In 2015, it was reported that there were more than 300,000 bankrupts in Malaysia, with a majority of bankrupt individuals within the age group of between 25 and 44 years. Common reasons cited are the failure to repay hire purchase loans and default in personal loans. As such, several changes were made to improve and enhance insolvency laws in Malaysia.
FROM BANKRUPTCY TO INSOLVENCY
Although 'bankruptcy' and 'insolvency' are technically two different terminologies, the Bankruptcy Act 1967 is now known as the Insolvency Act 1967.
One of the prominent changes is the pre-bankruptcy rescue mechanism known as voluntary arrangement. A voluntary arrangement, which is common in other jurisdictions such as Singapore and the United Kingdom, is a proposal by a debtor to his creditors in connection to the repayment or settlement of the sum owed.
- Scope of application An individual debtor, before he is adjudged bankrupt, may propose a voluntary arrangement to his creditors. An insolvent firm, on the other hand, may propose a voluntary arrangement upon obtaining consent from all or majority of its partners. However, this rescue mechanism is available to neither an undischarged bankrupt debtor, nor a limited liability partnership under the Limited Liability Partnerships Act 2012.
- Appointment of nominee A debtor who intends to propose a voluntary arrangement is required to appoint a qualified nominee to serve as an independent party to oversee and supervise the implementation of the voluntary arrangement.
- Application for Interim Order In addition, a debtor is also required to apply for an Interim ("the Court"). The debtor has to demonstrate to the Court that (i) no prior application was made by the applicant in the last 12 months, and (ii) the nominee is willing to act for such voluntary arrangement. The Order is valid for 90 days only and no extension may be granted. During the subsistence of the 90-day period, bankruptcy and other legal proceedings may not be commenced against the debtor, unless permitted by the Court. Order ("the Order") for the voluntary arrangement from court
- Creditors' Meeting During the period of the Order, the nominee shall arrange for a meeting ("the Meeting") with all of the debtor's creditors to secure their approval for the debtor's proposed voluntary arrangement. In the Meeting, the proposed voluntary arrangement will be put to a vote. In order to obtain the approval for the voluntary arrangement, the nominee needs to garner a majority support and at least three-fourths in value of the creditors who are present personally or by a proxy at the Meeting, and voting on the resolution.
However, any proposal or modification to the proposed voluntary arrangement affecting the rights of secured creditors may not be passed, unless they consent. Subsequently, the decision of the Meeting has to be reported to the Court by the nominee and a sealed report containing the terms of the voluntary arrangement has to be served to the debtor and creditors.
- Binding effect The proposed voluntary arrangement, if passed at the Meeting, takes effect and binds all creditors who have been notified of the Meeting and entitled to vote at the Meeting, as if they were a party to such voluntary arrangement.
- Review However, upon an application by a debtor, nominee or person entitled to vote at the Meeting, the approved voluntary arrangement may be reviewed by the Court on the ground that (i) it unfairly prejudices the interests of the debtor or creditors, or (ii) there was present material irregularity in connection to the Meeting.
A social guarantor is a person who offers a guarantee not for profitmaking purposes but for any of the following, namely (i) education loan, scholarship, grant for research purposes, (ii) hire-purchase transaction for personal or non-business use, and (iii) housing loan for personal dwelling.
- Immunity Under the previous Act, a bankruptcy action may be commenced against a social guarantor when the Court is satisfied that the creditor concerned has exhausted all means of recovering the sum owing. This position is changed under section 5(3) of the new Act, where a social guarantor enjoys immunity from any bankruptcy action.
Some notable changes, both substantive and procedural, have been made to the commencement of bankruptcy proceedings under the new Act.
DISCHARGE OF BANKRUPT
- Increased threshold The previous Act sets the threshold for bankruptcy proceedings at MYR30,000. Under the new Act, the monetary threshold is increased to MYR50,000.
- Leave of Court In the past, bankruptcy proceedings may be initiated against a guarantor (other than a social guarantor), when the statutory requirements stipulated in the previous Act are fulfilled. Pursuant to the amendments, a creditor will have to first obtain permission from the Court, before commencing bankruptcy proceedings against a guarantor (other than a social guarantor) under the new Act. In applying such permission, the creditor has to satisfy the Court that he has exhausted all modes of execution and enforcement to recover the debts owed to him by the debtor. This renders the initiation of bankruptcy proceedings more difficult, but offers better protection to the guarantor (other than a social guarantor).
- Service of bankruptcy notice The service of bankruptcy notice ("the Notice") has also been amended. In the previous Act, the service of the Notice is required to be effected according to the manner prescribed by the Notice. The Notice is now required to be personally served on a debtor. Further, the court may order for substituted service of the Notice, if the creditor can factually prove that the debtor intends to defeat, delay, or evade personal service by (i) leaving or staying outside of Malaysia, or (ii) absenting himself from his residence or place of business.
Two new provisions concerning the discharge of a bankrupt have been introduced to the new Act, namely, section 33C on the automatic discharge of a bankrupt and section 33B(2A) on the non-objection to discharge a bankrupt.
- Automatic discharge The previous Act allowed the Director General of Insolvency (“the Director") to exercise his discretion in discharging a bankrupt debtor after five years from the pronouncement of the bankruptcy order. The position in the new Act has been enhanced where a bankrupt shall be discharged from bankruptcy, on the expiration of three years from the date of submission of his statement of affairs, once he (i) achieves the target contribution of his provable debt, and (ii) renders an account of monies and property to the Director.
- Non-objection Under the previous Act, a creditor may object to the discharge of a bankrupt by furnishing a notice of objection stating the reasons of his objection. However, the new section 33B(2A) of the new Act allows the discharge of a bankrupt without objection, if the bankrupt is (i) a social guarantor, (ii) a person with disabilities under the Persons with Disabilities Act 2008, (iii) a deceased bankrupt, or (iv) suffering a serious illness certified by a Government Medical Officer.
“A bankrupt individual who fulfils the criteria for release has the potential to be released faster to stimulate the country's economic growth and development and at the same time creditors would benefit when reasonable contributions are made by debtors." – Datuk Seri Azalina Othman, Minister in the Prime Minister's Department.
The changes made to the new Act are welcomed as the interests of both debtors and creditors are protected and an alternate avenue for settlement of debts has been introduced. Furthermore, the interests of debtors are also enhanced as the creditors will now have to comply with more stringent procedural requirements under the new Act.