except certain specifled debts, all other
bankrupt's
ationsrelatingto bankruptcy are removed. On
cancelledand debor's disqualific
the debtor getsafreshstart
becoming freefrom past obligationsand disqualifications
life.
He can engage in tradeor service and get on with
in life.

his
 and Powers of the BankruptcyCourt
Constitution Continued...
Under the Bankruptcy Act,the DistrictCourt actsas the BankruptcyCourt and the -Itmust operateas res judicataas between the debtor'sestate
on the one hand and
all
claimantsagainst him and allpersons
DistrictJudge acts as the Bankruptcy Judge to deal with and dispose of the claimingthrough or under them or any of
them, on the otherhand.[SinnaSubba Goundan v Rangai
bankruptcy proceedingswithin the territorial ofthe [Link] District
jurisdiction Judge Goundan AIR 1946 Mad 141.
may authorizeany AdditionalDistrictJudge to deal with and dispose of any

bankruptcy proceedings.
[Section
4 of the Act of 1997] Such court has inherentpowers tomake necessary ordersin order tomeet
the ends

Itis
notedthatthatin 1997the Government established
two Special BankruptcyCourts ofjustice
and to prevent abuse of process of court.[lsarDas v Fatima BibiAIR 1934 Lah

in Dhaka and in Chittagong,headed by Additional Judges

District 468,(1934)ILR15Lah 698, 153 IC 993 1]

The Court has full

power todecide all
questions arisingin a bankruptcy proceeding. However, when a tribunalcommits an errorof law in decidingan issue raisedby it,it
actsbeyond itsjurisdiction
and such decision of the Tribunalcan be qUashed under
Every decisiongiven by a court shall be finaland binding.
(Section 5 of the Act of
[AbdurRashid Chowdhury
writjurisdiction. v AdditionalDistrict
Judge and Others 56
1997.]
DLR 573]

Act of bankruptcy Continued...

of
isdeemed tohave been committed [Section 9

financially Under the Act,an act of bankruptcy

An act bankruptcy issome act of the debtor which shows that he is
of

thepubliceye, shake the the Act of 1997.)

embarrassed. These acts presuppose those acts,which in

scramble amongst the creditorsfor the thedebtortransferspropertykept in his name, in thename of hiswifeor children
creditof a debtorand are likelyto cause if
a
debtor's
assets. toa thirdperson for thebenefitof hiscreditorsgenerally.

or children
with
he transfersproperty kept
if inhis name, in the name of his wife

These acts may be either voluntaryor involuntary and may be classifiedintothree or

the debtor's dealing with his property,those the intentto defeathiscreditors

kinds, namely those which arise from
o f the debfor,and those which arisefrom pledges, hypothecates creates charge
which arisedue topersonalacts or defaults or ifhe transfersproperty or mortgages,

or
affairsshowing him tobe bankrupt.
of thedebtor's
condition
a particular which would be void as a fraudulentpreference,
thereon,

if he was adjudged a bankrupt,

 Continued...
BankruptcyProceedings
or it,with the intenttodefeathiscreditors,he refrainsfromcommimicatingwithhis Under theAct,ifa debtorcommits an act of
bankruptcy, a plaintmay be presented
creditors,
or submitsfraudulentlytoan adverse decree,judgement or order,
by one or more eligible or by the debtor,and the Court may make an
creditors
order
or if his propertyhas been sold in executionof a decree forpayment ofdebt" adjudging the debtor a bankrupt.(Section10 of theAct of 1997]

or it he flesa plaintforbeingadjudged bankrupt, The persons subjecttobankruptcy proceedings [Section 11(1)

offhe Act of 1997]

or if he gives notice
to hiscreditorsthathe has suspended payment of hisdebt, either any person, who isdomiciled in Bangladesh, or who generallycarrieson
búsiness in Bangladesh, or who withina year beforefiling
or ifhe isimprisoned in executionof thedecree forthepayment ofdebt, of the plaint,residedinor
had a house or placeof businessin Bangladesh. [These provisions
are wide enough to
or iione or more creditorshavinga validand matured debt against thedebor for
include a lunatic,ifthe bankruptcy proceedingis for his own benefit(Re Lee (1883)23
an amount of not less than Tk. 500,000 has / have served on the debtora formal
ChD 216;See also Ex parte Cahnn (1879)
LR 10 ChD 183],maried woman ]
etc.
demand requiringthedebtorto pay the debt or to givesecurityfor itand within 90
days the debtorfailed
tocomply withthedemand.

Continued... Continued...
The creditors to filea plaint
are entitled to initiate
bankruptcy proceeding.(Section 12(1)
On theofher hand,the institutions
exempted from bankruptcyproceedingsare either
of the Act of 1997.]
any Government organization,
including
the Parliament and a judicialbody, or any

charitable
or religiousbody, or any statutory
body, whose principalobject is not if
they can prove firstly, (Accordingto section2(39)
thatthey are eligiblecreditor of the

Act, "eligible
creditor"means a creditoror creditors ho, individually
or raiseda
jointly.
financialgain,orany autonomous body established
by or with thefinancialassistance

w
claim foramatureddebt of at leastTk. 500,000 by sending a formaldemand.]
of the Government. Itappeors that these institutions
are eitherparts of the

Government or theyserve [Link] thegreaterinterestofthe society sécondly, thatthe aggregate amount of debt amounts toTk. 500,000,thirdly,
thatthere

is
primafacie case that that the
act of bankruptcy has been committed and lastly,
Ahese exemptionsare justified.] an
a
plaintisfiledwithinone year from thedate of commission of act of bankruptcy. On the

otherhand, the debtorisentitled [Section13(1)

tofilea plaint, of the Act of 1997]

that his debts amounts to

thathe Isunable to pay his debts, lastly,
if he can prove firstly,
he under arest or imprisonment in execution of decree for non
Tk. 20,000, or that is

a
attachment in execution of a decree has been made
payment of debt,or that order

an
of
of plaint
againsthispropetyat thetimeof fillng
 Continued... Continued...
When an orderofadjudication
ismade, thebankruptmust assistin therealization
of his and becomes divisibleamong the [Link] propertyso
vested is known as the
propertyand the distribution
of theproceeds thereof
among the [Link] property No creditor
Estate. can, during the pendency of the bankruptcy proceedings, have
of the bankrupt,exceptthe exempted property,
vests in the Receiver, or where no any remedy against the exempted propertyof the debtorand the Estate or institute

Receiver
has been appointed,in theCourt,[The operationof thisrule [Link] any civil
suitor any legal proceeding,
except with the leave of the Court.(Fate chand
if a bankrupt has an interestin certainprospects,
thatinterestvest in the Receiver by Tarachand v Parashram Maghan mal AIR 1953 Bom 101.]

operationof law ;Hira Lalv Shankar Lal AlR 1939 Cal 116,180 IC 683 (1938)42 Cal W N Affermaking an orderof adjudication,
the Court appoints a [Link] of
695. H ow ever, any propertyacquiredby a bankruptafteradjudication
does not vest
receiver
is one big problem [Link] the receiver
has to bear the initial
costs of
in the Receiver untilhe takes measures to thateffect:
N Mohamed Hussain Sahib v
itisrelly
proceedings, toget
difficult a person, who isinterested
to work as a receiver.
CharteredBank, Madras AlIR 1965 M ad 266,(1964)ILR1 Mad 1012(1965) 2 C omp LJ
No firm has developed yet which is resourceful and at the same time efficientin
37.] propertymanagement. We believethatthe post of receiver should be made more
in ordertogetpeople toactas receiver.
lucrative

Continued... Continued...
Any Court in which a suitor other proceedingin relationto a claim for money or other
propertyispendingagainst a debtorshall,on proof thatan order ofadjudication
hasbeen fraudulentpreference
isvoidifitcouldbe proved

A
made against him, transferit to the Court which has made the order of adjudication.
that thedebtorwas unable topay hisdebts at thetime of ransferringany property.
firsty,
[Section33 (1)ofthe Act of 1997]
or making any payment, or incuring
any obligation toany property,or allowing
in relation
The Court may, by order, nullify
the transferof any propertyof the debtor,withinfiffeen himselftobe affected
by a judicialproceedingin favourof a creditor,

years immediately
proceedingthedateof the order of adjudication,
ifthe Court issatisfied
secóndly, that the transfer,
or payment, or obligation,
or the proceeding has theeffectof
that the transferwas made to defeat any debt owed by the [Link] nullification,
in relationtothe debt due, and
or surety,or grantor
giving any preference tothatcreditor,
toa fransferfora propervalue consistingof goods,ora
however, shallnot be applicable
transferof property
acquiredby way of inheritance
or a transfermade, at any timewithin thedebtorisadjudged bankrupt on a plaint presented within one year afterthedate
lastly,
sx years immediatelyproceedingthe date of the order of adjudication,
in favourof a or payment, or obligation,
of such transfer, of proceeding.[Section 61 (1)of the
or initiation

person, who proves thatatthetime of fransferthedebtorwas able topay, without theaid Act of 1997.]
of the transferredproperty,
all the claims made in the bankruptcyproceedings.
Where an
order ismade nullifying
a transfer,
theproperty
shallform part of the Estate.(Section 60 of
the Act of 1997]
 Continued...
Continued...
The bankrupt may apply to the Court forprotectionfrom arrestor detentionfor any debt,
nullify orpayment, or
thetransfer, to the
Upon the application ofthe Receiver, theCourt shall and the Court may aftergiving notice and reasonable opportunityof hearing
and thereuponthe
82 of the Act of 1997.] ()o the Act
an order for such protectionof the debtor, [Section
35 f of
obligation,or judicialproceeding[Section make
creditors,
transferredorthe paymnent made.
Receiver shallrecovertheproperty 1997]
authority
as a member of Parliament or of a local
forelection does nof operate automaticallyas a protection
An order of adjudication
to the bankrupt.[P
bankrupt isdisqualified
A
for appointment ILR 13 Rang 623, 159 IC 936.J
or voting theproceedingsthereof,
or sitting in
M Hamid v Mohnrned Sheriff
AIR 1935 Rang 415 (1935)
or other statutorybody
the service of the Republicor
as a Judge, Magistrate, Justice or any otheroffice in
protectionorderisa privilegetobe granted or withheld,as the court its discretion, may

in
A
as sUch and forobtaining loan Cal N 112: The
forappointmentas Receiver or acting Cal 640, 94 IC 793 (1925) 30 W
acting as such, determine. [Re Gopal Das Aurora AIR 1926
shallcease when the order of thatthe
These disqualifications to grant him privilege of protectionagainstarrest
from bonk or financial institutions. debtor must apply to the court
once granted
makes an orderof dischargeofthe bankrupt. a
case justifyit: protection order,
adjudication is annulled or the Court court would do only ifcircumstances of

ISection94 of the Actof 1997] cannot be refusedor cancelled.]

Continued...
Continued... to exempted propertieshave
been
relating
It appears clearly that the provisions
over the Court, debtorstill
which cannot to be taken When everything is over,the
by
The exempted propertyof a debtor, toprotectthe interestof thedebtor.
designed
wearing apparel and hoUsehold furnishing
includes toolsused by the debtor himself, has something tomove on
withhislife.
un-mortgaged
and childrenand debtor's
and otherlikeaccessories of himself,spouse contain any provisionrelatingto
does not
Itis noted that the Bankruptcy Act
2500 square feetof
is not exceeding
dwellingplace of homestead, the area of which
DisputeResolution.
Alternative
feetof land in the ruralarea. Itshouldbe noted
landin the urban area,or 5000 square
[Link] not
wearing appareland household furnishing
thatthe totalvalue of tools,

of 1997.]
exceedTk. 300,000. (Section32 ofthe Act
 Disposal
of estateand dischargeof
bankrupt
While disposingof the Estate,in the first
phase, the administrative Continued...
expenses, including
the necessary expenses incurredby the Afterdisposalof theestate,
Receiver, and thereafter the Receiver'sfee theCourt may mnake an
order of discharge
shallbe paid. Inthe second phase thedebtsto be the Act of 1997.J Section47 of
paidin priority
tootherdebts.
[Debtspaid in priority
rank equallybetween themselvesand must be paidin and such order shallhave
full,
unless theeffectof dischargingthebankrupt fromallclaims,
the propertyof the bankrupt is insufficientto and liabilities debts
meet them, in which case they must (provable debts).Such order,however, shallnot dischargehim fromany
abate in equal proportions between them.] debt due tothe Government,or
from any debt or liability
incurredby means of fraud
or fraudulentbreach of
are alltaxesand debtsdue tothe Government, all or from any debtor liability
trust, in respectof which he has
wages or salariesnotexceeding Tk.
2000 due to any clerk,servantor labour, obtainedforbearanceby any fraudtowhich he was
all bank debts,allunsecured claims,and a party or fromany liability
under
any
[Link] the last phase interest,calculating an orderof maintenancegiven under Section488 of
from the date Code of CriminalProcedure1898
on which the
or theprovisions
debtor is adjudged bankrupt,at a rateof not exceeding6% per annum on alldebts theFamily Courts Ordinance1985. (Section51of the Act of 19971

of
included in the schedulearetobe paid.[Section 75 of the Act of 19971

ConcludingRemarks
Since2003, flingrate of new cases in the bankruptcycourts has declinedgradvally.
In
most of the cases, complainantsin the bankruptcycourt are either
a bank, ora money
lendinginstitution.
Generallyitisagreed thatdue totheintroduction
of Artha Rin AdalatAin
2003, filingof cases under the BankruptcyAct 1997 has reduced and the activitiesof the
BankruptcyCourt have become limited.
At the same time,the recovery rate of loans
throughArtha Rin Adalat isquitesatisfactory.
impediment torealizethe fullpotentials
and benefits
Artha Rin Adalatis definitely
of the Bankruptcy [Link] two
actingas an
QuestionsSession
courtsare operatingparallel
to one [Link] Rin AdalatAin creates Iiability
on the
mortgaged propertyof the debtor,while thebankruptcylaw bring thedebtorintoa legal
compulsionby creatingliability
on the total
propertyof [Link] isa tendency on
the part ofbusinessmen ofour countrytotake loan from several banks and notto repay
them. In thiscase under theBankruptcylaw,itispossible tosettleor recover the loan taken
from allthe [Link], under the Artha Rin Adalat Ain differentbanks are tofiledifferent
cases in the Artha Rin Adalat to recovertheir loans, which is time consuming and
complicated.
So,thereare advantages and disadvantagesof boththe courts.