Bankruptcy, Insolvency and Loan Default: The Bankruptcy Act 1997, the Artha Rin Adalat, Defaulter Status under the Bank Company Act, Rescheduling and Exit, and What Happens to Directors and Guarantors

In this guide: The Bankruptcy Act 1997: petitions, adjudication and discharge · The Artha Rin Adalat Ain 2003: the bank's court · Defaulter and wilful defaulter under the Bank Company Act · Classification, provisioning, rescheduling and the exit policy · Directors, personal guarantors and cheques · What a defaulting business should do, in order

The short answer

Separate three questions that clients run together. What can the bank do to the business? Classify the loan at three, six and twelve months overdue, report it to the CIB, sell the security under s.12 of the Artha Rin Adalat Ain without a suit where it holds a power of sale, sue in the Artha Rin Adalat (which must happen within a year of the default reaching the s.46 thresholds), take an ex parte decree if the company does not appear, auction the mortgaged property under s.33, and recover the shortfall from the company’s other assets. What can the bank do to the people? Implead the directors and the personal guarantors as defendants (a guarantor is liable co-extensively under s.128 of the Contract Act), obtain civil imprisonment of up to six months under s.34 against them, list them in the CIB so that no bank lends to them or to any company they are connected with, have them declared wilful defaulters with the travel-ban, licence and listing consequences, and bar them from bank boards and from Parliament. What can the business do? Reschedule under the 2022 circular if it is viable (down payment, longer tenor, up to four times); take the exit policy if it has closed or cannot recover (5% down, two to three years, interest waiver, no wilful-defaulter tag); negotiate in the mandatory s.22 mediation; defend the suit on the s.12 and s.47 points (security not sold first, interest above 200%); or, rarely, petition for its own bankruptcy under s.13, which stays unsecured creditors but not the bank with security and now attracts judicial suspicion as a stalling device. Winding up under the Companies Act is the fourth route and does not bind the secured bank either. The sections below take each regime; our closing a business guide covers the orderly exit where the debts can be paid.

The Bankruptcy Act 1997: petitions, adjudication and discharge

The statistics explain the practice. Five hundred and thirty-three cases were filed in the twenty-six years to June 2023, 361 disposed, and about Tk 416 crore recovered of Tk 2,757 crore claimed; the banks prefer the Artha Rin Adalat, where their security is enforced rather than stayed. The Act’s recent use is the opposite of its purpose: debtor self-petitions rose to 81 in 2025 and 46 in the first eight months of 2026 in the Dhaka court alone, filed to obtain the s.31 stay against unsecured creditors and to complicate Artha Rin execution; the courts have responded by scrutinising the asset statements, and concealment is punishable with imprisonment. A business owner who considers the route should know that it binds the trade creditors and the landlord, not the bank with a mortgage, and that the disabilities of s.94 follow him personally until discharge.

The Artha Rin Adalat Ain 2003: the bank's court

Section 5 sends every suit by a bank or financial institution for recovery of a loan to the Artha Rin Adalat, a Joint District Judge designated for the purpose (s.4), including mortgage suits, and makes the decree preliminary and then final on sale, extinguishing the right of redemption; the Public Demands Recovery Act certificate route survives only for state banks’ claims up to Tk 5 lakh. The sequence a defaulting borrower meets is this. Pre-suit sale (s.12). A bank holding a pledge or lien with a power of sale must sell and adjust the proceeds before suing (s.12(1)); a bank holding mortgaged immovable or hypothecated movable property with a power of sale must sell it or attempt to, following the auction procedure of s.33, and may take possession through the District Magistrate (s.12(3), (5), (5A)); a bank that sues without doing so has the declared or assessed value of the property deducted from its claim (s.12(6)); the buyer’s title is unimpeachable and the borrower’s remedy is compensation (s.12(8)). Suit and mediation. The plaint is filed with the loan documents; since the 2010 amendment the court must refer the parties to mediation under s.22 after the written statement, for 60 days extendable by up to 30, and s.44A provides for mediation at the appellate stage; the settlement conference of the original s.21 was removed. Section 6(5) requires the guarantor and any third-party mortgagor to be joined as defendants, with joint and several liability and execution following the statutory order of assets so far as possible. Ex parte decree (s.19). If the defendant does not appear the court decrees ex parte; an application to set aside must be filed within 30 days and 10% of the decretal amount deposited within 15 days of the application, failing which it is dismissed; the suit cannot be dismissed for the plaintiff’s default. Interest (ss.47, 50). The claim may not include interest exceeding 200% of the principal; the court may not reduce pre-suit contractual interest; post-decree simple interest runs at the staged rates in s.50. Execution and auction (s.33). Sale by sealed tender at the decree-holder’s expense on at least fifteen days’ notice in a national Bangla daily and a local paper; bidders deposit 20%, 15% or 10% by the size of the bid and pay the balance within 30, 60 or 90 days; if there is no buyer the property may be vested in the decree-holder (s.33(7)). Civil imprisonment (s.34). The judgment-debtor may be detained in civil prison for up to six months without the debt being discharged; the section is applied to the natural persons behind a corporate borrower, that is directors, partners and guarantors, not to heirs; release on depositing 25% with surety for the balance within 90 days; the High Court Division treats a s.34 order as interlocutory and not appealable under s.44(2). Appeal and revision (ss.41–42). Appeal lies within 30 days to the District Judge where the decree is up to Tk 50 lakh and within 60 days to the High Court Division above that, on deposit of 50% of the decretal amount (paid to the bank in part satisfaction or held as security, with credit for any s.19 deposit), with financial institutions exempt from the deposit (s.41(4)) and disposal targeted at 90 days; revision against the appellate decree lies to the High Court Division within 30 days on a further deposit (75% in total is the figure practitioners use; the section should be read). Time limit on the bank (s.46). Notwithstanding the Limitation Act, the bank must sue within one year after the default reaches the thresholds the section sets (for term loans over three years, 10% of one year’s dues, 15% of two or 25% of three; for shorter loans 20% of the total), and late filing exposes the responsible officer to disciplinary action; this is the borrower’s most useful defence after s.12. Interlocutory orders are not appealable (s.44(2)); the court has inherent powers (s.57).

Defaulter and wilful defaulter under the Bank Company Act

The practical consequence of the 2023 amendment and the 2024 circular is that the question for a defaulting owner is no longer only whether the bank will sue, but whether the bank will classify him as wilful, because the wilful tag brings the travel ban request, the licence consequences and the bar on any negotiated settlement. The circular’s process gives a show-cause and an appeal to Bangladesh Bank, and the borrower who can show inability rather than unwillingness (audited accounts, the business’s closure, the use of the funds for the sanctioned purpose, collateral intact) should put that evidence in at the show-cause stage. Travel bans are not automatic under any statute; they are imposed by court order in the Artha Rin suit or by the Home Ministry on Bangladesh Bank’s request. Finance companies were required to set up the same units from April 2024.

Classification, provisioning, rescheduling and the exit policy

Classification. Under the BRPD circular of 26 November 2024, effective 1 April 2025, one timeline applies to all loan types: a loan overdue beyond 90 days is classified substandard from three months, doubtful from six and bad or loss from twelve; the separate and longer timelines for cottage, micro, small and medium enterprises were withdrawn; provisioning stays at 1 to 5% for unclassified and special-mention loans, 20% substandard, 50% doubtful and 100% bad. The nine-month bad-loss trigger that older material cites was the pre-2019 rule. Classification is the bank’s balance-sheet consequence and is what drives it to sue; the CIB status follows it. Rescheduling. The 2022 master circular (BRPD Circular 16 of 18 July 2022) allows a classified loan to be rescheduled on a down payment of 2.5% to 6.5% of the outstanding by the number of the rescheduling, with tenors of up to eight years and up to four reschedulings, subject to board approval and tightened in 2024–25; a rescheduled loan is unclassified while performing but the CIB shows the history. A wilful defaulter may not reschedule. Exit policy. For a borrower whose business has closed or cannot recover, the BRPD circular of July 2024, revised on 10 March 2025, allows a negotiated exit: a down payment of 5% (10% under the 2024 version), repayment within two years with a one-year extension, waiver of interest (reinstated if the exit terms are breached), approval by the bank’s board (management up to Tk 20 lakh), a decision within 60 days, no new loans until the exit is complete, “exit” annotated in the CIB with the loan remaining classified until paid, and exit borrowers not treated as wilful defaulters. For finance companies, the FCRPD circular of 16 July 2026 opened a one-time exit for bad and loss loans as at 30 June 2026 by lump-sum settlement with interest (not principal) waivable, valid to 31 December 2026, excluding loans tainted by fraud or diversion. The exit policy is the route most closed businesses should be asking their bank about before the suit is filed; after the decree the bank has less reason to agree. Context. Non-performing loans stood at roughly a third of sector credit in early 2025 on Bangladesh Bank’s figures, which is why the circulars have moved towards exit and resolution.

Directors, personal guarantors and cheques

Guarantors. A personal guarantee makes the guarantor liable co-extensively with the borrower under s.128 of the Contract Act 1872; the bank need not exhaust the borrower first unless the guarantee says so; the Artha Rin Adalat Ain requires the guarantor to be made a defendant and allows the decree to be executed against the guarantor where the principal debtor’s property is insufficient (s.6(5) as read), and s.34 detention is ordered against guarantors as judgment-debtors. Most owner-managed companies’ facilities are supported by the directors’ personal guarantees and by mortgages of family property, so the corporate veil is thin from the start. Directors without guarantees. A director who has not guaranteed the loan is not personally liable for the company’s debt, but the CIB links him as a connected person, no bank will lend to him or to another company he directs while the first is in default, he is exposed to the wilful-defaulter process if the default is attributed to diversion or unwillingness, and he is barred from a bank board. Resigning after default does not clear the CIB link for the period of default. Cheques. Security cheques are routinely presented after default, and dishonour is an offence under s.138 of the Negotiable Instruments Act 1881: notice within 30 days of dishonour, 30 days to pay, complaint within 30 days after that; up to one year’s imprisonment or a fine of up to three times the amount; appeal on deposit of 50% (s.138A). The Negotiable Instruments (Amendment) Act 2026 (Act 65 of 2026, 10 April 2026) made s.138 offences compoundable at any stage, allowed the appellate court to relax the 50% deposit for recorded reasons, and narrowed company liability under s.141 to the signatories and persons in charge. The criminal case still runs alongside the Artha Rin suit and is the pressure point on the signatory, who is usually a director. Insolvent company. Winding up by the court on a creditor’s petition under the Companies Act 1994 (a debt above the statutory figure unpaid three weeks after demand, ss.241–242 as read) or a creditors’ voluntary winding up puts a liquidator in and stays unsecured actions, but the secured bank realises its security outside the liquidation and ranks for the shortfall; there is no administration, moratorium or rescue procedure, the Bankruptcy Act’s reorganisation chapter is unused, and schemes of arrangement under ss.228–229 need the creditors’ majorities and the court’s sanction. The draft Insolvency and Bankruptcy Ordinance 2025, which would have introduced a moratorium and an accelerated reorganisation, has not been enacted; the Bank Resolution Act of 10 April 2026 applies to failing banks, not to their borrowers.

What a defaulting business should do, in order

Before the loan is classified: talk to the bank about restructuring while the account is still regular; a rescheduling or a fresh tenor agreed at special-mention stage costs least. At three months overdue: expect classification, and if the business is viable apply to reschedule under the 2022 circular with a down payment and a cash-flow plan; if it has closed or cannot recover, apply under the exit policy before the suit, with the 5% down payment and a proposal for the balance within two years, and ask for the interest waiver. When the s.12 notice of sale arrives: check that the bank holds a power of sale, that the valuation is fair and that the s.33 procedure is followed, because a sale at undervalue is challengeable only in damages afterwards. When the suit is filed: appear, because an ex parte decree costs 10% to reopen and the thirty days run fast; use the s.22 mediation, which is mandatory and where most settlements are reached; plead s.12(6) if security was not sold first, s.47 if interest exceeds 200% of principal, and s.46 if the bank sued more than a year after the default crossed the thresholds. After the decree: an appeal needs 50% deposited, so the appeal is for cases with a real point; otherwise negotiate the instalments the court can allow and avoid the s.34 application against the directors and guarantors by showing payment. Throughout: keep the collateral intact, keep the use of funds documented, and do not transfer property to family, because disposal of collateral and diversion are the wilful-defaulter grounds and the Bankruptcy Act’s fifteen-year claw-back reaches transfers anyway. Our closing a business guide covers the orderly exit; our Artha Rin case guide for borrowers and guarantors covers the suit in detail.