Legal Opinion regarding Classification and Provisioning of rescheduled liability of Company 1 and its Managing Director, Mr. x.

Mr. Z

Address….

Dear Sir,

RE:     Legal Opinion regarding Classification and Provisioning of rescheduled liability of Company 1 and its Managing Director, Mr. x.

We refer to your letter dated 17 October 2007 on the above subject.

From perusal of your letter it appears that the outstanding liability of Company 1 (the “Company”) and its Managing Director, Mr. x and others were rescheduled by BANK 1 (“the Bank”) vide a Deed of Agreement dated 23.May 2000 (“the Agreement”) which approved by the Bankruptcy Court by its order dated 28.05.2000.

According to the Agreement, the borrowers were supposed to pay Tk. 7.44 Crore for full and final settlement of their liabilities within 31.12.2007. The Borrower had been servicing its liabilities in half yearly installments.

At the borrowers’ request, the Bank vide its sanction letter dated 26 May, 2004, extended time for repayment of the liabilities of the borrower and revised the Repayment Schedule for repayment of the outstanding remaining amount of Tk. 3.33 Crore within 31.12.2012.

Upon the reschedulement of the outstanding liability and the continuous repayment of its liabilities up to March 2007, the Bank rectified the Classification Status of the borrower in its CIB report from “Bad and Loss” to “Unclassified”.

In the meantime, Mr. x has been arrested and various corruption cases have been initiated against him. We have been informed that at present his release from jail seems unlikely and all business activities of the Company and Mr. x have stopped.

At present we have been informed 2 quarterly installments amounting to Tk. 22 lac under the repayment schedule is overdue.

In view of the above circumstances, you require our legal opinion as to whether the Bank can maintain Classification Status as “Unclassified” or should the Bank reclassify the outstanding amount as “Sub-Standard” or “Bad and Loss”.

OUR OPINION:

The BRPD Circular No. 16 [Clause 2(ka)(3.2)] dated 06-12-1998 issued by Bangladesh Bank provides for the classification and provisioning of loans (the “Circular”).

According to the Circular, there are three (3) classifications of loans for various defaulting loan facilities: “Sub-Standard”, “Suspicious”; and “Bad and Loss”.

In case of defaulting term loans, under the Objective Criteria provided under the Circular:

If  the repayment tenor of such loan is more than (5) five years, the following shall apply:

a)      If the ‘default instalments’ are equal to the instalments that are due in a period of 12 months or more, then the loan shall be classified as “Sub-Standard”;

b)      If the ‘default instalments’ are equal to the instalments that are due in a period of 18 months or more, then the loan shall be classified as “Suspicious”;

c)      If the ‘default instalments’ are equal to the instalments that are due in a period of 24 months or more, then the loan shall be classified as “Bad and Loss”;

In the instant case, only 2 quarterly instalments (i.e. amount equal to instalments due in a period of 6 months) are overdue. Therefore, the instant case does not fall under any classification under the Objective Criterion of the said BRPD Circular.

Notwithstanding the above, according to the Qualitative Judgement under the Circular, if there is any uncertainty in the recovery of any defaulting loan then it has to be classified according to the Qualitative Judgement criteria.

A loan shall have to be classified according to the Qualitative Judgement in the following situations:

  • If the considerations, depending upon which the loan was granted has changed, or
  • If the capital of the borrower is damaged because of adverse situation, or
  • If the value of a security has diminished, or
  • If for any other reason the recovery of the loan is uncertain.

A loan may be classified as:

  • “Sub-Standard” if after taking appropriate steps there is a possibility of changing the present situation,
  • “Suspicious” if even after taking appropriate steps the whole outstanding amount cannot be recovered fully, or
  • “Bad and Loss” if there is no possibility of recovering the loan even after taking all appropriate steps.

In the instant case, although all business activities of the Company and Mr. x have stopped, the Bank can still recover against the Company and enforce any security which has been granted by the Company or third parties in favour the Bank.

If no appropriate steps has been taken as yet by the Bank, and if recovery of the loan could be achieved by enforcement of security or assets of the Company, its guarantors (if any) or third party security providers, the defaulting loan of the borrower may be classified as “Sub-Standard”.

If you have any further query, please do not hesitate to contact the undersigned.

Thanking you.

Yours faithfully,

………………….

For: “The Lawyers & Jurists”