Section 43A of BRA : Section 43A: Preferential Payments To Depositors

Explanation using Example

Imagine a scenario where a small regional bank, "Local Bank Ltd.," has unfortunately gone into bankruptcy and an official liquidator has been appointed to handle the winding-up process. A winding-up order has been issued by the court, and the process of dissolving the bank and paying off its debts has begun.

Under Section 43A of the Banking Regulation Act, 1949, the liquidator is now required to ensure that certain preferential payments are made to depositors. Within three months of the winding-up order, the liquidator must make these payments or set aside funds for them.

Firstly, the liquidator will address the preferential claims under section 530 of the Companies Act, 1956, which might include unpaid wages or taxes. Once these are dealt with, the liquidator will then focus on the bank's depositors.

For example, Mrs. Sharma, who has a savings account with "Local Bank Ltd.," is entitled to receive up to ₹250 or the balance in her account, whichever is less, as a priority payment. Similarly, Mr. Gupta, who has a fixed deposit with the bank, will also receive up to ₹250 or his account balance, whichever is less, but only after savings account holders like Mrs. Sharma have been paid.

If the bank's cash assets are not sufficient to pay the full amounts due to each depositor, payments will be made on a pro rata basis. This means that Mrs. Sharma and Mr. Gupta might receive only a portion of the ₹250 initially, with the promise of the remaining amount being paid as more assets are liquidated.

After addressing the needs of the depositors, any remaining assets will be used to pay the bank's general creditors. If Mrs. Sharma or Mr. Gupta cannot be located, the liquidator must set aside their entitled payments until they can be found.

This section also specifies that if the Deposit Insurance Corporation is liable for the deposits, as is often the case, the rules for payment may differ, with the Corporation stepping in to protect depositors up to a certain limit.