Malaysian Bankruptcy Law

• Bankruptcy is the process where a debtor is declared bankrupt, pursuant to an Adjudication Order made by the High Court.

• The debtor must be unable to pay debts of at least RM100,000.00 to be declared bankrupt.

Introduction to Malaysian Bankruptcy Law

• The Insolvency Act 1967 ("IA 1967") and the Insolvency Rules 2017 (“IR 2017”) govern bankruptcy in Malaysia.
• Malaysian Insolvency Act 1967 is adopted from English Bankruptcy laws. deals with the entire process by which an insolvent individual is made bankrupt and handles the administration of the estate for the benefit of creditors.
• Bankruptcy proceedings remain a popular method of debt enforcement.
• Debtors can use bankruptcy proceedings to seek legal protection.
• Due to COVID-19 and Movement Control Order (MCO), the Insolvency (Amendment) Act 2020 took effect on 1 Sept 2021.
• The key amendment is the indebtedness threshold increase from RM50,000 to RM100,000 in Amendment S.5 (1) (a) of the IA.
• The Minister in the Prime Minister's Department (Law), after consulting with the Minister of Finance, can amend the debt amount in Section 5(1)(a) by order published in the Gazette for a specific time period under special circumstances, if not contrary to public interest via section 5 (1A) in the IA.

Objectives of Bankruptcy

• Ensure a just and equitable distribution of the debtor's available assets among creditors.
• Bankruptcy ensures fair distribution by transferring the bankrupt's assets and affairs to the Director General of Insolvency (DGI).
• DGI is an independent person with duties and powers regulated by statute and the courts.
• When bankruptcy is declared, unsecured creditors' rights are frozen, preventing them from individually pursuing debt collection actions like suing or seizing assets
• The debtor's assets are controlled by the Director General of Insolvency (DGI), responsible for fairly dividing assets among all creditors.
• An unsecured creditor lacks security (charge) over the debtor's or company's property.
• Relieve the debtor from debts and enable a fresh start upon discharge by the court.
• Investigate insolvency reasons to protect creditors' and the public's interests.

Courts and Parties Involved

• Bankruptcy jurisdiction in Malaysia is vested in the High Court in Malaya and High Court in Sabah and Sarawak (Section 88 of IA 1967).
• Parties involved in bankruptcy include Debtors, Creditors, and the Director General of Insolvency (DGI).

Debtors

• A 'Debtor' is defined as a person subject to the bankruptcy jurisdiction of the court within the definition of section 3(3) and 5(1)(d) of the Insolvency Act 1967.
• Section 3(3) of the Insolvency Act defines a debtor as someone who, at the time of the bankruptcy act:
  • Was personally present in Malaysia.
  • Ordinarily resided or had a place of residence in Malaysia.
  • Was carrying on business in Malaysia either personally or through an agent.
  • Was a member of a firm carrying on business in Malaysia
• Section 5(1)(d) states that to be under the bankruptcy jurisdiction of the court, the debtor must be domiciled in Malaysia or, within one year before the petition, have:
  • Ordinarily resided in Malaysia
  • Possessed a dwelling house in Malaysia,
  • Maintained a place of business in Malaysia,
  • Conducted business in Malaysia personally or via an agent; or been a firm member conducting business in Malaysia within one year before the petition via partners or an agent/manager.
• Section 3(3) focuses on the debtor and the criteria for being under Malaysia's bankruptcy jurisdiction.
• Section 5(1)(d) focuses on the creditor and the rules for when a creditor can file a bankruptcy petition against a debtor in Malaysian courts.
• Section 122(2) Insolvency Act covers deceased debtors. A creditor of a deceased debtor can file a bankruptcy petition for estate administration under bankruptcy law.
• Foreigners can be adjudged bankrupt if they fall within the definition of debtor and are domiciled in Malaysia or have a place/residence/business
• Married women are subject to the same bankruptcy laws as single individuals, per Section 120 of the Insolvency Act.
• Proceedings against lunatics, persons of unsound mind, and mental patients require a conference with a committee appointed to represent them before action can be taken
• Members of Parliament are subject to bankruptcy. Article 48(1)(b) of the Federal Constitution states parliamentary privileges do not cover bankruptcy.

Social Guarantors

• Prior to 1.10.2003, judgment creditors could start bankruptcy actions against any judgment debtor, whether their liability was primary or secondary.
• Before 1.10.2003, judgment creditors could pursue bankruptcy against any guarantor without exhausting proceedings against the main debtor.
• Effective 1.10.2003, the Bankruptcy (Amendment) Act 2003 (Act A1197) introduced "social guarantor" concept, which requires a petitioning creditor to prove they've exhausted avenues to recover debts from the debtor before commencing bankruptcy action against a social guarantor.
• Section 2 defines a social guarantor as someone providing a guarantee without profit motive for:
  • Educational loans/scholarships/grants.
  • Hire purchase transactions of vehicles for personal or non-business use.
  • Housing loan transactions solely for personal dwelling.
• Section 5(3) of the Insolvency Act 1967 prevents petitioning creditors from starting bankruptcy action.
  • Against social guarantors.
  • Against other guarantors unless the petitioning creditor has obtained permission from the court.
• Section 5(4) states that before granting leave referred to a guarantor other than a social guarantor, the court mandate that the petitioning creditor to show that they exhausted all the debt recovery modes from the debtor.
• Section 5(6) defines "modes of execution and enforcement" as seizure and sale, judgment debtor summons, garnishment, and bankruptcy or winding up proceedings.
• Section 5(7) states if the petitioning creditor does not fulfil the requirements of this section, the court must dismiss the petition.
• Yuri Zaharin bin Wahab v Ann Joo Metal Sdn Bhd [2024] MLJU 2387 states that the amendments aimed to reduce bankruptcies resulting from guarantees.
• Social guarantors were initially partially protected and then given complete protection, while all other guarantors received partial protection.
• The Court of Appeal addressed these Issues in Hong Leong Bank Berhad v Ong Moon Huat [2018] 1 LNS 1612:
  • Does "debtor" in section 5(4) of the Insolvency Act 1967 refer to the guarantor or principal debtor when discussing debt recovery?
  • When to apply for leave under section 5(3)(b) of the Insolvency Act 1967?
• The COA held that the provision seeks to introduce protection for the guarantor against whom proceedings are brought, with protection given that enforcement has been exhausted. It seeks to remedy the mischief proceeding against the guarantor rather than the debtor.
• It makes no sense that the reference to "debtor” in section 5(4) refers to the guarantor because bankruptcy has not been commenced against the guarantor
• Section 5(6) specifies bankruptcy, which includes seizure and sale, judgment debtor summons, garnishment and bankruptcy against the borrower.
• Therefore is is the principal debtor or the borrower that should the court order a leave in the enforcement.
• The interpretation is supported by Khairulnizam's case (Hong Leong Bank Bhd v. Khairulnizam bin Jamaludin [2016] 4 MLJ 302) from the Federal Court.
• Issue (b) seeks to determine when to apply for leave under Section 5(3)(b) of the Insolvency Act 1967.
• Held decision based on the Khairulnizam case and Section 5(3)(b) read with Rule 97, means judgment creditor application to proceed can happen upon the of bankruptcy notice to any creditor's petition filing.
• Leeway is given to fit particular case circumstances and ensures judgement to be is prerequirement of legislation requirements.

Types of Creditors

• Preferential creditors

• Secured creditors

• Unsecured creditors

• Preferential creditors have priority in distributing the bankrupt's property, as outlined in Section 43 of the Insolvency Act.

• These include claims related to local rates, land tax, income tax, wage claims, employment provident fund contributions, and workmen’s compensation.

• Secured creditors hold a charge, lien, or mortgage over the debtor's land or property, thus being able to realise or deal with his security

• An unsecured creditor is not entitled to priority in debt settlement, which may include a judgment creditor.

Director General of Insolvency (DGI)

• The receiver of the debtor's property upon the making of a Bankruptcy Order (BO).
• The DGI heads the Department of Insolvency, serving as the designated government official administering bankruptcy in Malaysia.
• Encompasses the administration of the estate of the bankrupt and the conduct of the debtor.

Irrecoverable debts

• Section 40 of Insolvency Act 1967- Debt is nature of unliquidated damage.
• Debts:
  • Barred by the Limitation Act 1953.
  • Under illegal transactions.
  • Money claimed under pending proceedings.
  • Incurred on or after the commission of bankruptcy.
  • Claims for non-payment of alimony: Also tends to be a continuing payment which accrues with the passage of time.

Procedure

• Precondition before procedure begins are:
  • The minimum debt owing by the debtor is RM100,000 or more (section 5 of Insolvency Act).
  • An office copy of the Judgment exists
  • The debtor must have committed an act of bankruptcy (section 3 of Insolvency Act).

Explore bankruptcy law in Malaysia, including the role of the Director General of Insolvency and the implications for debtors and creditors. Understand the debt threshold for bankruptcy and the effects on debt collection efforts.