Q1. Who is considered a bankrupt?
A person is bankrupt when the Bankruptcy Order is made against him by the High Court. A petition for bankruptcy can be presented either by the creditor (i.e. Creditor’s Petition) or by the debtor himself/herself (i.e. Debtor’s Petition).
To present a Creditor’s Petition, the amount of debts owed by the debtor must be at least RM50,000.00 and the debtor must have committed an act of bankruptcy within six months before the presentation of the Creditor’s Petition.
A debtor commits an act of bankruptcy if he fails to pay the judgment sum demanded in a Bankruptcy Notice within seven (7) days after the Notice of Bankruptcy is served on him.
On the other hand, there is no requirement of minimum debt to present a Debtor’s Petition. A debtor only needs to show that he is unable to pay his debts.
Q2. What is the effect if you are being adjudged as a bankrupt?
The implications or effects if you are being adjudged as a bankrupt, among others, are as follows: –
- Assets and properties – All the property of the bankrupt shall vest in the Director General of Insolvency (hereinafter being referred to as “DGI”) and become divisible among his creditors. Hence, a bankrupt is not allowed to transfer his property upon a Bankruptcy Order has been made against him. However, a secured creditor may deal with the bankrupt’s property whereby such secured creditor is entitled to realise his security.
- Travel overseas – A bankrupt shall not leave Malaysia except with the written permission from the DGI or the court. The DGI may by notice issued to any immigration officer requesting that a bankrupt be prevented from leaving Malaysia and an immigration officer shall be empowered to seize and deliver to the DGI any passport or travel document of the bankrupt.
- Directorship – A bankrupt shall not become a director or take part in the management of any company directly or indirectly except with the permission of the DGI or the court.
- Business – A bankrupt shall not, except with the permission of the DGI or the court, carry on any business either alone or in partnership, or work in the business of (a) his spouse; (b) a lineal ancestor or a lineal descendant of his or a spouse of such ancestor or descendant; or (c) a sibling of his or a spouse of such sibling.
- Employment – A bankrupt cannot be appointed as a Sessions Court Judge or Magistrate, being nominated or holding the office of Councillor of a local authority, be a trustee under any written law, be a member of parliament, practising in certain professions such as lawyer.
- Legal proceedings – A bankrupt cannot maintain any legal action (other than an action for damages in respect of an injury to his person) without the sanction of the DGI.
Q3. How long is the status of bankruptcy will last?
The status of the bankruptcy will last until you are being discharged from bankruptcy in accordance with the Insolvency Act 1967. How a bankrupt can get out from the bankruptcy status is explained in detail in question 16 below.
You may be one of them
Q4: I am unable to repay my housing loan, hire purchase loan, credit card outstanding and/or personal loan, can I apply for myself to be declared as a bankrupt?
As explained in Question 1 above, you can present a Debtor’s Petition asserting that you are unable to pay your debts. The presentation of the Debtor’s Petition is deemed an act of bankruptcy and the court shall make a Bankruptcy Order. After the presentation, a debtor’s petition cannot be withdrawn without the permission of the court.
Following is the brief procedure for you to present the Debtor’s Petition: –
Step 1: Payment of Deposit
Before filing your Debtor’s Petition, you must first deposit with the DGI a sum of RM1,500.00. The court will not accept your petition unless the receipt of the DGI for the deposit is produced.
Step 2: Filing of Petition
You can file your Debtor’s Petition in the court in Form 40 of the Insolvency Rules 2017 stating that you are unable to pay your debts and that you are petitioning to the court that a Bankruptcy Order be made.
You must insert your name, National Registration Identity Card number or passport number, description, your address at the date of presentation of the petition as well as any address which you have resided or carried on business and at which you have incurred debts and liabilities remaining unpaid or unsatisfied at the date of the petition.
Your petition must be dated, signed and attested. The petition can be attested in or out of Malaysia pursuant to the requirement under Rule 101 of the Insolvency Rules 2017.
Step 3: Service of the sealed Petition to the DGI
After you have filed your Petition, the Court will seal the Petition for you. The Court will fix a Hearing date for the Petition on the sealed Petition. You must then serve a sealed copy of the petition to the DGI.
Step 4: Hearing of the Petition
You will need to attend the Court on the Hearing date. The court shall make a Bankruptcy Order on the said hearing date. If you do not appear at the hearing, the petition may be dismissed.
Step 5: Advertisement of the Bankruptcy Order
After the Bankruptcy Order is made by the Court, a Notice of the Bankruptcy Order stating your name, address, description, the date of the order and the date of the petition shall be gazetted and advertised in a local newspaper.
Q5: Is there any benefit for me to apply to be declared a bankrupt?
You will be protected from legal proceedings from the creditors. The moment you file a debtor’s petition, no creditors shall proceed with legal proceedings against you in respect of the debts owed to them unless with the leave of court. However, it shall be noted that the creditors may claim for the debt owed to them by way of Proof of Debt lodge to DGI.
Q6: I am unable to repay my debts such as housing loan, hire purchase loan, credit card outstanding and/or personal loan, can the bank make me a bankrupt?
If the threshold amount of the debt is satisfied, the bank can by way of Creditor’s Petition apply to Court for you to be adjudged a bankrupt. The bank will have to commence a civil suit against you and obtain a Judgment for the amount owed before proceeding with the bankruptcy proceeding.
The time from the filing of the Bankruptcy Notice to the making of the Bankruptcy Order by the Court is expected to take around six (6) to nine (9) months. The brief procedure for presentation of a Creditor’s Petition is as follows: –
Step 1: Filing of Bankruptcy Notice
The bank will file a Bankruptcy Notice based on the Judgment that the bank has prior obtained from the Court due to your failure to pay outstanding loan into the Court for it to be sealed. A Bankruptcy Notice is only valid for 3 months from date of issuance.
Step 2: Service of Bankruptcy Notice
The Bankruptcy Notice must be personally served on you. If the court is satisfied that the personal service cannot be effected, the Court may order the Bankruptcy Notice to be served by way of substituted service. Substituted service can be effected by way of advertisement.
You will need to pay the judgment sum in the bankruptcy notice within seven (7) days after the date of service of the Bankruptcy Notice (either by from the date of personal service was effected or the advertisement was published), failing which, an act of bankruptcy is committed by you and the bank is entitled to present a Creditor’s Petition against you.
Step 3: Payment of Deposit
The bank must deposit with the DGI a sum of RM2,000.00. The court will not accept the petition unless the receipt of the Director General of Insolvency for the deposit is shown.
Step 4: Filing of Petition
The bank may then file a Creditor’s Petition to the court in Form 41 of the Insolvency Rules. Like the Debtor’s Petition, the Creditor’s Petition must be dated, signed and witnessed. The petition can be attested in or out of Malaysia pursuant to the requirement under Rule 101 of the Insolvency Rules 2017.
Step 5: Service of Creditor Petition
The Creditor Petition must be served on you by personal service. If the Court is satisfied that personal service cannot be effected, the Court may order the Bankruptcy Notice to be served by way of substituted service. Substituted service can be effected by way of advertisement.
Step 6: Hearing of the Petition
A creditor’s petition shall not be heard until the expiration of 8 days from the service. If the debtor intending to show cause against the creditor’s petition, he must give notice in Form 45 of the Insolvency Rules specifying the statements in the petition which he intends to deny or dispute. This notice must then be served to the creditor or his solicitor by post or otherwise 3 days before the hearing.
Step 7: Advertisement of the Bankruptcy Order
If the Bankruptcy Order is made by the Court, a Notice of the Bankruptcy Order stating your name, address, description, the date of the order and the date of the petition shall be advertised in a local newspaper.
Q7: If I am a guarantor for my brother’s loan. Now my brother is unemployed and is unable to repay the loan, will I be made a bankrupt as a guarantor for the loan?
It would depend on the nature of your brother’s loan. The Insolvency Act 1967 has a specific provision to protect social guarantor. Social guarantor means a person who provides, not for the purpose of making profit, the following guarantees: –
- a guarantee for a loan, scholarship or grant for educational or research purposes;
- a guarantee for a hire-purchase transaction of a vehicle for personal or non-business use; and
- a guarantee for a housing loan transaction solely for personal dwelling.
Pursuant to Section 5(3)(a) of the Insolvency Act 1967, a petitioning creditor shall not entitle to commence any bankruptcy action against a social guarantor.
For guarantor other than the social guarantor, the creditor is required to obtain the leave from Court before commencing any bankruptcy action against you. The creditor must satisfy the Court that he has exhausted all mode of execution and enforcement to recover debts owed to him by the debtor.
Q8: My business has incurred substantial debt due to COVID-19. As an owner of the business, can I be made a bankrupt due to the debt owed by the business?
Yes. A sole proprietor has no separate legal entity from his business. What this means is that your creditor will be able to sue you personally for the debt owed by the business. If the judgment debt achieved the minimum threshold of debt, then the creditor will be able to commence bankruptcy action against you.
Q9: I am running a business under a registered partnership with my friend and it has incurred substantial debt due to COVID-19. As one of the partners, can I be made a bankrupt for debts owed by the company?
Yes. Section 11 of the Partnership Act 1961 provides that every partner in a firm is liable jointly with the other partners for all debts and obligations of the firm incurred while he is a partner. Hence, you and your partner will be jointly liable for the debts owed by the company. If the judgment debt achieved the minimum threshold of debt, then the creditor will be able to commence bankruptcy action against you.
Q10: My company has incurred substantial debt due to COVID-19. As the shareholder of the company, can I be made a bankrupt for debts owed by the company?
No. Section 20 and 21 of the Companies Act 2016 provides that a company shall have separate legal entity from its shareholders and is capable of suing or being sued. The shareholders’ liability is limited to the extent of their capital contributions, which is also known as limited liability. Hence, the creditor of the company will not be able to sue you personally for the debts owed by the company.
Q11: I am the guarantor for my company for the credit term from the suppliers and the credit facilities from banks. Can I be made a bankrupt if my company is unable to pay the outstanding debts?
A guarantor for company’s debt does not fall into the definition of social guarantor in Section 2 of the Insolvency Act 1967. As explained above, the Creditor is required to obtain the leave from Court before commencing any bankruptcy action against you. To obtain the leave, the creditor must satisfy the Court that he has exhausted all mode of execution and enforcement to recover debts owed to him by the debtor.
Q12: How would bankruptcy affect my position and role in the company or business?
A bankrupt shall not become a director or take part in the management of any company directly or indirectly except with the permission of the DGI or of the court.
Q13: How bankruptcy will affect my current or future employment?
Bankruptcy does not prevent you from working. However, there are certain restrictions such as you cannot be appointed as a Sessions Court Judge or Magistrate, being nominated or holding the office of Councillor of a local authority, be a trustee under any written law, be a member of parliament, practising in certain professions such as lawyers, accountant and liquidator.
Q14: Can a bankrupt continue using his existing credit card or banking account?
According to the information from the Insolvency Department, a bankrupt can only use his existing credit card up to a credit of RM1,000.00. In respect of existing banking account, a bankrupt can continue using his existing account provided he obtains the permission of the DGI.
Q15: Can a bankrupt travel to overseas?
A bankrupt shall not leave Malaysia except with the written permission from the DGI or of the court. The DGI may by notice issued to immigration officer requesting that a bankrupt be prevented from leaving Malaysia and an immigration officer shall be empowered to seize and deliver to the DGI any passport or travel document of the bankrupt.
How to get out from Bankruptcy?
Q16: After being adjudged a bankrupt, how can release myself from bankruptcy?
There are few ways you can get out from bankruptcy: –
- Apply to the Court for an order to discharge.
You may at any time after being adjudged bankrupt apply to the court for an order of discharge. The Court on the hearing of the application, will take into account a report of the DGI as to your conduct and affair, and may either grant or refuse an absolute order of discharge, or suspend the operation order of discharge subject to any conditions.
- Apply to the DGI for a certificate of discharge.
You may apply to the DGI for a certificate of discharge after 5 years from the date of the bankruptcy order. Before issuing a certificate of discharge, the DGI will have to serve on each creditor who has filed a proof of debt a notice of his intention to issue the certificate.
The creditor who wishes to object the issuance of the certificate of charge shall furnish a notice of objection stating his ground of objections within twenty-one (21) days from the date of service of the notice from the DGI.
If the DGI reject the creditor’s objection, the creditor may make an application to the Court for an order prohibiting the DGI from issuing a certificate of discharge.
The court upon hearing the application of the creditor, may dismiss the application or make an order that for a period not exceeding two years a certificate of discharge shall not be issued by the DGI.
- Automatic discharge.
According to Section 33C of the Insolvency Act 1967, you shall be discharged from bankruptcy after 3 years from the date of submission of the Statement of Affairs provided that: –
- You have achieved the amount of target contribution (which is determined by the DGI) of your provable debt; and
- You have rendered a full account of your money and property to the DGI.
Similarly, the DGI would have to serve a notice to the creditor and the creditors may apply to the court to suspend the automatic discharge. The Court on the hearing of this application may either dismiss the application to object or suspend the discharge for a period of two years.
What should you do if you are at risk of being bankrupt?
Q18: What should I do to respond to any potential bankruptcy proceeding?
Section 3 of the Insolvency Act 1967 has listed out the situations where an act of bankruptcy is committed. The most common situation is where a debtor fails to pay the judgment debts within the seven (7) days after a Bankruptcy Notice is served on him. Hence, it is important for you to respond to a Bankruptcy Notice served on you.
Upon receiving service of a Bankruptcy Notice, the following options are available for you to avoid being adjudged a bankrupt: –
- Pay the debts within the specified period in the Bankruptcy Notice;
- Dispute the amount of debts by applying to set aside the Bankruptcy Notice; or
- Propose a voluntary arrangement to your creditors any time before you are adjudged bankrupt.
It is advisable for you to consult a qualified legal practitioner to explore each of the option to take as it would be depending on the circumstance which you are in.
This FAQs are prepared and published by Messrs Gan & Zul, Advocates & Solicitors, Kuala Lumpur.
-General Dispute Resolution and Appellate Division-
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Cross Border Taxation Planning
Shafihani Binti Md Ali (Associate)
General Dispute Resolution
Contractual, Land and Commercial
Pre and Post Liquidation Disputes