Introduction to Bankruptcy Law - PDF

TOPIC 1 : INTRODUCTION TO BANKRUPTCY LAW Puan Nurul Jannah Mustafa Khan  WHAT IS BANKRUPTCY? Bankruptcy is a process where a debtor is declared a bankrupt pursuant to an Adjudication Order made by the High Court against the debtor if he is unable to pay his debts of at least RM100,...

TOPIC 1 : INTRODUCTION TO BANKRUPTCY LAW Puan Nurul Jannah Mustafa Khan  WHAT IS BANKRUPTCY? Bankruptcy is a process where a debtor is declared a bankrupt pursuant to an Adjudication Order made by the High Court against the debtor if he is unable to pay his debts of at least RM100,000.00 (Malaysian Department of Insolvency). Introduction In Malaysia, an individual who becomes bankrupt is governed by the Insolvency Act 1967 (“IA 1967”) and the Insolvency Rules 2017 (“IR 2017”). Adopted from the English Bankruptcy laws. Malaysian Insolvency Act 1967 deals with the entire process by which an insolvent individual is made bankrupt, as well as the administration of his estate for the benefit of his creditors.  Continued.. Bankruptcy proceedings have always been and will continue to be a popular mode of enforcement of a debt, whether as a first or last resort. Debtor too, can resort to this proceeding to seek protection under the law.  Continued.. Due to Covid19 outbreak and MCO, on 1 Sept 2021, the Insolvency (Amendment) Act 2020 (Amendment Act) came into operation. The key amendment are as follows:- i. Amendment S.5 (1) (a) of the IA (the Principal Act) which increase the indebtedness threshold from RM50,000 to RM100,000.  ii. A new section 5 (1A) in the IA provides that the Minister in the Prime Minister’s Department (Law) may, after consultation with the Minister of Finance, by order published in the Gazette, amend the amount of debt in Section 5(1)(a) for the presentation of BP for a specific time period, if the Minister is satisfied that there are special circumstances and that would not be contrary to public interest, to do so.  Objectives of Bankruptcy (i) To ensure a just and equitable distribution of the debtor’s available assets among his creditors. A just distribution is ensured in bankruptcy by the following:- a) upon bankruptcy, the assets and affairs of the bankrupt pass into the hands of the Director General of Insolvency who is an independent person and whose duties and powers are regulated by the statute and the courts. b) When a person is declared bankrupt, the rights of unsecured creditors are frozen. This means creditors can’t take further action to collect their debts individually, such as suing the debtor or seizing assets. The law steps in, and the debtor’s assets are controlled by an official known as the Director General of Insolvency (DGI). The DGI decides how the debtor's assets are to be divided among all creditors fairly. *An unsecured creditor is a creditor who has no security (charge) of the property of the debtor/company. Continued… ii) To relieve the debtor from his debts and to enable him to make a fresh start as soon as he is discharged by the court. iii)To investigate the reasons for the debtor’s insolvency so that the interests of the creditors and the public are protected.  Courts Bankruptcy jurisdiction in Malaysia is vested in the High Court in Malaya & High Court in Sabah and Sarawak (Section 88 of IA 1967)  Parties involved in the bankruptcy Debtors Creditor/s Director General of Insolvency (DGI) DEBTOR ‘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 A debtor: at the time the act of bankruptcy is committed, » i. Was personally present in Malaysia; or » ii. Ordinarily resided or had a place of residence in Malaysia; or » iii. Was carrying on business in Malaysia either personally or by means of an agent; or » iv. Was a member of a firm of partnership which was carrying on business in Malaysia.  Persons subject to bankruptcy jurisdiction Section 5(1)(d) : Where a debtor is subject to the bankruptcy jurisdiction of the court, no creditor can present a petition against him unless the debtor:- -is domiciled in Malaysia; or within one year before the date of the presentation of the petition has:- (a) ordinarily resided in Malaysia (b) had a dwelling house in Malaysia; or  (c) had a place of business in Malaysia; or (d) carried on business in Malaysia personally or by means of an agent; or 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.  Section 3(3): Focus: This section focuses on the debtor and the conditions that must be met for a person to be considered within the bankruptcy jurisdiction of Malaysia. Section 5(1)(d): Focus: This section focuses on the creditor and the rules for when a creditor can file a bankruptcy petition against a debtor in Malaysian courts. Deceased debtors Section 122(2) of Insolvency Act A creditor of a deceased debtor may present a bankruptcy petition praying for an order for the administration of the estate of the deceased debtor according to the law of bankruptcy.  Persons capable of being adjudged bankrupt Foreigner provided he falls within the definition of debtor and is domiciled in Malaysia or has a place or residence or business links in Malaysia See also section 5(1)(d) of the Insolvency Act. Married women subject to the same law as those who are single (Section 120 of the Insolvency Act) Lunatics, persons of unsound mind and mental patients Proceedings cannot be taken against such persons without a conference with the committee appointed to represent them.  Persons capable of being adjudged bankrupt Members of Parliament Article 48(1)(b) of the Federal Constitution- Parliamentary privileges do not cover an act of bankruptcy.  SOCIAL GUARANTOR Prior to 1.10.2003, a judgment creditor may, without any restriction, commence bankruptcy action against any judgment debtor regardless of whether the liability of the debtor was primary or secondary. Thus, a judgment creditor could commence bankruptcy action against any guarantor without troubling to commence or exhaust execution proceedings against the principal debtor.  With effect from 1.10.2003, sub-section (3) was inserted into section 5 via the Bankruptcy (Amendment) Act 2003 (Act A1197). It introduced the concept of the “social guarantor” for the first time. The provision read as follows: (3) A petitioning creditor shall not be entitled to social commence any bankruptcy action against a guarantor unless he proves to the satisfaction of the court that he has exhausted all avenues to recover debts owed to him by the debtor.  Section 2: A social guarantor is a person who provides guarantee, not for the purpose of making profit, with regard to:- (1) a loan, scholarship or grant for educational or research purposes; (2) a hire purchase transaction of a vehicle for personal use; or non business use; and (3) a housing loan transaction solely for personal dwelling.  SOCIAL GUARANTOR *CURRENT POSITION Section 5(3) of the Insolvency Act 1967: A petitioning creditor SHALL NOT be entitled to commence any bankruptcy action - (a) against a social guarantor; and (b) against a guarantor other than a social guarantor unless the petitioning creditor has obtained leave from the court.  Section 5(4)- Before granting leave referred to in a guarantor other paragraph (3)(b) than a social guarantor, the court shall satisfy itself that the petitioning creditor has exhausted all modes of execution and enforcement to recover debts owed to him by the debtor.  Section 5(6)- For the purposes of subsection (4), modes of execution and enforcement include seizure and sale, judgment debtor summon, garnishment and bankruptcy or winding up proceedings against the borrower. Section 5(7)- If the petitioning creditor fails to comply with the requirements of this section, the court shall dismiss the petition.  Yuri Zaharin bin Wahab v Ann Joo Metal Sdn Bhd MLJU 2387 “From the history of the amendments to section 5, it is apparent that Parliament intended to limit the number of bankruptcies that result from guarantees. First, social guarantors were given partial protection. Subsequently, social guarantors were given complete protection and all other guarantors were given partial protection.”  Hong Leong Bank Berhad v Ong Moon Huat 1 LNS 1612 Court of Appeal : Issues (a) Whether the word “debtor” in “to recover the debts owed to him by the debtor” in section 5(4) of the Insolvency Act 1967 refers to the guarantor or the principal debtor; (b) When or at what point should an application for leave under section 5(3)(b) of the Insolvency Act 1967 be made?  COA held: The provision seeks to introduce protection for the guarantor against whom bankruptcy proceedings are to be brought. The protection comes in the form of ensuring that enforcement has been exhausted with respect to the principal debtor prior to proceeding against the guarantor. It is to remedy the mischief of judgment creditors proceeding against the guarantors directly in bankruptcy rather than executing and enforcing against the principal debtor.  “We are borne out in our conclusion by section 5(6) of the Insolvency Act 1967 that provides: “...For the purposes of subsection (4), modes of execution and enforcement include seizure and sale, judgment debtor summons, garnishment and bankruptcy or winding up proceedings against the borrower.” It follows therefore that in construing section 5(4) regard must be given to section 5(6). Section 5(6) provides that the modes of execution and enforcement that must be exhausted include seizure and sale, judgment debtor summons, garnishment and bankruptcy against the borrower.  It does not make sense that the reference to “debtor” in section 5(4) refers to the guarantor because section 5(6) specifies bankruptcy as one of the modes of enforcement that must be exhausted. As bankruptcy has not been commenced against the guarantor, it makes the entire construction that “debtor” includes the guarantor, wholly untenable and incomprehensible. The only reasonable construction that can be accorded is that “debtor” in section 5(4) refers to the principal debtor or the borrower.  This interpretation is further supported by the decision of the Federal Court in Khairulnizam’s case (Hong Leong Bank Bhd v. Khairulnizam bin Jamaludin 4 MLJ 302) which stipulates that: “In the instant case the High Court, as mentioned earlier, was satisfied from the affidavit evidence that the appellant had proved that it had exhausted all avenues to recover debts owed to him by the hirer. As such the appellant had satisfied the requirement of section 5(3) of the Act to commence the bankruptcy action against the respondent.”  Issue (b): When or at what point should an application for leave under section 5(3)(b) of the Insolvency Act 1967 be made? Held: On a proper reading of the Khairulnizam case coupled with section 5(3)(b) as well as Rule 97, it is open to a judgment creditor to file an application for leave to proceed against a guarantor either upon the issuance of the bankruptcy notice…up to and immediately prior to the filing of a  This gives leeway to the judgment creditor to obtain such leave as it deems fit in the circumstances of a particular case. This will in no way prejudice the judgment debtor/guarantor who is protected by the legislation which requires such leave to be obtained as a prerequisite to the grant of receiving and adjudication orders.  Creditors Types:- – Preferential creditors – Secured creditors – Unsecured creditors Preferential creditors One who has priority over other creditors in the distribution of the bankrupt’s property which includes claims in the nature of local rates and land tax, income tax, wage claims against the bankrupt, amount owing to employment provident fund, all workmen compensation etc. (Section 43 of the Insolvency Act) – Secured creditor One who holds a charge, lien or mortgage over land or property of a debtor. He may proceed to realise or deal with his security. Options available – Schedule C; i) Realise his security, if the proceeds are not enough, lodged proof of debts (ranks as unsecured creditor) OR ii) Surrender the security to the DG for the benefit of the creditors and become an ordinary creditor.  Unsecured creditors A person who is not entitled to any priority in the settlement of the debt owing to him, which may include a judgment creditor.  Director General of Insolvency (DGI) The receiver of the property of the debtor upon the making of the Bankruptcy Order (BO). The Director General of Insolvency (DGI) heads the Department of Insolvency and is the designated government official in the administration of bankruptcy in Malaysia. This encompasses the administration of the estate of the bankrupt as well as the conduct of the debtor. Irrecoverable debts a) Section 40 of Insolvency Act 1967- Debt in nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust shall not be provable in bankruptcy. b) Debts barred by the Limitation Act 1953. c) Debts under illegal transactions, or unenforceable debts such as those arising from gambling, card games etc. d) Money claimed under pending proceedings or contingent situations because there is uncertainty and no finality in the claim. Irrecoverable debts d) Debts incurred on or after the commission of bankruptcy. e) Claims for non-payment of alimony. Alimony tends to be a continuing payment which accrues with the passage of time, and hence is not a claim for liquidated damages. Procedure Pre condition:- – The minimum debt owing by the debtor is RM100,000 or more (section 5 of Insolvency Act) – An office copy of the Judgment – The debtor must have committed an act of bankruptcy (section 3 of Insolvency Act)