The Bangladeshi insolvency regime is based primarily upon the 1997 Bankruptcy Act, supported by provisions of the Companies Act of 1994, the Banking Companies Act of 1991 (as amended), and the Finance Institution Act of 1993. The laws provide the mandate for money loan courts, bankruptcy courts, and dedicated courts that handle the recovery of debts for banks and other financial institutions. However, according to a 2004 report by the U.S. Department of Commerce on "Doing Business in Bangladesh," the legislation is largely ineffective in addressing insolvent companies. Banks prefer alternatives to the bankruptcy courts, including demanding blanket guarantees from company directors as a condition for issuing loans. Implementation of creditor rights is weak. According to the World Bank's "Doing Business" snapshot of Bangladesh for 2008, the average cost of a business-closing is 8% of the debtor estate, as compared to a regional average of 6.5% and an average of 7.5% for member states of the Organization for Economic Cooperation and Development (OECD). In Bangladesh it takes an average of 4 years to complete the business-closing process, compared to 5 years regionally and 1.3 years in OECD member states. The return to creditors in Bangladesh is 23.2 cents on the dollar, compared to a regional return of 20.1 cents and an OECD average return of 74.1 cents.

General Overview

The Bangladeshi insolvency regime is based primarily upon the 1997 Bankruptcy Act, supported by provisions of the Companies Act of 1994, the Banking Companies Act of 1991 (as amended), and the Finance Institution Act of 1993. A 2004 report by the U.S. Department of Commerce (DoC) on "Doing Business in Bangladesh" asserts that the Bankruptcy Act, enacted in 1997, is ineffective in dealing with the problems that underlay the country's insolvency regime as a whole. Use of the insolvency laws is inhibited "because of a web of falsified assets and uncollectible cross-indebtedness supporting insolvent banks and companies" (p. 37). In 1997, the Bankruptcy Act was passed, but the DoC found it to be "ineffective in addressing the insolvency and cross-indebtedness problem of borrowers." (p. 37). The DoC characterizes the Bangladeshi legal system as weak and slow, with serious corruption issues in the lower courts. Compounding the problem are inadequate accounting practices and procedures for the registration of real property, which complicates any attempt to transfer ownership. The DoC finds that "with the exception of those conducted by a few internationally affiliated accounting firms, audits of balance sheets and profit and loss statements often follow clients' instructions and fail to conform to international standards" (p. 37). The report notes that some companies have attempted to overcome the shortcomings of the Bangladeshi legal regime by taking advantage of their legal right to bring their disputes before a non-Bangladeshi court. This is done by inserting a clause to that effect in their arbitration agreements. The 2003 report on "Commercial Enforcement and Insolvency Systems" in Bangladesh by Judge Amirul Kabir Chowdhury provides a detailed exegesis of the 1997 Bankruptcy Act.

Also writing in 2003, Farooq Sobhan and Wendy Werner report that banks and financial institutions seeking debt recovery have recourse to dedicated courts. There are also "money-loan courts" and bankruptcy courts. Nonetheless, creditor rights under the Bangladesh insolvency regime are characterized as "weak." According to Sobhan and Werner, the money loan courts have inadequate resources, resulting in delays. Banks tend not to favor the use of bankruptcy courts because they would prefer to seek a solution that allows the debtor to remain commercially viable. To protect their interests, banks refrain from extending loans unless they receive personal guarantees of repayment from company directors. This has a number of negative consequences, ranging from the inhibition of entrepreneurialism to discouraging individuals from becoming members of boards of directors. Sobhan and Werner assert that a misunderstanding of the consequences of a bankruptcy ruling has hindered the effective implementation of the 1997 Bankruptcy Act.

Further reducing the effectiveness of the Bankruptcy Act, according to Sobhan and Werner, was the fact that business interests were allowed to review it in draft form. This led to the removal of a number of the Act's original provisions. In its final form, the Act (which covers both individual and corporate debtors) contains a provision for the public disclosure of a bankruptcy proceeding initiated against a debtor, which has led to the filing of defamation charges and challenges to the constitutionality of the disclosure requirement. Sobhan and Werner concluded in their 2003 report that "the combination of the bankruptcy law and its ineffective implementation make it nearly impossible for a company to close or declare bankruptcy" (p. 70).

In its "Doing Business" snapshot series, the World Bank provides a summary snapshot of the ease with which a business closing is handled in 178 countries, worldwide. Using three indicators -- cost of closing (as a percentage of the estate), length of time required to effect closing (stated in years), and average return to creditors (expressed in cents on the dollar). In addition to providing these figures for the country in question, the World Bank provides comparable figures for other countries in the region, and for "high-income" countries (i.e., member states of the Organization for Economic Cooperation and Development, or OECD). For Bangladesh, the average cost of a business closing is 8% of the debtor estate, as compared to a regional average of 6.5% and an OECD average of 7.5%. In Bangladesh it takes an average of 4 years to complete the business-closing process, compared to 5 years regionally and 1.3 years in OECD member states. The return to creditors in Bangladesh is 23.2 cents on the dollar, compared to a regional return of 20.1 cents and an OECD average return of 74.1 cents.