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Bankruptcy Act-1997-Accounting
Aspects
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Objectives of this Module

1. To understand salient features of Bankruptcy
Act and its basics
2. To understand the rules and regulations
mentioned in this act for settlement
3. To understand accounting aspects regarding
insolvency
4. Oriented with the required books and records
under insolvency proceedings etc.
5. To get a idea regarding winding up a company
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Bankruptcy Act- Inception

• Come into force from 29th July 1997

• Enacted in place of
1. The Insolvency (Dacca) Act 1909 and
2. The Insolvency Act 1920
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Bankruptcy Act- its Objectives

The main objectives of this act are -
1.To protect the interest of the creditors
2.To ensure equitable distribution of property
3.To enable the debtors to be free from debts
4.To give opportunity to fresh start of business
5.Cancellation of debts and removal of
disqualification
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Meaning of Bankruptcy
• A person unable to pay his debts is called
insolvent. (Insolvency and Bankruptcy is in same
meaning)

• But no man can be called insolvent unless a

competent court declares him an insolvent.
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Bankruptcy Procedures- A Snapshot

Order of Appoint an Official
Adjudication Receiver
Petition
filled by the
Creditors
Debtors
Eligible to be Realize the property
Competent of debtors and
declared as Court
Insolvent entitled to receive
fees
Petition filled
by the Debtor
himself
Distribute among
the creditors as
per law
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When a Debtor get eligible to be

declared Insolvent

Two conditions must be satisfied

1. Must be a debtor and his assets must be

insufficient to meet all the claims of creditors
and
2. The debtor has committed an ‘act of insolvency’
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Act of Insolvency/Bankruptcy (Sec-9)

Any of the following acts of a debtor shall be an act
of insolvency, namely-
1.Transfer his property (all or major part) in BD or
elsewhere to third person for the benefits of creditors
generally.
2.Transfer his property (all or major part) in BD or
elsewhere with intent to defeat or delay the creditors’
demand.
3.In case of fraudulent preference by way of transfer,
pledge, hypothecation or creates charge on property.
( Upon adjudication all transfer or fraudulent preference will be void)
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Act of Insolvency Con-----d

4. If, with intent to defeat or delay his creditors-
a. he departs or remain out of country
b. Depart from house or usual place of business
c. Deprive by means of communication, or
5. Sold any of his property in execution of a decree
of any court for the payment of money
6. If he files to the court to be adjudged bankrupt.
7. Give notice by the creditor that has suspended or
going to suspend payment of his debts.
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Act of Insolvency Con-----d

8. Under imprisonment for a decree of any court
for the payment of debt. or
9. Unable to meet the formal demand (pay debt or
security) of any creditor having due not less than
Tk 5 lakh with in 90 days from the date of formal
demand.
[Formal demand must be in prescribed form and shall
state the consequence of non compliance]
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Insolvency Petition- Conditions of

Creditors’ Petition:
1. The debts owing by the debtor is not less than
Tk 5 lakh or jointly not less than Tk 5 lakh.

2. Have a valid evidence regarding act of

insolvency and

3. The act of insolvency must be with in one year

immediately before the file of petition.
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Insolvency Petition- Conditions of

Debtor’s Petition(voluntary):
Debtor shall specifically mention that he is unable
to pay his debts and
1. His debts amount to Tk 20,000, or

2. Under arrest or imprisonment in execution of

a decree of any Court, or

3. an order of attachment in execution of such

decree has been made and is subsisting against
of his property.
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Process of Adjudication
1.After a petition by a creditor or by the debtor
himself, Court shall appoint an Interim Receiver
or shall appoint Permanent Receiver.
2.May appoint Official Receiver.
3.All the property of the debtor except the
exempted property shall be vested on Receiver
or Court
4.Receiver will realize money from the property
and shall distribute among the parties after
deducting his fees and administrative expenses.
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Exempted Property of Debtor

Following properties of debtor are exempted and
shall not be taken over by the Receiver:
1.The tools used by the debtor himself;
2.Wearing apparels and household furnishing of
himself, spouse and children;
Provided that total value of articles mentioned in
point 1 and 2 shall not exceed Tk 3 lac.
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Accounting relating to Insolvency

For accounting treatment need to understand-
1.Receiver’s Fees
2.Priority of debts for distribution
3.Distribution in case of unable to meet 50%
payment for unsecured creditors in term of bank
debt.
4.Statement of Financial Affairs
5.Deficiency Account
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Receiver’s Fees:
Subject to the approval of the court, Receiver shall
be entitled a fee-
1.From the sale proceeds of assets realized:

On first Tk 1,000,000 @ 10%

From 1,000,001 to Tk 2 Crore @ 5%
On excess of Tk 2 Crore @ 1%
2. From the sale proceeds of Mortgaged
Property:
Entitled to receive @ 4% of sales proceeds of
mortgaged property.
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Receiver’s Fees: Con------d

Receiver shall also be entitled-
1.Reimbursement of all actual expenses for
realizing and distributing
2.Expenses for giving reward in locating and
recovering any property
Reward may be given by the Receiver up to 15% of
the realized value of the property subject to the
prior approval of Court

Official Receiver shall entitled to get fees as

determined by Court.
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Priority of debts for distribution (1)

1. Realization expenses/ Administrative expenses
(Auction, Advertisement, reward, case and law
charge etc)
2. Receiver’s fees
3. Secured creditors’ claim
4. All taxes and other debts due to the Govt.
5. All wages or salaries, not exceeding Tk 2,000
due to any clerk, servant, labor, or workman in
respect of service rendered to the debtor during
the period of 6 months immediately before the
date of filing the petition.
(Excess of Tk 2,000 will be treated as unsecured
debt)
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Priority of debts for distribution (2)

6. All bank debts.
7. All unsecured claim
8. Any subordinate claim
(Items mentioned in number 4 and 5 together
called preferential claim)
Critical Point:
Where the amount after payment of preferential
debts is not sufficient to pay 100% of all bank
debts and at least 50% of all unsecured claims,
then-
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Priority of debts for distribution (3)

Then-
All bank debts shall be reduced to the extent so far
the payment to be made in respect of all
unsecured creditors is at least 50% of the bank
debts.
Example- Say, Amount remain after payment of
preferential debts Tk 28,000
Bank overdraft Tk 20,000
Unsecured creditors Tk 30,000
Here we see, after payment of bank debt 100% it is
not possible to pay at least 50% of Unsecured
creditors.
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Priority of debts for distribution (4)

So distribution ratio of unsecured creditors must
be at least 50% of bank debts.

Ratio will be- Bank debts: Unsecured Creditors

20,000 (100%) : 15,000 (50%)
4:3=7
Payments for bank debts= 28,000 x 4/7= 16,000
(16000/20000=80%)
Payment for unsecured creditors=28,000 x 3/7
=12,000 (12000/30000=40%)
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Books of Accounts

For Insolvency required to prepare-

1.Statement of Financial Affairs, and

2.Deficiency Account
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1. Statement of Financial Affairs VS

Balance sheet (1)
It is a statement prepared after filing petition of
insolvency by incorporating realized value of
assets and debts based on rank.
Difference between Balance sheet and Statement
of financial affairs:
i. B/s- disclose true financial position at a
particular point of time.
Where as S/a prepares after filing petition of
insolvency.
ii. B/s prepares on cost basis- Ensures going
concern
Whereas S/a prepares on realized value
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1. Statement of Financial Affairs

VS Balance sheet (2)
iii. B/s prepares on the basis of separate entity but
S/a incorporates both business and personal debts
iv. Presentational difference: (Current vs non
current)
v. Prescribed format:
vi. Shown of deficiency:
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Format of Statement of Affairs (1)

Actually there is no prescribed format for
preparing a Statement of Financial Affairs.
Based on necessity following format is
recommended:

Points to be remembered:
1. Assets which are mortgage or charged in favor
of fully secured of partly secured creditors shall
not be included in assets side of Statement of
affairs.
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Format of Statement of Affairs (2)

If any surplus is left after paying fully secured
creditor or partly if any, to be shown in assets
sides. Note that before payment realization
expenses and receiver’s fees to be paid first.

2. Preferential creditors to be shown in liability

sided and to be deducted as contra.

3. Two columns are shown in assets side of affairs.

One is for book value another for estimated to
produce.
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Format of Statement of Affairs (3)

4. Creditors often have first or second charge over
some of the assets. Those who have first charge
have priority for recovering their claim. If any
surplus is left, then only creditors having second
charge will be able to get something.
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Deficiency Account
It is one kind of special account require in case of
insolvency. Intend of deficiency account to
explain the deficiency as shown in statement of
affairs. It shows by means of figures how
deficiency has been brought about.

It is prepared as like capital account with the two

sides reversed.
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Deficiency Account
Debit side consists of –
• Capital (excess of assets over liabilities) at the
start of period under review, if any
• Net profit, if any
• Any other receipts
• Deficiency as per Statement of Affairs
Credit side consists of –
• Excess of liabilities over assets
• Net loss from carrying on business
• Expenses incurred other than trade expenses-
drawings
• Surplus as per Statement of affairs if any.
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Dissolution Process- Company (1)

The winding up or liquidation of a company
means the termination of the legal existence
of a company by stopping its business, collecting
its assets and distributing the assets among
creditors and shareholders, in the manner laid
down in the Companies Act 1994.
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Dissolution Process- Company (2)

Modes of Winding up:

1. Compulsory winding up by the court

2.Voluntary winding up

3.Voluntary winding up under the supervision of

Court
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1. Compulsory winding up by the

Court
Compulsory winding up takes place when a
company is directed to be wound up by an order
of Court.
Grounds of Compulsory winding up:
A.By special resolution
B.Default in delivering statutory report
C.Failure to commence to start with in one year
D.Reducing the minimum members
E.Inability to pay debts
F.Court’s opinion as it is just and equitable
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2. Voluntary winding up
A company may be wound up voluntarily – if

1.Expire the fixed period or fixed event

2.Passed special resolution by-

a Members for voluntary winding up

b. Creditors for voluntary winding up

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3. Voluntary winding up under the

supervision of Court
At any time after a company has passed a
resolution for voluntary winding up, the Court
may make an order that the voluntary winding
up shall continue but subject to the supervision
of the Court.

A supervision order is usually made for the

protection of the creditors and contributories of
the company.
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End of the Module