Bankruptcy by the debtor: A legal analysis

Although the Bankruptcy Act provides some benefits to the stakeholders, the Act suffers from several loopholes. For example, the Act failed to address corporate body and cross-border bankruptcy issues. Though the Companies Act, 1994 contains some of the aspects of corporate body bankruptcy in different forms, the Bankruptcy Act should include corporate bankruptcy and also cross-border bankruptcy following the UNCITRAL Model Law on Cross-Border Insolvency.

In Bangladesh, bankruptcy is governed by the Bankruptcy Act, 1997. An individual can be declared 'bankrupt' through an order of adjudication by the bankruptcy court if he commits an act of bankruptcy as described in section 9 of the said Act. The Act provides opportunities to both creditors and debtors to initiate bankruptcy proceedings. However, a debtor is usually reluctant to initiate such proceedings due to some adverse legal consequences and social dogma attached to the word 'bankrupt'. As a result, full potential of bankruptcy by debtor is still a realm which remains to be explored extensively. 

After a legally specific act of bankruptcy is committed by the debtor, a petition may be presented before the bankruptcy court by the debtor himself or the creditors to publish an order of bankruptcy. According to section 13 of the Act, in case of petition by the debtor himself, certain conditions must be complied with, e.g. (i) he has to mention specifically in his plaint that he is unable to pay his debt and (ii) the amount of debt is minimum 20,000 or due to his incapability of paying debt he is not under arrest or detained in prison in the process of execution by court or his property is not attached amid the filing of plaint.

The petition for bankruptcy by the debtor is required to include certain information, e.g. a specific statement of his incapability to pay debt, the amount of claim against him, the detail description of his total property and the value thereof, a declaration of his will to submit all his properties with accounts book before the court and a statement with regard to his previous declaration of bankruptcy or application for being bankrupt (if any) etc.

After hearing both parties, the bankruptcy court can pass an order of adjudication declaring the debtor as 'bankrupt' and fix a date for hearing to determine whether the bankrupt will be declared as discharged or not. While determining the issue the court may take into consideration the normal behaviour and other activities of debtor during the continuance of the process or beforehand. For bankruptcy by the debtor a separate petition for discharge is not necessary rather his petition for bankruptcy will be considered for the discharge as well. When an order of adjudication is made, the bankrupt individual has to assist in the realisation of his property and the distribution of the proceeds thereof among the creditors. Any court in which a suit or other proceeding in relation to a claim for money or other property is pending against a debtor will, on proof that an order of bankruptcy has been made against him, transfer it to the bankruptcy court which has made the order of bankruptcy.

Sections 50, 60 and 94 of the Act impose some obligations and restrictions on a bankrupt, for whom no order of discharge is passed. For instance, he is to delegate his all property except maintenance cost of himself and his family and required to submit, after every six months, the report containing ins and outs of his acquired property of any kind within six months. Furthermore, he will not be allowed to leave Bangladesh without prior permission of the court. Moreover, he will be disqualified from being an elected member of house of the nation or any other statutory organisation or acquiring nomination, participating in the meeting or casting vote for such purpose, being a receiver, being appointed as judges, magistrates, justices of the peace or being employed in the service of the republic and taking loan from any financial institutions. Having satisfied as to the intention of debtor to defeat the creditors the court may nullify any transfer of property made within 15 years before the order of adjudication is published except the properties sold for a proper value or acquired by way of inheritance. Additionally, the undischarged bankrupt will be barred from being a director of a company.

Flip side of the coin is that a debtor enjoys, before or after publishing an order of bankruptcy, some immunities and protections under this Act. According to section 32 of the Act, the following exempted properties of a bankrupt individual will not liable to be taken over or vested, i.e. the instruments or tool the debtor uses, cloths, household appliance and any other necessary instruments of his family, the debtor's non-mortgaged living house the area of which is not more than 2500 square ft in urban areas and 5000 square ft in local areas and the total price of these instruments cannot be more than Taka 3 Lac. Likewise, on application, the eligible debtor may be, during the continuance of the proceedings or afterwards, provided with an order of reorganisation to repay the debts subject to the consent of two thirds of the creditors. In addition to that the insolvent will be entitled to apply for an order of protection to be protected from any kind of arrest or detention against debts and to that effect the court may order for such protection and necessary actions. Under section 31(3) of the Act, during the continuance of the proceedings no creditor is allowed to claim any relief or take any step against the estate or exempted property without permission from the court.

Moreover, section 51 extends some additional perks to a bankrupt individual who has been discharged by the court, i.e. he will be freed from any type of claims, liabilities and debts except any debt due to the Government; any debt or liability incurred by means of any fraud or fraudulent breach of trust to which he was a party; any debt or liability in respect of which he has obtained forbearance by any fraud to which he was a party. In addition to that a discharged bankrupt will be entitled to claim the bar against all liabilities arising before the petition is presented.

Although the Bankruptcy Act provides some benefits to the stakeholders, the Act suffers from several loopholes. For example, the Act failed to address corporate body and cross-border bankruptcy issues. Though the Companies Act, 1994 contains some of the aspects of corporate body bankruptcy in different forms, the Bankruptcy Act should include corporate bankruptcy and also cross-border bankruptcy following the UNCITRAL Model Law on Cross-Border Insolvency. Moreover, any arrest or attachment of property in the process of recovery of money should not be a bar in order to file a petition by the debtor for initiating bankruptcy proceedings in favour of the debtor himself because such arrested individual or owner of the attached property should not be deprived of right to be bankrupt. The provisions regarding reorganisation plan is of subjective nature where no special criterions have been set which may give rise to arbitrary actions by the receiver. Alternative dispute resolution mechanism should be improved. Being laws of similar nature the Artha Rin Adalat Ain, 2003 and the Bankruptcy Act, 1997 should complement each other. However, no such correspondence is tried rather the cases are adjudicated in the different courts. Despite there being some downsides, bankruptcy by the debtor could give a bankrupt individual a fresh start and has the potential of being an armour for a distressed debtor in lieu of being a sword for creditors.

The writer is an Advocate, Supreme Court of Bangladesh.