AUTOMATIC DISCHARGE OF BANKRUPTCY IN MALAYSIA: A COMPREHENSIVE OVERVIEW

In Malaysia, there are two methods for a person to be released from the status of bankruptcy, either through annulment of the bankruptcy order or through discharge as follows:

(i) Annulment order under Section 105 of the Insolvency Act 1967 (“IA 1967”);

(ii) Discharge by Court Order under Section 33(3) of the IA 1967;

(iii) Discharge by the Director General of Insolvency (“the DGI”); and

(iv) Automatic discharge under Section 33C of the IA 1967.

A discharge in bankruptcy marks the conclusion of the legal status of bankruptcy for an individual by forgiving eligible debts, releasing them from further obligation to repay those debts.

In contrast, an annulment of bankruptcy reverses the entire process, effectively erasing the bankruptcy from the individual's record as if it never occurred. An annulment may be granted under specific circumstances, such as full repayment of debts or if the court is of the opinion that the debtor should never have been made a bankrupt in the first place.

Both discharge and annulment signify different outcomes in bankruptcy proceedings: one providing debt forgiveness and legal closure, the other entirely rescinding the bankruptcy's legal effects.

This article will focus specifically on the automatic discharge of a bankrupt.

BACKGROUND ON SECTION 33C IA 1967

This mode of discharge was first introduced by the Bankruptcy (Amendment) Act 2017 (hereinafter referred to as “BA 2017”) which came into force on 6th October 2017. The initial iteration of s.33C of the IA 1967 under the BA 2017 intended to discharge the bankrupt from bankruptcy upon the expiration of three (3) years from the date of the submission of the statement of affairs provided that (i) the bankrupt had achieved a targeted contribution of their provable debt and (ii) had rendered an account of moneys and property to the DGI.

However, the automatic discharge under the BA 2017 proved to be too strenuous as there were in fact no successful cases due to difficulties for the bankrupt to achieve the targeted contribution of their provable debt. In view of this, Parliament amended the mechanism for automatic discharge under s.33C of the IA 1967 through the Insolvency (Amendment) Act 2023 (hereinafter referred to as “IAA 2023”) which came into force on the 6th October 2023.

AUTOMATIC DISCHARGE UNDER THE IAA 2023

The amended s.33C of the IA 1967 for automatic discharge retains its original goal: to aid in the discharge of bankrupts within a short period of time. It retains its initial intended timeline for the bankrupt to be automatically discharged upon expiry of three (3) years from the date of submission of the bankrupt’s statement of affairs to the DGI and the requirement for the bankrupt to render an account of moneys to the DGI every six months but replaces the requirement for the bankrupt to have achieved a targeted contribution of their provable debt to the lower threshold requirement of the payment of a sum of money determined by the DGI.

VARIOUS REQUIREMENTS FOR AUTOMATIC DISCHARGE

However, this does not mean that the DGI can determine at their own whim and fancy whatever sum payable by the bankrupt to be automatically discharged. The DGI would have to take into account the following factors when determining the sum of money to be payable by the bankrupt before issuing a notice for automatic discharge [1]:-

(a) the current monthly income of the bankrupt;

(b) the extent to which the current monthly income of the bankrupt's spouse may contribute to the maintenance of the bankrupt's family;

(c) the monthly income that the bankrupt may reasonably be expected to earn over the duration of the bankruptcy, taking into account-

(i) the previous and current monthly income of the bankrupt;

(ii) the educational and vocational qualifications, age and work experience of the bankrupt;

[1] Section 33(C)(2) of the IA 1967.

(iii) the range of monthly income earned by persons who are employed in occupations, positions or roles similar to that in which the bankrupt is, or can be expected to be, employed;

(iv) the effect which the bankruptcy may have on the bankrupt's earning capacity or other

 income;

(v) the prevailing economic conditions; and

(vi) the period of time during which the bankrupt is likely to be capable of earning a meaningful income;

(d) the reasonable expenses for the maintenance of the bankrupt and the bankrupt's family;

(e) the property of the bankrupt[2] which may be realized during the period of three years; and

(f) the debt provable in bankruptcy.

NOTICE FOR AUTOMATIC DISCHARGE

The DGI after being satisfied that all the requirements for an automatic discharge have been met, would then issue a notice for automatic discharge on each and every one of the creditors of the bankrupt who have filed a proof of debt at least six (6) months before the expiration of the three (3) year period from the date of the submission of the bankrupt’s statement of affairs but no earlier than a year before the expiration of such period.[3]

Going forward, the DGI would have to adhere strictly to the six (6) months window lest they miss the opportunity to consider the automatic discharge of the bankrupt. However, the six (6) month time window would not affect person(s) who have been adjudged bankrupt before the IAA 2023 came into force as the automatic discharge was envisaged by the IAA 2023 would apply retrospectively to those bankrupts as long as the DGI has issued the said notice within twelve (12) months of the IAA 2023 coming into operation.[4]

DGI’S BURDEN OF PROOF TO JUSTIFY THE AUTOMATIC DISCHARGE

It can be inferred that the DGI bears the burden of proof to provide justification to the Court and the creditors if the DGI decided to automatically discharge the bankrupt under s.33C of the IA. The DGI also bears the general duty to consult the wishes of the creditors due to the following reasons:

(i)The DGI bears the general duty under s.73 of the IA 1967 to summon and preside at all meetings of creditors and to consult the creditors of their wishes when it is practicable to do so.

(ii)The DGI owes a duty to the creditors to act as the trustee, receiver and manager of the bankrupt’s estate and not the agent of the bankrupt.[5]

[2] Section 48(1)(b) IA 1967.

[3] Section 33C (3) IA 1967.

[4] Section 16 IAA 2023.

[5] Section 33C (8A) IA 1967.

(iii)The DGI possesses the sole knowledge on the various factors in s.33C (2) of the IA 1967 when determining the sum of money payable by the bankrupt as to not prejudice the administration of the estate of the bankrupt.

(iv)The DGI has and possesses all the powers and authorities as the receiver and manager of the bankrupt’s estate to find out information on the various factors in s.33C (2) of the IA 1967.

Thus, it is clear that the DGI bears the BURDEN OF PROOF premised on the abovementioned reasons. Furthermore, it is undeniable that an application for automatic discharge as envisaged under s.33C of the IA 1967 is in fact an application made by the DGI to discharge a bankrupt from bankruptcy. As such, the DGI bears the burden of proof to justify that the issuance of the said s.33C Notice would not prejudice the administration of the estate of the bankrupt. [6]

DISCRETION OF THE DGI

While it is clear that the DGI is conferred with a wide discretion when determining the sum of money payable by the bankrupt for them to qualify for an automatic discharge, such discretion is not unfettered. The DGI must take into account all the relevant factors under s.33C(2) of the IA before issuing a Notice under s.33C of the IA 1967 for an automatic discharge so as to avoid the decline of commercial morality and most importantly, it must not create any public perception that any money borrowed from any bank or any debt owing to any creditor need not be fully settled and from any bankruptcy resulted from an outstanding owing, such bankruptcy may be discharged automatically after three short years with a minimum or too little dividend to be paid to the creditors.

It was in fact Parliament’s intention to maintain a balance between granting a second chance to the bankrupt and also the interest of public and commercial morality where the said s.33C of the IA 1967 where it was enacted in such a way that before the issuance of a Notice of automatic discharge of a bankrupt, various factors shall be taken into account by the DGI in determining the sum of money to be paid by the bankrupt and a creditor is given a right to object to such automatic discharge if such purported automatic discharge would prejudice the administration of the bankrupt’s estate.[7][8]

CONCLUSION

It is beyond a shadow of doubt that the new automatic discharge provisions under the IAA 2023 aims to make it easier for bankrupts to be discharged from bankruptcy automatically and to extend a second chance to the debtors to lead improved lives and contribute to the economic development of the country. However, such automatic discharge must only be invoked in appropriate cases based on the facts and circumstances of each case and such second chance for a bankrupt must not be given in total disregard of the interests of the creditors especially in relation to the administration of the estate of the bankrupt involving a huge outstanding sum owing to various creditors.

[6] Mayban Finance v. Lee Kee Sen [2014] 10 CLJ.

[7] Public Bank Bhd V Choong Yew Wah [2014] 4 MLJ.

[8] Lim Hun Swee V Malaysia British Assurance Bhd (Currently known as Allianz General Insurance Malaysia Bhd) & Ors (Judgment Creditors) [2011] 2 MLJ.

Procedure to object

STEP 1: THE APPICATION TO OBJECT

• Upon receipt of the said s.33C Notice, any creditor who wishes to object to the automatic discharge shall, within twenty-one (21) days from the date in which a s.33C Notice is served on them, make an application (in Form 101) supported by an affidavit to suspend the automatic discharge (hereinafter referred to as “the Application”).[9]

• It is pertinent to note that the creditor would only be able to make the Application to object on the following grounds[10]:-

(a) that the bankrupt has committed any offence under the IA 1967 or under Section 421 to 424 of the Penal Code;

(b) that the automatic discharge would prejudice the administration of the bankrupt’s estate;

(c) that the bankrupt has failed to co-operate with the administration of estate.

STEP 2: SERVICE OF THE APPLICATION AND DGI’s AFFIDAVIT IN OPPOSITION

• Once the Application is made and presented to the Court, the Court would then fix a date for the Application to be heard before a Senior Assistant Registrar. The creditor must then serve the Application on the DGI and the bankrupt at least fourteen (14) days before the date of the hearing of the application.[11]

• The DGI might also oppose the application by filing and serving an affidavit in opposition (hereinafter referred to as “AIO”).

STEP 3: HEARING OF THE APPLICATION

• During the hearing of the Application, the Court may require further written submissions and/or order the DGI to file and serve their AIO on the applicant if they have not already done so. In this situation the hearing would be adjourned to a further date pending the exchange of submissions and affidavits.

• After that, the Court would have to decide whether to dismiss the application and to approve the automatic discharge or to suspend the automatic discharge for a period of two years.[12]

STEP 4: SUSPENSION OF THE APPLICATION

• If the Court does decide to allow the Application, the suspension of the automatic discharge of the bankrupt would take effect from the expiration of a period of three (3) years from the date of the submission of the bankrupt’s statement of affairs to two (2) years afterwards (hereinafter referred to as “the period of suspension”).[13]

• The DGI would also be required to serve a notice of suspension of the automatic discharge on the bankrupt and on each creditor who has filed a proof of debt not less then six months before of the period of suspension.[14] Meanwhile, the DGI would have to continue their duties and obligations as the receiver and manager of the estate of the bankrupt during this period of suspension. [15]

• The bankrupt would be automatically discharged after the period of suspension has lapsed.

[9] Section 33C (4) IA1967.

[10] Ibid.

[11] Section 33C (6) IA 1967.

[12]Section 33C (7) IA 1967.

13] Section 33C (8B) IA 1967.

[14] Section 33C (8A) IA 1967.

[15] Section 33C (8) IA 1967.

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