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The state of bankruptcy can often be very challenging to manage. It is confusing and emotionally devastating to an individual as well as an organization. Filing for bankruptcy is a very serious decision, and once it has been made, there is no turning back.
Bankruptcy in Malaysia is often considered a taboo subject, although it is perfectly formulated to help people to clear off their debts and start all over again. Not to mention, it is an indirect support to free you of your immediate accountability to the creditors.
Although the mere act of filing for bankruptcy is considered a disgraceful deed in the eyes of society, the stigma is just temporary. It nurtures an excellent environment to make better and improved financial conditions in the future.
When you decide to file for it, the overwhelming feeling of a black mark on your credit report (for up to ten years) is definitely hard to deal with. But as you regain your creditworthiness over a period of time, your overall credit score will eventually improve, which is a good sign!
The economic performance of Malaysia is one of Asia’s best. However, in an official announcement made by Liew Vui Keong, then Minister in the Prime Minister’s Department, a total of 80,625 Malaysians have been declared bankrupt from 2015 up to August 2019. Surprisingly, 60% of them belong to the age group of 35 to 54 years.
What is Bankruptcy?
In simple sense, it is a court proceeding initiated by you or your creditor (after obtaining judgement against you) where you inform the judge that you are financially incapable of paying your debts. The Official Assignee will be appointed by the court to examine your assets and liabilities, and if the court finds out that you have committed an act of bankruptcy and do not have any financial means to pay back to your creditors, you will be officially declared bankrupt.
What does it mean to be bankrupt in Malaysia?
In Malaysia, the governing law is the Insolvency Act 1967.
In legal language, it is the process where a debtor is declared bankrupt following an Adjudication Order from the High Court. In Malaysia a debtor will be declared bankrupt under the following conditions:
- The individual should be domiciled or have resided in or carried on business in Malaysia within one year before the date of presentation of the petition for bankruptcy.
- The individual is unable to pay debts, which amount to a minimum of RM 50,000.
- 6 months have lapsed since the debtor committed an act of bankruptcy. An act of bankruptcy could include a declaration from the Court at the behest of the debtor that he is unable to pay his debts, or a judgement obtained against him which remains unsatisfied.
What is the difference between Insolvency and Bankruptcy?
Both “Bankruptcy” and “Insolvency” deal with excessive debts. Although the terms sound similar, in reality, they are not.
Insolvency is a term used for the particular state which prompts one to eventually file for bankruptcy. In layman’s term, insolvency occurs when the debtor is unable to pay back the creditor on time.
The debtor can be an individual or a company.
For an individual debtor, this happens when the income levels are too low to pay off the debts.
For large companies and SMBs (Small and medium businesses), this condition occurs when the cash flow to the business along with its assets, are too low in comparison to the payables and liabilities.
The insolvency situation does not automatically lead to bankruptcy as it can be tackled by other means such as:
- Taking a debt consolidation loan
- Compounding the debt or making an arrangement with the creditors to their satisfaction.
Bankruptcy is a legal declaration that a person is unable to pay off his/her debts. Once a person is made bankrupt, the Insolvency Department assumes control of the person’s assets to seek to pay off as much that is owed as possible.
In summary, the main differences between bankruptcy and insolvency are :
- Insolvency is a financial state while the latter is a legal status.
If you are insolvent, you are simply not in a financial state to pay off your debts. On the other hand, if you are declared bankrupt, you lose control over your own assets whilst the Insolvency Department steps in to manage your affairs. This is either by selling off the assets or by a repayment plan.
- A bankrupt is surely insolvent, but not all insolvencies need to lead to the declaration of bankruptcy.
How do I apply for bankruptcy?
In Malaysia, as per the Insolvency Act 1967, if an individual is unable to pay back her/his debts, s/he can voluntarily declare herself/himself bankrupt by submitting a petition to the court.
A debtor’s petition cannot be withdrawn without the permission of the Court.
Unlike a creditor’s petition, there is no requirement here that the debtor should owe a minimum amount of money to the creditor.
- The applicant has to deposit a sum as prescribed fee to cover the necessary costs of the Insolvency Department.
- The petitioner has to file the petition in the state of his residence or business.
- A copy of the sealed petition must be sent to the Director-General of Insolvency.
During the hearing, if all the necessary details are promptly submitted, the court will make and Adjudication Order of bankruptcy as well as a Receiving Order vesting all the assets of the bankrupt to the Insolvency Department.
Can a debt collector make you bankrupt?
Yes, certainly, he can. As per the law, bankruptcy proceedings can be initiated if the debtor owes you RM 50,000.00 and above. However, prior to commencing bankruptcy proceedings, a creditor would first have to obtain a judgement from a Court adjudicating the said debt. If the judgement remains unsatisfied, then the creditor can apply to render the debtor a bankrupt. Once a person is declared bankrupt, then it would be up to the Insolvency Department to handle the rest.
In accordance with the law, all your personal assets including company shares can be liquidated and sold off to repay the debt.
How to apply for discharge from bankruptcy?
The Malaysian law provides several provisions for one to get discharged from this state.
This includes a discharge by the order of the court, by annulment of bankruptcy, discharge by the certificate of Director General of Insolvency (“DGI”), and automatic discharge.
1. Annulment of Bankruptcy
Under this provision, the adjudged bankrupt applies to the court of law for an order to annul.
This is applicable under two conditions.
- If the adjudged person can prove that he should not have been declared bankrupt in the first place.
- If he is successful in paying back his debts to his creditor.
Once the annulment order is granted by the court, the effect will be similar as if no order had been made against him.
2. Discharge by Order of Court (Sec 33 )
This provision allows adjudged bankrupt to apply to the court to grant him an order of discharge.
Once his application has been accepted, the court will review a report submitted by the DGI (Director General of Insolvency).
The report mainly deals with the conduct and affairs of the person who is declared bankrupt. If the court is satisfied with the report, an order of discharge may be granted by the court, removing the tag of bankrupt from the applicant.
If the results are not satisfactory, the court could:
- Refuse the order.
- Temporarily suspend the operation for a specified period of time.
- Grant a conditional discharge order.
- Suspend the operation of the order until the debtor has paid back 50% of the owed money to the creditor.
3. Discharge by Certificate of DGI (Sec 33 A )
The Director-General of Insolvency holds sufficient power to provide a certificate of discharge to the adjudged bankrupt person to relieve him of bankruptcy.
This will be done only after the completion of five years from the date of the order.
Before the issuance of the certificate of discharge, the law imposes an obligation to the DGI to serve a notice to each and every creditor who has filed a proof of debt.
The notice should clearly mention the intention of relieving the debtor of the bankruptcy status. If the creditor wishes to object, he should file a notice of objection within 21 days from the date of issuing the notice.
It should be noted that objections are not acceptable against:
- A person who was declared bankrupt for the reason of being a social guarantor.
- A person who is registered as a disabled person under the Disabilities Act 2008;
- A deceased person.
- A person who is suffering from a serious health condition, certified by a Government Medical Officer.
If the DGI rejects the notice issued by the creditors, they can directly apply to the court for an order prohibiting the DGI from issuing a certificate of discharge.
3. Automatic discharge (Sec 33 D)
An adjudged bankrupt may be discharged upon the completion of 3 years from the date of the submission of the statement of affairs, under the following conditions:
- If the bankrupt has achieved the amount of targeted contribution previously set by the DGI and
- if the bankrupt has fulfilled the requirement laid down by the DGI to surrender money and property to compensate for the debt.
For anyone who is struggling with a debt, being bankrupt is the last option on their mind.
However, in various cases, bankruptcy can be a great opportunity to re-organize your life free from the shackles of debt. In situations like these, it is vital to have a lawyer that you can trust to guide you through the steps to manage these fortuitous & financially arduous circumstances.