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How insolvency system reform may open Bangladesh’s investment bottleneck

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Insolvency occurs when a person or corporation cannot repay its creditors. In other words, bankruptcy. Businesses face financial hardship for numerous reasons. Creditors pressure them. A good insolvency system balances debtor and creditor requirements. The debtor prioritizes debt payments while the creditor pursues the greatest recovery, often via foreclosure.

Policymakers value company growth and job development as much as lender protection. Lenders like banks invest and lend from consumer deposits. Lender uncertainty may destabilize the economy. Foreclosing firms discourages entrepreneurs and increases unemployment. Getting the perfect balance is crucial. A good insolvency regime can assist!

The 25-year-old Bankruptcy Act of 1997 governs the country’s insolvency system. It has not been reviewed since implemented. Investment policy must adapt quickly in a fast-paced financial sector. Bangladesh’s insolvency regime must be updated. Fortunately, Bangladesh has announced its intention to revise the 1997 Bankruptcy Act. Investors will keenly monitor this modernization.

The causes

Debtors who cannot pay their debts, such as those who took out loans from financial institutions, enter insolvency. When debt exceeds assets, the debtor becomes bankrupt by law.

All creditors claim on the debtor’s assets when unpaid debts, bills, rents, wages, and taxes reach a crucial point in financial crisis. This may lead to bankruptcy by liquidating all debtor assets. The debtor’s business may close, causing employment losses. This is ordinary bankruptcy.

Modern insolvency regimes can better handle bankruptcy. The goal is to maximize creditor recovery while letting debtors maintain operations. Such systems exist in many economies, including India and the US. Bangladesh should adopt current laws to attract investors.

Present conditions

The Bankruptcy Act of 1997, Bangladesh’s main bankruptcy law, does not address financial difficulties. A strictly defined method causes bankruptcy. Only bankruptcy can solve this problem. Even yet, the Act only affects people, not businesses. So the Act is basically ineffectual for business. Additionally, bankruptcy procedures prolong the process. For creditors, this is frustrating.

Bangladesh has seen few bankruptcy procedures since 1997. By mid-2022, 179 bankruptcy cases were pending, 111 of them filed by financial institutions. This country’s High Court halted 55% of these. This restricts these financial firms’ money access.

Bangladesh passed the Money Loan Court Act (Artho Rin Adalat Ain) in 2003, another historic insolvency legislation. Better solutions for financial creditors were intended. Banks and other financial organizations loved it. It did not protect commercial creditors. This limited it to one sort of creditor. The legislation emphasized foreclosure and asset-selling for recovery.

Even financial creditors failed under Bangladesh’s 2003 Money Loan Court Act. Recovery was USD 0.29 per dollar. One-third of European nations’. India has a USD 71.6 recovery rate, whereas OECD high-income nations average USD 0.70. The procedure takes time. What takes 4 years in Bangladesh takes 1.6 in India. In Ireland, it takes fewer than 120 days!

The Money Loan Court Act of 2003 in Bangladesh has negative effects on financial creditors.
Bangladesh’s bankruptcy procedure was not improved by the 2003 Money Loan Court Act. Instead, it reduced economic output and employment.

The way ahead

The days of asset liquidation maximizing corporate value are fading. Companies are increasingly valued for their technological expertise, brand loyalty, goodwill, and human capabilities rather than their physical assets.

The fastest and simplest alternative for creditors is liquidation. However, its poor recovery rate makes it ineffective. Modern insolvency and bankruptcy strategies improve recovery. These restructure and give creditors control of a debtor’s firm. This is frequent in the US, where liquidation laws are rarely enforced. India changed its insolvency regime in 2016. India lets struggling enterprises operate without damaging creditors.

Reformed contemporary bankruptcy in Bangladesh may teach nine things:

1) Reorganisation and restructuring: Bangladeshi regulators may use reorganisation for insolvency. This is social too. Debtors getting a second opportunity will encourage entrepreneurs. In essence, the private sector rescues families devastated by company closures. The US bankruptcy prediction model is useful here. This describes debt restructuring for reorganization.

Alternatively, creditors may run the faltering firm. They may manage the debtor’s company and drive it strategically to make money. Thus, creditors may collect more than the sold assets. They might rebuild the governing board and top management to establish control, possibly via a ‘creditors’ committee.’ This strategy would help troubled Bangladeshi enterprises survive and safeguard their workers. Rewriting the legislation would be more progressive.

2) Expanding coverage to corporations: Bangladesh’s bankruptcy law only allows individual debtors. Only financial creditors may start it. Instead of the Bankruptcy Act of 1997, the Money Loan Court Act of 2003 is used. A reformed statute should allow corporate debtors and creditors to file bankruptcy. Insolvency should apply to all corporations, borrowers, and creditors.

If a debtor’s business fails, operational creditors should also be able to sue. In this instance, the operational creditor may reduce its supplies to the firm and increase its recovery likelihood without hurting its development. Excellent examples are found worldwide. US small firms may petition for bankruptcy faster under the Bankruptcy Code. In recovery, the Indian Insolvency system and Bankruptcy Code recognizes operational creditors and debt.

3) Reconsidering the Money Loan Court Act of 2003: Bangladesh’s bankruptcy process forces creditors—mostly banks and financial institutions—to utilize the act. Even at USD 0.29 per dollar, recovery is faster (average four years). A beggar’s option for creditors. Unfortunately, bankruptcy stakeholders are too comfortable with this situation. For substantial legal change, reorganization must first be established. If reorganization fails, liquidation should follow. The goal should be to rescue the debtor’s firm and workers.

Laws now include too many delaying tactics. To gain stakeholder support, the new legislation must include time efficiency and a ‘resolution plan’ provision. If resolution fails, the law should mandate an expedition so creditors don’t wait four years.

4) Time management: Bangladeshi insolvency system proceedings take a long time. The 2003 Money Loan Court Act’s four-year limit should be eliminated. Insolvency system proceedings should be real-time and take six to nine months to resolve.

insolvency system proceedings in Bangladesh are lengthy.

A three-month extension may be granted by a ‘insolvency system practitioner’ if most creditors cannot resolve. Bangladesh’s specialized Money Loan Courts guarantee the 6-month (180-day) deadline is met. This change requires educated resolution specialists and judicial allocation.

5) Regulated qualified insolvency system practitioners: They mediate bankruptcy negotiations between the court and stakeholders. They are essential to fair, transparent, and speedy transactions. Interim insolvency system practitioners usually take over the debtor’s assets, obligations, and activities and negotiate a resolution plan. The interim insolvency practitioner documents all creditors’ claims and forms a court-supervised ‘creditors’ committee’. The creditors’ committee may then hire a new insolvency practitioner.

Insolvency practitioners are essential to insolvency system regimes. Bangladesh requires official training and licensure for these professions. Traditional, inexperienced insolvency system practitioners mainly practice under the Arbitration Act of 2001. Regulation must alter this.

6) Allocation of judicial resources: Modern insolvency system proceedings need court resources, including “bankruptcy benches.” Bangladesh needs this. The senior-most district judges, known as “district judges,” handle bankruptcy cases. Judges are already overworked. Rapid business dispute resolution or a specialized district judge are required as reforms. They will handle bankruptcy.

Bangladesh does not require a bankruptcy special court.

This does not need a new special court in Bangladesh. The mid-level ‘joint district judges,’ with Supreme Court approval, should be adequate, particularly if there are experienced insolvency system practitioners. In insolvent high-commerce areas, this approach may be tested. The current Money Loan Courts may be empowered. The most effective change is streamlining the system.

7)Continuing operation as an ongoing concern: Running a contemporary bankruptcy procedure in Bangladesh requires more than foreclosure and asset liquidation. The reform proposal requires allowing debtors’ businesses to operate. Business restructuring should come first. Otherwise, foreclosure sells equipment, stocks, and other assets and destabilizes the workforce, costing the economy too much. The record reveals that the recovery is a small fraction of the debt.

Continuous operating under financial difficulty is business as usual. Supply and manufacturing should continue until the recovery strategy is executed. Permit cancellations and termination should be barred by the court. In India, reforming the bankruptcy rules helped distressed enterprises survive.

8) Automatic stay and release from stay: Reorganizing a bankrupt firm gives it a second shot. This must be done in a controlled atmosphere. This idea is not followed in Bangladesh’s insolvency system procedure. Laws should be changed to automatically stay liquidation proceedings during reorganization. If the automatic stay is misused, creditors should be entitled to seek relief to improve resolution time.

9) willful vs. innocent defaulter: A reformed bankruptcy process must clearly differentiate between willful and innocent defaulters. Wilful defaulters lie to get credit and don’t pay. Unexpected events often cause innocent defaulters financial trouble. Only innocent defaulters should gain from reorganization. Reorganization advantages should also be denied to debtors who misbehave. In this situation, consider India’s bankruptcy law.

Final comments

The Bangladeshi insolvency system is outdated and below international norms. It needs updating. Country regulators know this. Bangladesh’s Ministry of Finance and central bank will undergo reform. It must be optimized. This article suggests include corporate restructuring and a time efficiency language in any modified legislation. Bangladesh will meet international standards after these adjustments.

Also a rights problem. A contemporary insolvency system process protects creditors and debtors. Implementing this change will be difficult. Bangladeshi authorities must understand global trends and incorporate indigenous desires and business culture into the bankruptcy system.


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