BANKRUPTCY PROCEEDINGS

“Bankruptcy is a legal proceeding in which you put your money in your pants pocket and give your coat to your creditors”

 - Joey Lauren Adams

BANKRUPTCY VS. INSOLVENCY

The terms “Bankruptcy” and “Insolvency” are often used interchangeably. Despite this, both terms refer to two different things. The latter refers to the financial state by which an individual and/or debtor is unable to meet their financial obligations and/or debts as they become due while the former is the legal process in order to adjudge and/or declare that an insolvent individual who is unable to meet his/her debts a bankrupt.

The properties of the bankrupt would then be vested in the possession of the Director General of Insolvency (hereinafter referred to as “the DGI”) acting as the Official Assignee to be realized and distributed (subject to certain priorities) pro rata amongst creditors who have filed their Proof of Debts. [1] In return, the Bankrupt would obtain protection from further suits by creditors (subject to certain exceptions) and be able to reorganize and/or eliminate their debts.

This article aims to provide a general overview of procedures in commencing bankruptcy proceedings as governed by the Insolvency Act 1967 (hereinafter referred to as “the IA 1967”) which came into effect on 30th September 1967 and the Insolvency Rules 2017 (hereinafter referred to as “the IR 2017”) which came into effect on 6th October 2017 especially in regards to a bankruptcy proceeding commenced by the presentation of a Bankruptcy Notice by a creditor.

[1] Page 4 Halsbury’s Laws of Malaysia 2015 Reissue 6(2) LexisNexis.

PERSONS SUBJECT TO BANKRUPTCY JURISDICTION

A person is subject to the bankruptcy jurisdiction of the court if he is a ‘debtor’. Under section 3(3) of the IA 1967, a debtor is defined as any person who at the time when he committed or suffered an act of bankruptcy:

(1) was personally present in Malaysia;

(2) ordinarily resided or had a place of residence in Malaysia;

(3) was carrying on business in Malaysia either personally or by means of an agent; or

(4) was a member of a firm or partnership which was carrying on business in Malaysia.

A debtor does not need to be a Malaysian citizen and may be a foreigner as long as he satisfies the four conditions above. The bankruptcy jurisdiction of the court extends even if the person is not present in Malaysia at the time of the act of bankruptcy as the act may be committed through an agent unless the act of bankruptcy is a personal act and has not been authorized by him. The court has no jurisdiction to entertain a bankruptcy proceeding against a person if the person is not a debtor as defined under section 3(3) of the IA 1967.

Apart from the exclusion of non-debtors from the bankruptcy jurisdiction of the court, no creditor can present a petition against a debtor unless the debtor:

(1) is domiciled in Malaysia;

(2) within one year before the date of presentation of the petition:

(a) has ordinarily resided in Malaysia;

(b) had a dwelling house in Malaysia;

(c) had a place of business in Malaysia;

(d) has carried on business in Malaysia personally or by means of an agent; or

(3) is, or has been within one year before the date of the presentation of the petition, a member of a firm or partnership which has carried on business in Malaysia by means of a partner or partners or an agent or manager.

MINORS

Under section 2 of the Age of Majority Act 1971 (Act 21), a minor is a person who is below the age of 18 years. Bankruptcy proceedings may be taken against a minor in respect of debts that are legally enforceable against him, i.e. a debt arising from a contract for necessaries,

[2] a tortious liability or tax liability.

[2] See sections 11 and 69 of the Contracts Act 1950 (Act 136).

PERSONS OF UNSOUND MIND

A person of unsound mind, whether so found by inquisition pursuant to the Mental Health Act 2001 (Act 615), may be adjudged bankrupt. Under section 133(c) of the IA 1967, where a debtor’s lunacy is confirmed by inquisition, he may act by his committee or curator bonis. Under Rule 226 of the IR 2017, where his lunacy is not so confirmed, the court may appoint a suitable person to represent him in the proceedings.

SOCIAL GUARANTOR

Pursuant to section 5(3)(a) of the IA 1967, no bankruptcy proceedings shall be commenced against a social guarantor. Referring to section 2 of the IA 1967, a social guarantor is a person who provides a guarantee, not for the purpose of making profit, in relation to:

(1) A loan, scholarship or grant for educational or research purposes;

(2) A hire-purchase transaction of a vehicle for personal or non-business use; or

(3) A housing loan transaction solely for personal dwelling.

DECEASED

Under section 122(2) of the IA 1967, a petition may be presented to the court for an order to administer the estate of the deceased debtor. The petition may be presented by the following persons:

(1) A creditor to whom the deceased debtor owed a liquidated sum of not less than RM100,000.00;

(2) The DGI.

Pursuant to section 96 of the IA 1967, for cases where the debtor has passed away after the creditor’s petition has been presented to him, the bankruptcy proceedings shall continue as if the debtor were still alive unless the court orders otherwise. If the debtor has passed away before the creditor’s petition is served on him, the court may dispense with the service or may order service to be effected on his personal representative or such person as it thinks fit.

BANKRUPTS

Under section 96 of the IA 1967, an undischarged bankrupt may be subject to a fresh bankruptcy proceeding in respect of the debts incurred by him subsequent to the making of the bankruptcy order in the first bankruptcy proceeding. However, if the court is satisfied that there are no more assets available for administration under the subsequent bankruptcy proceeding, then the court may refuse to grant a further bankruptcy order.

TWO METHODS OF BANKRUPTCY 

There are two methods that an individual and/or debtor can be declared/adjudged bankrupt in Malaysia, either via the debtor’s own application through a debtor’s petition and/or through a creditor-initiated creditor’s petition.

DEBTOR’S PETITION

A debtor may voluntary make himself/herself a bankrupt by presenting a debtor’s petition to the High Court stating his/her inability to pay his/her debt pursuant to Section 7 of the IA 1967. There is no minimum amount of debt required for the debtor to commence bankruptcy proceedings under a debtor’s petition.

CREDITOR’S PETITION 

A creditor may initiate bankruptcy proceedings against a debtor via the presentation of a creditor’s petition pursuant to meeting all the conditions under Section 5 of the IA 1967 as follows: -

(i) DEBT OWING AMOUNTS TO RM 100,000.00

• That the debt owing by the debtor and/or debtors who join in the creditor’s petition amounts to RM100,000-00.

• The threshold to commence a bankruptcy action was initially fixed at a mere RM2,000-00 but had been revised and increased a total of four times over the years.

(ii) LIQUIDATED SUM OF DEBT

• The debt is a liquidated sum payable either immediately or at some certain future time.

(iii) ACT OF BANKRUPTCY HAS OCCURRED

• The act of bankruptcy on which the creditor’s petition is grounded has occurred within six (6) months before the presentation of the petition;

  
  

(iv) THE DEBTOR IS DOMICILED IN MALAYSIA

• The debtor is domiciled in Malaysia or within one (1) year before the date of the presentation of the creditor’s petition has ordinarily resided or had carried out business in Malaysia or has carried on business in Malaysia personally or by means of an agent or is or has been within the same period a member of a firm or partnership which has carried on business in Malaysia by means of a partner or partners or an agent or manager.

(v) NOT A SOCIAL GUARANTOR/ LEAVE WITH OTHER GUARANTORS

• The debtor must not be a social guarantor;

• Leave must be obtained from the Court if a creditor intends to commence bankruptcy proceedings against any other guarantor other than a social guarantor (through an application via a Summons in Chamber supported by an Affidavit) proving to the court that all other modes of execution and enforcement to recover debts owed to him/her by the debtor has been exhausted such as proceedings through Seizure and Sale, Judgment Debtor Summons, Garnishment, Bankruptcy or Winding – Up Proceedings against the Borrower.

It is pertinent to note that failure to comply with ANY of the above requirements would result in the dismissal of the creditor’s petition by the Court.

ACTS OF BANKRUPTCY 

As briefly mentioned above, an act of bankruptcy must have occurred for a creditor to present a creditor’s petition against their debtor. The various acts of bankruptcy pursuant to Section 3 of the IA 1967 are as follows: -

(i) CONVEYANCE AND/OR ASSIGNMENT AND/OR CHARGE

• If the debtor has made a conveyance or assignment of his property to a trustee or trustees for the benefit of their creditor(s).

(ii) FRAUD

• If the debtor makes a fraudulent conveyance, gift, delivery or transfer of his property or of any part thereof;

• The debtor makes any conveyance or transfer of their property or of any part thereof, or creates any charge thereon which would be void due to fraudulent preference if they were adjudged bankrupt.

(iii) INTENT TO DEFEAT OR DELAY CREDITORS

• If the debtor with the intent to defeat or delay his creditors, departs out of Malaysia, remains out of Malaysia or departs from his dwelling house closes his place or business;

• If the debtor with the intent to defeat or delay his creditors, submits collusively or fraudulently to an adverse judgment or order for the payment of money.

(iv) EXECUTION AGAINST DEBTOR IS LEVIED BY SEIZURE

• If execution issued against the debtor has been levied by seizure of the debtor’s property under process in an action or in any civil proceeding in the High Court, Sessions Court or Magistrates Court where the judgment, including costs, is for an amount of one thousand ringgit or more.

(v) DEBTOR’S PETITION

• If the debtor files in the court a declaration of his inability to pay his debts or presents a bankruptcy petition against himself.

(vi) NOTICE TO SUSPEND DEBT

• If the debtor gives notice to any of his creditors that he has suspended or that he is about to suspend payment of his debts.

(vii) BANKRUPTCY NOTICE ISSUED

• If a creditor has obtained a final judgment or final order against the debtor and has served a Bankruptcy Notice under the IA 1967 on the debtor requiring the debtor to pay the judgment debt in accordance to the judgment.

(viii) NO PROPERTY FOR SEIZURE

• If the officer charged with the execution of a writ of attachment or other process makes a return that the debtor was possessed of no property liable to seizure.

BANKRUPTCY PROCEEDINGS THROUGH A BANKRUPTCY NOTICE

The most common way to obtain a bankruptcy order is via creditor’s petition when the debtor has committed an act of bankruptcy by failing to comply with a bankruptcy notice issued. The general process of this is as follows: -

STEP 1:   Obtain a final judgment and/or final order.

• The creditor would first need to have obtained a final judgment and/or final order against the debtor in court with a judgment sum of not less than RM100,000.00.

• If it has already been six (6) years since the Judgment has been obtained, leave of Court must be applied.[3]

[3] Order 46 Rule 2 of the Rules of Court 2012 and Dr Shamsul Bahar Abdul Kadir v RHB Bank Bhd [2015] 4 CLJ 561.

STEP 2:  The final judgment/final order must be served on the Judgment Debtor.

• Service of the final judgment and/or final order can be done pursuant to any terms of contract between the creditor and debtor and/or any orders made by the court for substituted service and or pursuant to the Rules of Court 2012.

STEP 3: The preparation and filing of a request for bankruptcy notice in Form 35 and a Bankruptcy Notice in Form 34.[4]

• The Bankruptcy Notice must be based on the terms of the final judgment or order.

• All the sums reflected in the Bankruptcy Notice must be accurate and expressly quantified.

• Any interest must be quantified up to the date of the issue of the Bankruptcy Notice.

STEP 4:     The Bankruptcy Notice must be served on the Judgment Debtor.

• The Bankruptcy Notice must then be served on the Judgment Debtor personally and would be valid for three (3) months.

• If the service of the Bankruptcy Notice could not be effected within those three (3) months, an application to extend the duration of validity of the Bankruptcy Notice must be made.[5]

• Good cause must be shown as to show special circumstances and good cause for the extension.[6]

• If the Bankruptcy Notice could not be effected on the Judgment Debtor via personal service the judgment debtor is at liberty to apply for the Bankruptcy Notice and all subsequent cause papers in the same bankruptcy suit and proceedings to be served via substituted service on the Judgment Debtor.[7]

• The court must be satisfied that personal service of the Bankruptcy Notice could not be affected by personal service and that there is a practical impossibility of personal service; and that the method sought for substituted service (i.e. advertising the notice in one local newspaper, placing the notice on the notice board of the court premises and any other means the court thinks fit and just to bring the notice of the judgment debtor) would be effective in bringing about knowledge of the proceedings to the debtor.[8]

• An Affidavit of Service/Affidavit of Substituted Service would be filed to prove service of the Bankruptcy Notice on the Judgment Debtor.

 STEP 5:     Compliance of the Judgment Debtor.

• The Judgment Debtor has seven (7) days to comply with the Bankruptcy Notice, failing which, an act of bankruptcy would have been committed.

• The seven (7) days excludes the day of service of the Bankruptcy Notice.

[4] Rule 89 and 90 of the IR 2017 .

[5] Rules 17, 4 of the IR 2017 and Section 93 (4) of the IA 1967.

[6] Rohani Hamidah bt Nor v Sincere Leasing Sdn Bhd [1993] AMR 224.

[7] Rules 95, 109 and 17 of the IR 2017.

[8] Rules 95 and 109 of the IR 2017 and also Re S Nirmala A/P Muthiah Selvarajah T/A Shamin Properties; Ex Parte The New Straits Times Press (Malaysia) Bhd [1988] 2 MLJ 616).

STEP 6:  The preparation and presentation of the Creditor’s Petition in Form 41 [9] verified by an Affidavit.[10]

• The Creditor’s Petition must be presented within six (6) months from the Act of Bankruptcy.

• The Court would then fix a hearing date for the Creditor’s Petition to be heard.

• A deposit of a sum of RM2,000 must be made to the DGI.

STEP 7:     The Creditor’s Petition must be served on the Judgment Debtor

• The Creditor’s Petition must be served on the Judgment Debtor personally or if there is an order for substituted service served via such substituted service stipulated.

• All cause papers must then be also served to the DGI together with the receipt of the deposit of RM2,000.

• An Affidavit of Service/Affidavit of Substituted Service would be filed to prove service of the Creditor’s Petition on the Judgment Debtor.

STEP 8:     Hearing of the Creditor’s Petition

• The Creditor’s Petition must not be heard until the expiration of eight (8) days from the date of service.

• If the Court is satisfied that all the requirements under the IA 1967 have been satisfied, a Bankruptcy Order would be granted.

CONCLUSION

This article is only aimed to provide an overview of the general steps involved in a bankruptcy proceedings starting from the issuance of a Bankruptcy Notice up to the grant of a Bankruptcy Order by the court. Once a Bankruptcy Order is pronounced, all the properties of the bankrupt shall be vested in the DGI who is responsible for liquidating the assets and distributing them to the creditors.

[9] Rule 98 of the IR 2017.

[10] Section 6(1) IA 1967 and Rule 105 IR 2017.

DISCLAIMER: THE CONTENTS HEREIN ARE INTENDED FOR GENERAL INFORMATION ONLY AND NOT TO BE CONSTRUED AS LEGAL ADVICE. SHOULD YOU HAVE FURTHER QUERIES AND/OR WOULD LIKE TO HAVE THE FULL ARTICLE, KINDLY CONTACT US.