All About Bankruptcy

I. INTRODUCTION
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In 2016 alone, a whopping number of 294,000 Malaysians were involved in bankruptcy cases, which is shocking to say the least.[1] To most people, the thought of being bankrupt is remote and only occurs during a bad game of Monopoly. A bankrupt person is usually perceived as either a spendthrift or someone who is horrendous at keeping tabs on his or her expenditures. Sadly, the problem of bankruptcy is more prevalent than people realise and may affect anyone regardless of their age or income. For the record, majority of bankrupts come from the age group of 25-44 years.[2] Being declared bankrupt is bad enough, but worse is how most people are in the dark about what comes after.

II. WHAT IS BANKRUPTCY?

Simply put, ‘bankruptcy’ is the legal status of a person or entity who is unable to repay their debts to the creditors. This term is commonly confused with the term ‘insolvency’, though the difference is quite stark. While the latter is just the inability to repay your creditors at a particular time, the former is a legal status of a person who is given an Adjudication Order by the courts.[1] According to the Insolvency Act 1967, to be declared bankrupt, a person must be unable to pay debts amounting to at least RM50,000 and the debt involved must be ascertainable, that is, in a liquidated sum.[2] In addition to that the individual  must have defaulted in payment for a period of six months and resided in Malaysia for at least one year.[3] However, it should be noted that bankruptcy proceedings can only take place if a person has committed an act of bankruptcy as provided in  S.3 of the Insolvency Act 1967. Some of the more common acts of bankruptcy include the debtor declaring his or her inability to repay their creditors and a failure to heed a bankruptcy notice or a judgement debt.[4]

Be that as it may, it is not surprising to discover that there are people who have no clue as to whether they have been declared bankrupt. Hence, some people would plea that they were unaware of said fact. However, a bankruptcy notice need not be served personally by a creditor to a debtor.[5] Creditors have the avenue of applying for a ‘substituted service’ which allows creditors to serve notice of a person’s bankruptcy through alternative means, such as newspapers and advertisements.[6] Hence, it is pointless to attempt to flee from ones creditors as the courts can still declare a person as bankrupt.

III. WHAT IS NEXT?

The stigma attached to bankruptcy is that a person, once declared bankrupt, is reduced to having to live on the streets with absolutely no belongings, as they have all been taken away by the banks. Thankfully, this is far from the truth.

Pursuant to S.27(1) of the Insolvency Act,[7] every debtor shall attend a meeting with his or her creditors and provide the required information. S.27(2) of the Insolvency Act further states that a debtor shall provide a list of his or her inventory of property, a list of his or her creditors and debtors as well as the debts due to and from them respectively.[8] After a debtor has declared their assets, S.48 of the Insolvency Act 1967 provides that although various types of property can be taken by the Director General of Insolvency (DGI), some property are off-limits, namely, property held by the bankrupt on trust for any other person, the tools of his trade and other necessities for daily life not exceeding RM5,000.[9] In a sense, a bankrupt will have most of his or her property taken away to be sold to settle debts but should still be left with enough to live a normal life.

Nevertheless, a bankrupt would have lost certain rights. The individual will be assigned to a DGI who is responsible for administering the bankrupt’s property.[10] Furthermore, all existing bank accounts belonging to the bankrupt will be deactivated, and a bankrupt will not be able to withdraw money from a bank account and only have a RM1,000 limit on any credit cards. Travelling overseas becomes a hassle as a bankrupt is only allowed to travel overseas with the written permission of their assigned DGI or a court order allowing the bankrupt to travel overseas.[11] On top of that, a bankrupt is forbidden from acting as a director of a company, owning a business or being a part of a business ownership.[12] A bankrupt’s family may also be affected as stated in S.31 of the Insolvency Act 1967,  where the spouse of the bankrupt can be summoned by the court or even arrested if the bankrupt fails to turn up.[13]

A. Guarantors
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It is common to see close friends and family members becoming guarantors for the loans taken by the debtor. Most people are usually less cautious when deciding to be a guarantor of a loan for someone they know as they have a sense of trust and familiarity towards that person. However, it is not rare to see that when a debtor defaults in the payment of his or her loan, the creditor will commence proceedings against the guarantor and in some cases, guarantors have even been declared bankrupt.[14] Under the pre-amended Bankruptcy Act 1967,[15] protection afforded to social guarantors was minimal. [16] A social guarantor is  a person who provides a guarantee without the purpose of making profit but for an education loan, hire-purchase transactions for personal or non-business use, or a housing loan for personal dwellings.[17] So long as the creditor can prove that all possible avenues of recovery against the principal debtor have been exhausted, the creditor may then begin bankruptcy proceedings against the guarantor.[18]

Prior to the new Insolvency Act 1967, many social guarantors were declared bankrupt under the old Act. A notable case being that of the late Tan Sri Ngan Ching Wen who was a director of Unico-Desa Plantations. Moscow Narodny Bank hounded him for years to settle a debt for which he was the guarantor.[19] The Federal Court allowed the appeal by the bank and declared him a bankrupt for failing to settle an outstanding debt, reversing the lower court order which allowed a part payment in full and final settlement of the debts.[20] 

Now, S.5(3) of the Insolvency Act 1967 provides that a petitioning creditor is not entitled to commence any bankruptcy proceedings against any social guarantor.[21] For those other than a social guarantor, a petitioner creditor can only do so after obtaining leave from the court, [22] which will only be granted after the creditor has exhausted all means against the principal borrower.[23]  This is a step forward in protecting guarantors by ensuring that they are not penalised for the inability of the debtor to repay his or her debts.

IV. DISCHARGE BY THE COURTS

In Malaysia, bankrupts must wait a long time before they are discharged by the courts. A discharge, in essence, is the hitting of a reset button, the wiping clean of the debts and the allowance of a bankrupt to start afresh. A discharge is important as otherwise a bankrupt will probably remain liable for a large amount of debt for the rest of his or her life. Under the old Bankruptcy Act 1967, it was difficult to get a bankrupt to be discharged; the individual would typically only be discharged upon an application to the court after the bankrupt has been issued a certificate of discharge by the Director General of Insolvency (DGI). This certificate of discharge was usually obtained after five years from the date of the Adjudication Order and Receiving Order of a declared bankrupt. Indeed, a discharge under the old Act was a tedious and troublesome process. Now, according to S.33 of the Insolvency Act 1967,[24] a bankrupt is automatically discharged after three years from the date of submission of his or her statement of affairs provided that the bankrupt also achieved the target contribution for his or her debts and declared his or her assets to the Malaysia Department of Insolvency.

Undoubtedly, being a bankrupt is troublesome not only for the bankrupt but also for their friends and family members. However, a person is not as susceptible to being declared a bankrupt as it seems and individuals who are on the verge of being bankrupt have many ways to tackle this problem. One of the simplest ways is to consult the Credit Counselling and Debt Management Agency (AKPK) to obtain free financial counselling as well as to join debt management programs. Other than that, people should also discuss their debt with their creditors, most banks are open to discussion as they would rather the repayment their loans in some manner instead of a complete lack of performance. Unsurprisingly, the largest reason of bankruptcy is the obtaining of vehicle hire purchase loans as Malaysians love splurging on their dream ride.

V. CONCLUSION

​Thus, it is a must for Malaysians to practice sound financial management regardless of their age or income. It is essential for a person to be an informed consumer and not to give in to consumerism.[25] Even though advertisements on fruit-named phones and attractive looking houses are in abundance, it is of the utmost importance to understand that we should never spend beyond our means. Many Malaysians love to make impulsive purchases to satisfy their wants and to look good in front of their friends and family. It is all too familiar to see some people getting new cars and phones especially for festive occasions just to impress their relatives. Malaysians need to start looking at the bigger picture and stop spending on their wants for the mere reason of impressing others. The readers of this article should think about their future and start planning for their children and retirement funds by spending prudently.
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In a nutshell, bankruptcy may be an issue faced by many young people who are just beginning to stand on their own two feet. Thus, it is necessary that people realise the importance of sound financial management as well as practise delayed gratification. Hence, the next time you receive your paycheck, do not fall victim to your cravings, instead, plan out your expenses and allocate your money accordingly. Do not spend RM500 on a purse only to have nothing in it, instead, settle for a RM100 purse with RM400 in it.​

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Written by Matthew Ooi Xian Wei, a first-year law student.  Edited by Peh Qi Hui.

Disclaimer: The opinions expressed in this article are those of the author and do not necessarily reflect the views of the University of Malaya Law Review, and the institution it is affiliated with.

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Footnotes:
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[1] “Bankruptcy Cases Involve 294,000 Malaysians A Year, Says Minister”, Malay Mail, 14 September 2017 <https://www.malaymail.com/news/malaysia/2017/09/14/bankruptcy-cases-involve-294000-malaysians-a-year-says-minister/1465081>.

[2] “Fairer System for Guarantors”, The Star, 30 March 2017 <https://www.thestar.com.my/news/nation/2017/03/30/fairer-system-for-guarantors-they-wont-be-declared-bankrupt-if-borrowers-fail-to-repay-debts/>.

[3] Insolvency Act 1967 (Act 360), S.4.

[4] See footnote 3 at S.5.

[5] See footnote 4 above.

[6] See footnote 3 at S.3(1).

[7] See footnote 3 at S.3(2).

[8] See footnote 3 at S.13.

[9] See footnote 3 at S.27(1).

[10] See footnote 3 at S.27(2).

[11] See footnote 3 at S.48.

[12] See footnote 3 at S.8(1)(b).

[13] See footnote 3 at S.38A.

[14] See footnote 3 at S.38(1)(d).

[15] See footnote 3 at S.31.

[16] “Indian Traders All for New Rules on Bankruptcy Laws”, The Star, 12 July 2012  <https://www.thestar.com.my/news/nation/2012/12/07/indian-traders-all-for-new-rules-on-bankruptcy-laws/>.

[17] Later referred to as the Insolvency Act, see Bankruptcy (Amendment) Act 2017 (Act A1534), S5.

[18] See footnote 3, S2.

[19] See footnote 2.

[20] See footnote 17, S12(b).

[21] Moscow Narodny Bank v Ngan Ching Wen [2005] 3 MLJ 693.

[22] Civil Appeal No W–03–6 of 1996.

[23] See footnote 3 at S.5(3)(a).

[24] See footnote 3 at S.5(3)(b).

[25]  Hong Leong Bank Berhad v Ong Moon Huat [2018] 1 LNS 1612.

[26] See footnote 3 at S.33(c).

[27] Consumerism is defined as a preoccupation with and an inclination towards the buying of consumer goods, from “Consumerism”, Merriam Webster Dictionary, <https://www.merriam-webster.com/dictionary/consumerism>.