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Malaysia is facing an alarming rise in the number of cases related to bankruptcy!!
The Insolvency Department of Malaysia has reported that since 2007, the bankruptcy cases are on a steady rise.
Shockingly the number of reported cases in the last five years was 80,000.
Creditors often find themselves in a messy situation when they are unable to recover the debt from a debtor who declares to be insolvent. The situation is not better when considering insolvency amongst companies.
What is insolvency?
Insolvency means a particular state in which a company cannot pay back the money owed to its creditors. Financially it means that the company’s liabilities outweigh all its assets.
In Malaysia, pursuant to the Companies Act 2016, a company will be deemed insolvent if the following conditions are fulfilled:
- If a creditor serves a written notice of demand for the payment of money which the company owes him.
- The amount should be more than RM10,000.
- The company did not pay or compound its debt to the satisfaction of its creditors for a period of three weeks.
How about individuals?
An individual can also be insolvent if he has no means to pay off the debts owed to his creditors.
In a scenario where no alternate option is available to him for repayment, he can declare bankruptcy. His creditors can also petition to make him a bankrupt after obtaining a judgement in Court.
The Insolvency Act 1967 deals with both individual bankruptcy and corporate insolvency.
According to this Act, an individual can be made a bankrupt if the following conditions hold true:
- There is a period of six-month default for the debt.
- Unable to pay back the debts to his creditors, even for a minimum amount of RM 50,000.
- The applicant should be domiciled in Malaysia for a minimum of one year.
How do I know if I am insolvent?
On an individual level, to be insolvent means either one or both of the conditions should be fulfilled.
- The total amount of your debts overweighs the value of all your assets.
- You are unable to pay back the debt you owe to your creditors due to inadequate income or cash flow.
Insolvency vs Bankruptcy
People often get confused between the terms “Insolvency” and “Bankruptcy” and tend to mix them up. However, there is a difference between these two.
Insolvency is a financial state in which all the liabilities of a company or an individual exceeds its assets and the said company or person is unable to pay its/his debts as and when they fall due.
Bankruptcy is a legal declaration that the person is unable to pay back the debt which he owes to his creditors, and following such declaration the Insolvency Department assumes control of the bankrupt’s assets. A company that is insolvent will be wound-up.
Some interesting points to note here:
- An insolvent person or company does not automatically become bankrupt or wound-up.
- An insolvent person or company can pay off his debt after discussing it with his creditors through any alternate payment plan.
- A bankrupt person’s (and a wound-up company’s) assets will be liquidated by the Insolvency Department, and debts will be paid back based on the amount obtained after selling.
Let’s get down to the billion dollar question.
How to recover money from an insolvent debtor?
Following are some of the valid legal remedies for money recovery in the event of an insolvency:
1. Judgement Debtor Summons
Judgment Debtor Summons (“JDS”) is an excellent remedy once a judgement is obtained from Court, very well known to ‘drag’ the debtor to the court and force him to disclose all his financial status.
Once a Judgment Debtor Summons has been sent, the debtor will have to appear in court and produce all the material evidence as a proof of his expenses and income.
The evidence includes details of assets, properties, business revenue, source of income, bank accounts, etc. This process will take about three to four months once filed.
If the court is satisfied that the individual will be able to pay back the debt, an order will be issued, which will require him or her to settle the debt in full or an installment basis.
Some important questions that can be asked in this context include:
- What if the judgment debtor does not appear in court?
An order of arrest against the debtor can be issued from the court.
- What if the judgment debtor fails to make payment as per the order of court?
A show-cause notice can be issued against the debtor to appear in the court to explain. He/she will be required to answer questions like:
- Why did the debtor fail to perform as per the direction of the court?
- Show cause why the debtor should not be sent to prison for his failure to repay.
2. Winding Up Proceedings
To submit a petition for winding up proceedings, the debtor has to be a company and not an individual entity.
This can be initiated if the debtor owes RM 10,000.00 and above to the creditor. A winding-up petition will be submitted to the court, and the court will generally take four or five months to review and approve.
If the petition is approved by the court, a winding-up order will be issued to force the insolvent company into compulsory liquidation.
- How will creditors benefit?
The entire assets will be gathered and sold off. The money will be equally distributed to all the creditors.
3. Garnishee Proceedings
This is an excellent and fast means of realizing a judgment debt. First, an application should be made to court for the order. Once approved, the court will direct the account of the debtor to be frozen and to be handed over to the creditor instead.
- Wage garnishment-where a suit is filed to garnish the salary so that the employer will pay a particular portion of the monthly salary.
- Garnish debtor’s bank account-If the creditor knows the bank details of the borrower, he can file an application in the court to get money from the account until the debt is paid back.
4. Writ of Seizure and Sale
A Writ of Seizure and Sale is an enforcement proceeding whereby the creditor files an application in Court to request for an order for seizure and sale of judgment debtor’s property.
The seizure and sale is made through an auction. All the movable and immovable properties are included in the auction.
For this, an application has to be made to court for an order to seize the property. If the application is successful, the court will appoint a sheriff to seize all the properties of the judgment debtor.
- Can the judgment debtor deal with his properties after an order has been passed?
No, once the properties are seized, the judgment debtor is prohibited by law to deal with the assets in any manner which will affect the validity of the seizure.
The business environment is continuously subjected to market glitches. Debt collection efforts should be a part of the sales cycle. One wrong move and companies could end up losing all their investments.
For a debtor, it is quite easy to evade payment, stating that the debt is beyond repayment. But the creditor, on the other hand, takes a toll on his finances. Fortunately, Malaysian debt collection laws are sufficiently developed to facilitate recovery of delinquent debts by aggrieved creditors.