Protecting lenders’ interest: What law says

When a company becomes a loan defaulter, the bank concerned has the right to sell the mortgaged property in auction before it moves the Artha Rin Adalot (money loan court).

If the bank understands that they should get the possession and control of the mortgaged property before selling it in auction, then they can make a written request to the loan defaulter (mortgagor) to hand over the property.

If the mortgagor refuses to do so after receiving the request, the bank can make a request to the district magistrate to transfer the possession and control of the mortgaged property. And, if the magistrate is satisfied, then they shall hand over the possession and control of the property from the mortgagor to the bank.

In reality, loan defaulters approach the High Court whenever they are aggrieved by an order of the Artha Rin Adalot passed on auction, mediation or payment of the default amount in instalment. Upon obtaining an interim order from the High Court they linger the entire proceedings and thereby delay the process of the recovery of the loan amount.

In this case, banks should always engage skilled lawyers by paying appropriate legal fees so that an expert counsel can take all necessary initiatives to dispose of the matter in the High Court as well as in the Money Loan Court.

It has been observed that some defaulter companies eventually change their names or incorporate another company and carry on with their business.

What steps should a bank take to prevent such action?

Changing the name of a company or incorporation to a new company can only be done by making an application before the Office of the Registrar of Joint Stock Companies and Firms (RJSC). Thus, it is advised that bank may communicate their objection and concerns to the RJSC as well as to the Artha Rin Adalat or any other court concerned with regard to the malafide intention of the defaulter company as soon as they become aware of the said fact.

There is another important point. When a mortgagor dies, their successor(s) inherit the mortgaged property and when a director of a company dies, their successor(s) inherit the share and become director(s). But, oftentimes they are reluctant to get hold of the liabilities of the company.

What steps should banks take to protect their interest?

In case a mortgagor dies, there will be no deviation in the mortgage as per Section 59A of the Transfer of Property Act since "mortgagors include references to persons deriving title from them". Thus, a successor cannot deny the claim of a bank on the mortgaged property.

However, when a director of a company dies and his/her successors inherits the share and become new director(s) of the company, such changes in directorship are not allowed in the RJSC without an NOC from the bank. In such circumstances, the bank should act very cautiously and must obtain "personal guarantee" from all the incoming directors.

AM Masum, barrister-at-law and fellow of the Chartered Institute of Arbitrators, is an advocate at the Supreme Court of Bangladesh (Appellate Division)