Bankruptcy is a Legal Process

Since the debtor is unable to pay his debts, the assets should be shared fairly and equitably among his creditors and after being relieved from all further liabilities, he will be allowed to have fresh start financially.

Bankruptcy Procedure

After received the judgment from the court (usually in Session Court), the judgment creditor will then sent the bankruptcy notice to the judgment debtor and the Director General of Insolvency. The bankruptcy notice to the judgment debtor must be send by personal service. [2] The bankruptcy notice must be served to the judgment debtor himself and service to the spouse is not an effective way. If the judgment debtor refused to accept the bankruptcy notice, it may be place close to the debtor after informing him the content of the notice. Usually in practice, the attempt of personal service towards the debtor will be three times and if the service cannot be completed, substituted service will be applied before the court.

After the service of the bankruptcy notice have been served, the judgment debtor need to reply within 7 days and the duration of 7 days is excluded the day of the service was made but it is including the weekly holiday and any public holiday. Failure on the part of the debtor to comply with the bankruptcy notice will amount to committing the act of bankruptcy under section 3 of the Bankruptcy Act 1967(hereinafter referred as BA 1967).

When the debtor committed an act of bankruptcy, the creditor will proceed with the creditor’s petition. By filing the creditor’s petition, the court is requested to make a receiving order against the debtor. The court in making the receiving order also will grant adjudication order which will make a debtor becomes bankrupt unless he can satisfy court that he intends to make a composition for settlement of his debt. In practice, the receiving order and adjudication order will be petitioned at the same time. Order will be granted without giving chance for the debtor to make any arrangement with the creditors before being adjudicates as bankrupt.

Problems in Bankruptcy Law

Bankruptcy law can be said as cumbersome and complex since it involved with the technical procedure that need to be observed by the practitioner when dealing with bankruptcy matters. Failure to observe the procedure in bankruptcy law will amount to the bankruptcy petition is stroked out by the court. There are quite numbers of problems in our bankruptcy law that lead to the delay of the delay in the administration of estates. Bankruptcy law can be said as a technical law since it involved with a lot of procedures before the debtor can be adjudge as bankrupt. There is some opinion stating that the bankruptcy law is most of the time in favour of the debtor i.e. pro debtor law compare to corporate insolvency law which is more in favour of the creditor. This view come into exist because of the process that need to be carried out in the bankruptcy law which deal with the forms, time framing, the application procedure and the implementation of the bankruptcy procedure itself.

In my discussion, I will divide my discussion into three problems ie as a debtor, creditor and the role of the Insolvency Department under the bankruptcy law in Malaysia.

As a Debtor

There are three problems of the debtor under the bankruptcy law. Firstly, there is no pre-bankruptcy rehabilitation measure or interim order. Secondly, the procedure of examination of the debtor before being adjudged bankrupt and lastly, the problem of the bankruptcy law in discharging bankrupt.

In Malaysia Bankruptcy law, there was no pre- bankruptcy rehabilitation measure provided. In other meaning, there was no outside settlement for the debtor to make the proposal of arrangement with the creditor before the case being brought to the court. This situation is different from some countries such as Singapore, Australia and United Kingdom which provided with pre- bankruptcy rehabilitation measure in the bankruptcy law.

In Singapore, a moratorium had been introduced for debtors to explore debt settlement with their creditors in order to avoid bankruptcy proceedings. The provisions on voluntary arrangements under the Singapore Bankruptcy Act were adopted with the modifications from UK Insolvency Act 1986. Section 45 of the UK Insolvency Act 1986 provided that, the debtor can apply for an ‘interim order’ from the court so that all proceeding against the debtor by the creditors would be stayed and this order will be valid for 42 days. [3]

If the debtor fails to comply with any of the obligations under the voluntary arrangement, the nominee or any creditors may make a bankrupt application against the debtor. The debtor will prepare for the voluntary arrangement and will give notice of the proposal to the nominee. The nominee will act as a trustee in order to supervise the implementation of the proposal. Debtor then needs to provide the statement of affairs within 7 days of the delivery of the proposal which the nominee will then make application to the court for an interim order. Notice of debtor’s intention must be served at least 2 days to creditors and if granted, the order will be valid for 28 days. This option is inapplicable to an undischarged bankrupt or to any firm that bankruptcy order has been made and which bankruptcy partners in firm have not been discharged bankrupt.

In Australia, the pre-bankruptcy rehabilitation measures are governed under Part X (Personal Insolvency Agreement with Creditors) Australian Bankruptcy Act 1966. The agreement is a form of deed that must identify the debtor’s property that is available to pay the creditors’ claim and specify how the property is to be dealt with; the debtor’s income that is to be available to pay the creditors’ claim, and specify how the income is to be dealt with and how to make such deed come into operation in the event the agreement is terminated. The deed also must specify the manner which to proceed in realizing the assets and distribution among creditors. [4] An undischarged bankrupt in Australia can make an application for voluntary arrangements.

In UK, The Cork Committee’s Proposal 1982 through command paper of ‘A’ Revised Framework for Insolvency Law’s has been adopted and codified under Part VIII of Insolvency Act 1986 [Chapter 45] which deals with voluntary arrangements. Prior to 1985, debtors who wished to make an arrangement with his creditors to avoid the consequences of bankruptcy could use the Deed of Arrangement Act 1914. But, the Act does not prevent the dissatisfied creditors petitioning for bankruptcy. Section 253(1) states that a debtor may apply to court for an ‘interim order’ with intention to make a proposal through a ‘nominee’ and the order if granted will be valid for 28 days. The effect of the application is to protect a debtor from any legal action from the creditors. [5]

In my opinion, the pre-bankruptcy rehabilitation measures as practiced in Singapore, Australia and UK is very important to help the debtors who are facing financial problems since it can encourage the debtor to enter into a voluntary arrangement with the creditors. By having the pre-bankruptcy rehabilitation measures, the debtor will be given a chance to opt for out of court settlement if the creditors agree with the arrangement. Somehow, this measure also can be a good step to avoid bankruptcy proceeding as the only option for the creditors to get their money back.

The second problem as a debtor is the compulsory examination of bankrupt in Malaysia Bankruptcy Law. The bankrupt in Malaysia is obliged to attend his public examination and shall be examined as to his conduct, dealing and his property. [6] The examination will be held upon the application of Director General of Insolvency after the receiving order has been granted by the Court. The BA 1967 is silent about the power of the Court to direct the public examination to be conducted in a modified manner and at an alternative venue, if the bankrupt is suffering from some mental disorder or physical affliction or disability rendering him unfit to undergo or attend the examination in court. [7] In UK, the public examination is not compulsory and will be held by application of the Official Receiver.

I’m in opinion that the examination of bankrupt should not be made compulsory since in most cases, the debtor will reluctant to undergo the examination since he need to disclosed everything asked by the DGI. And the consequences of not attending the examination also will amount to being adjudge as bankrupt without being given any prior notice. Furthermore, it can be assumed that most debtors will not be ready to appear in the examination because it will involve huge humiliation not only to the debtor but also to the third party involved in the examination.

And the third problem in our bankruptcy law is the cumbersome process in discharging a bankrupt. A bankrupt in Malaysia will have to wait for a long time to be discharged bankrupt. There is no minimum or maximum period for the bankrupt to be released unless the bankrupt makes full and final settlement of the debt. Upon the satisfaction of the creditors towards any arrangement between them and the bankrupt, they will notify the Insolvency Department or the Court for the bankrupt to be released or discharged. This practice will take a longer time since it involved with some procedures and document. Since the life of the bankrupt will be limit when he being adjudge as bankrupt, such as not allowed moving out of Malaysia, or holding certain position in some profession, the delay of the discharged bankrupt will affect the daily activities of him. [8]

Therefore, the Act should be reform so that the bankrupt will not be punished for a long time. In present, BA 1967 provides three alternatives to discharge bankrupt namely the annulment or rescission of the bankruptcy order by the court, the discharged by the court, and a discharge order by the Court and discharged by certificate issued by the DGI upon application made by the bankrupt. [9] Since there are only three ways a bankrupt can be discharged under Malaysia Bankruptcy law, an ‘automatic discharge’ within a certain period of time or a ‘fast track voluntary arrangement’ as codified under UK Insolvency Act. Automatic discharge was introduced for the first time in 1976. The relevant period previously has been reduced from five years to three or two, provided that the bankrupt has not been previously adjudicated as a bankrupt within 15 years from the date of his current adjudication. If the bankrupt fails to comply with the obligation which he is subjected to by reason of his bankruptcy, the official receiver may apply to the court for an order that the relevant period of one year shall cease to run. [10]

The Fast Track Voluntary Arrangement also was practiced in UK which can be used by undischarged bankrupt and managed by the Official Receiver (hereinafter referred as OA) provided no interim order is applied by debtor. The onus is on the discharged bankrupt to initiate the procedure. The OA will act as a facilitator if he thinks that the arrangement proposed has reasonable prospect being approved and implemented, he will make arrangement inviting creditors to decide. If creditors agree, they inform OA and OA report to the court and apply the arrangement. Court will annul the bankruptcy order against bankrupt. [11]

The reason why the system of discharging the bankrupt should be reform is because of non cooperation or inter communication between the Insolvency Department with other relevant departments such as the Treasury or The Companies Commission of Malaysia. Most of the time, even the bankrupt manages to get the discharge order, his name is still in the blacklisted in the department’s database and this will deprived his right to have a normal life. The bank’s database also can be updated in a short time if the Insolvency Department have communication link with them so that the discharged bankrupt may start his business or life by applying the new loan from the banks.

As a Creditor

The second part of my discussion will be on the problems of Malaysian Bankruptcy Law on the part of the creditors. The first problem is regarding the two- tiers of court order by stages which are the receiving order and the adjudication order. Under section 4 of BA 1967 where the petitioner has to present the petition for receiving order, a special and public examination of debtor or composition scheme of arrangement. Only then the petitioner proceeds with the presentation of the adjudication order. This proceeding is costly and will delay the administration of justice towards the creditors despites the lengthy pleading papers needed. But in practice, the petitioner will make a presentation for both orders at the same time. The orders will be granted without giving the opportunity for the bankrupt to make any arrangement with the creditors before he is being adjudicated as bankrupt and indirectly deprived his right for the scheme of arrangement which is supposed to be given before the adjudication order being made.

In Re Mat Syah bin Safuan, [12] debtor relied on section 15(1) of BA 1967 and rule 150(2) of Bankruptcy Rules 1969 that he should be given chance to present proposal of arrangement before being adjudicated bankrupt. The judge rejected the argument and ruled that the two provisions did not prohibit her from making the adjudication order and that they merely set out the procedures to be follow after the receiving order being made under s24(1) of BA.

The second problem is the lacking of appointment of the interim receiver or private trustee under the Malaysian Bankruptcy Law. Interim receiver exists in BA 1967 but within the period after the presentation of the petition by creditors and before receiving order is made. No measure before the petition is filed. No measure to secure creditor’s interest during the period between the presentation of a petition and the date of making the bankruptcy order under BA 1967 i.e. the crucial period. Crucial period is where insolvent debtor may dissipate his assets to avoid the assets from forming part of bankruptcy estate.

In Singapore, the creditor or debtor can submit an application supported by affidavit to the court for the appointment of OA as the Interim Receiver of debtor’s property. The creditor also may apply to the court to appoint another person instead of OA as private trustee to recover and manage the asset of the bankrupt. Application has to be made immediately after the making of bankruptcy order. In order to prevent the dissipation of assets by the bankrupt, the appointment of interim receiver or private trustee must be immediately done. This is because by the time the receiving order was made, some of the assets might have been gone. The appointment of the debtor himself as a special manager under s12 of BA is impractical for me since it will give the bankrupt chances to dissipate his assets easily. Regarding the appointment of private trustees, the DGI should be given the power to supervise the private trustee in doing his duty to secure the assets of the bankrupt as practised by Singapore.

The third problem in our bankruptcy law is the BA 1976 is silent on the matter where there is insufficient amount of bankrupt’s estate. These amounts to the lack of creditor’s protection interest in claiming back the debt. In Singapore, Insolvency Assistance Fund was established to assist the administration and recovery assets on behalf of the bankruptcy estates which do not have sufficient money to pay the creditors. The Fund is managed by the Monetary Authority of Singapore. If the OA is satisfied that there is insufficient money in bankrupt’s estate to recover any monies owing to the bankrupt by third parties, the monies from the fund will be used. The source of the fund is from unclaimed and undistributed monies as well as costs and fees recovered by OA in any proceeding under the Act. The fund also will be used for payment of special manager, costs, fees, allowances and administrator in proceeding. Therefore, the approach taken by Singapore should be followed by Malaysia since most of the creditors are banks and if the banks can’t claim the money from the debtor, the banks operation could be in danger since the banks can only operate smoothly with lots of capital. If Malaysia established the Insolvency Assistant Fund as practiced in Singapore, it can reduce the loss suffered by the banks for the unpaid debts. The fund can be put under the custodian of the Insolvency Department which is supervised by the Treasury.

In addition, under section 43 of BA 1967, quit rent, taxes and remuneration of any employees not exceeding RM1000 shall be paid in priority to all other debts. Therefore, the creditors will be unsecured by the statutory priorities. The Singapore situation is different where the costs and expenses of administration incurred by the OA and the applicant for the bankruptcy order as well as for the costs and expenses properly incurred by a nominee in respect of the administration of any voluntary arrangement under Part V of Singapore Bankruptcy Act shall be paid in priority and will be followed by all wages, salary, allowances, reimbursement and award under contract of employment. [13] It is quite impractical to put all rent and taxes or remuneration over the priorities of the cost in the bankruptcy procedure itself since the interest of the creditors should be addressed first instead of paying the taxes and other claims. This is quite different from the practiced of corporate insolvency law where the priorities of the cost are the all the winding up costs and expenses compared to others claims such as employee’s salary or taxes.

Under section 3 of BA 1967 stated the situation where the debtor must committed any of ‘an act of bankruptcy’ before the creditor can petition for bankruptcy proceeding. There are ten acts of bankruptcy provided in section 3 but in most cases, the creditors will rely on the failure of the debtor to pay debt which is not less than RM30, 000. So, the remaining available act of bankruptcy can be said as being impractical. UK Insolvency Act 1986 introduced a single ground of act of bankruptcy i.e. inability to pay debt which equal to or exceeds “bankruptcy level” of 750 pounds. Singapore Bankruptcy Act 1995 define the act of bankruptcy with a single ground of inability to pay debt a minimum amount of SD$10,000. Section 3 of BA 1967 should be amended with only one single ground of act of bankruptcy i.e. inability to pay debt which is amount to RM30, 000.

The efficiency of Insolvency Department

Part IV of the BA 1967 provided the appointment, powers and office of DGI as the head of Insolvency department which is in charge of the investigation and enforcement of the bankruptcy cases throughout Malaysia. It can be assumed that the department dealt with the all information related to the bankrupt. However, the department has no proper database and is not user friendly for the public to access any information about the identity of the bankrupt and his affair in Malaysia. This will create difficulties to the creditors to identify the status of the bankrupt. For example, where the Companies Commission need to check for the qualification of the person nominated as directors for any companies, it will be difficult to know the status of that person whether he was once declared as bankrupt or not. And some of the person who was discharged as bankrupt need to wait for long time for his name to be cleared from blacklisted in the bank database because of the failure of the Insolvency Department to communicate the latest situation of the bankrupt to the other related departments. It is suggested that the Insolvency Department should create a user friendly database such as practiced in Land Office where any person or any interested parties such as banks or Companies Commission can make a search of the bankrupt status and certain money should be paid to the Insolvency department for administration fees.