Non-performing loans (NPL) have become an issue of grave concern for Bangladesh. The rising trend of the NPL is bound to have a long-lasting negative impact on the country's financial sector. The state-owned banks and a number of private banks are also facing capital shortfalls due to loan defaults of significant number of large-scale borrowers. In case of state-owned banks, capital shortfall amounts had been replenished through public money; the government has spent thousands of crores of taka in the last decade to recapitalise moribund state-owned banks. According to Bangladesh Bank (BB), more than 72 thousand suits related to recovering due loans are pending before the lower courts, especially with Artha Rin Courts which are governed by the Artha Rin Adalat Ain of 2003.

The existing legal mechanism for recovering a defaulted loan is inconsistent and archaic. Despite having a bundle of laws to recover the borrowed money from the loanee, the bank authorities are failing to do so. The Artha Rin Adalat Ain 2003 was enacted by the parliament upon repealing the Artha Rin Adalat Ain 1990 to recover the borrowed loan from the defaulted borrowers.  Section 4 of the Act speaks about the formation of court and the court administration. According to section 5, only banks, financial institutions and other loan providing agencies defined in section 2(ka) can file the suit for recovery of loan. Section 6(5) states that in case of money loan, the principal borrower and the third party related to the loan, who has not taken the loan, but has given a mortgage as security for the loan or who has become a personal guarantor, will be defendants.

The Artha Rin Adalat Act, 2003 is an important legal instrument to administer the bank and non-banking financial agencies. For the best interest of our economy and with a view to reducing the burden of NPLs, this Act should be updated, especially with respect to clarifying provisions on impleading necessary parties as defendants.

It is thus clear that, if a third person is a mortgagor of a loan, the suit will be prejudiced if he/she is not made a defendant. Section 6(5) of the Act also says that at the time of realising the decree amount, the decree will impact the property of the borrower first, then that of the mortgagor and guarantor, respectively. However, the provision of section 6(5) is seemingly inconsistent with section 34(3) of the Act. Section 34(3) of the Act states that if it becomes necessary to implement the decree against any company, partnership firm or any other corporate body, then the natural persons comprising whom such company, firm, or body is formed, may be committed to civil prison individually and collectively.

Apart from that, this Act has not made it clear as to who will be the defendants in a suit filed against a company. A company being a juristic or an artificial person, is run by natural person(s). Every person who, at the time when the loan was taken, oversaw, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed liable in this regard. After taking a loan if the board of director has changed and a new board of director is formed and there is no personal guarantor, then no director or chairman is to be held liable. In Mahbub Ali v Judge, Artha Rin Adalat & others, High Court Division stated that Chairman or Director, if he did not execute any charge document, he or she shall not be liable for the loan save and except their liability to the extent of the face value of the shares he/she holds. 

The Artha Rin Adalat Act, 2003 is an important legal instrument to administer the bank and non-banking financial agencies. For the best interest of our economy and with a view to reducing the burden of NPLs, this Act should be updated, especially with respect to clarifying provisions on impleading necessary parties as defendants.

The writer is a corporate lawyer.