Key Highlights on the Bankruptcy (Amendment) Bill 2016

The rapid increase in the number of bankruptcy in Malaysia is of particular concern. According to the Malaysian Insolvency Department statistics, a total of 97,215 people were declared bankrupt between January 2012 and September 2016, with Selangor heading the list with 27,269 cases. As a result, the government introduced the Bankruptcy (Amendment) Bill 2016 ("the Bill") with the aim to curb such continuing increase. The Bill was tabled for its first reading on 21 November 2016 and was passed by the Parliament during its second reading on 29 March 2017. It will make significant changes to the bankruptcy law once it is duly gazetted and enforced.

This article will highlight the key amendments under the Bill which, among others, includes the following:

Change of Name from Bankruptcy to Insolvency

The Bankruptcy Act 1967 will be renamed as the Insolvency Act 1967. All references to the Bankruptcy Act 1967 in any written law or document shall be construed as references to the Insolvency Act 1967 when the Bill comes into operation.

Introduction of Voluntary Arrangement as a Pre-Bankruptcy Rescue Mechanism

Voluntary arrangement is defined as a composition in satisfaction of a debtor's debt or a scheme of arrangement of a debtor's affairs. A debtor may propose a voluntary arrangement to his creditors at any time before he is adjudged bankrupt and work out a proposal for settlement of debt with his creditors.

The debtor is required to appoint a nominee to supervise the implementation of the voluntary arrangement and to simultaneously apply to the court for an interim order of voluntary arrangement. It is pertinent to note that the nominee must be a registered chartered accountant, an advocate and solicitor, or such other person approved by the Minister upon recommendation by the Director General of Insolvency and must fulfil other conditions stated in the Bill.

The interim order of voluntary arrangement is valid for 90 days from the date of order and no further extension will be granted. During the validity of this interim order, the debtor is temporarily immune with all legal proceedings. No bankruptcy petition may be made or proceeded with against the debtor. Besides that, other legal proceedings, execution or legal process are not allowed to be commenced or continued against the debtor unless with leave of the court.

Once the interim order has been made, the nominee shall summon every debtor's creditor to a meeting for the purpose of approving the debtor’s proposal for voluntary arrangement. Special resolution is required to be passed in order to approve the proposed voluntary arrangement. The right of a secured creditor to enforce his security will not be affected unless with the secured creditor's consent.

The nominee shall report the decision of the meeting to the court if the debtor and creditors could reach a consensus on the terms of the voluntary arrangement. The approved voluntary arrangement will take effect from the date of meeting and bind on all creditors. If the debtor fails to comply with any obligation under the voluntary arrangement, any creditor bound by the voluntary arrangement may file or proceed with a bankruptcy petition against the debtor. However, if the creditors decide not to approve the debtor's proposal, the court may set aside the interim order.

Stricter Requirement for Service of Bankruptcy Cause Papers

There is no change in the mode of service of the bankruptcy cause papers i.e. it is required to be served personally on the debtor. However, stricter requirements are imposed in that substituted service will only be allowed if the creditor can satisfy the court that the debtor, with intent to defeat, delay or evade personal service, departs out of Malaysia or being out of Malaysia remains out of Malaysia or departs from his dwelling house or otherwise absents himself or secludes himself in his house or closes his place of business.

Increase in Minimum Debt Threshold

The minimum threshold to present a bankruptcy petition under the Bankruptcy Act 1967 will be increased from RM30,000 to RM50,000.

Introduction of Single Order for Bankruptcy

The Bill replaces the two-tier order system namely 'receiving order and adjudication order' under the Bankruptcy Act 1967 to a single order to be called 'bankruptcy order'.

Protection for Guarantors

The Bill provides an absolute prohibition to commence any bankruptcy action against a social guarantor. “Social guarantor” is defined as a person who provides, not for the purpose of making profit, the following guarantees:

a) a guarantee for a loan, scholarship or grant for educational or research purposes;
b) a guarantee for a hire-purchase transaction of a vehicle for personal or non- business use; and
c) a guarantee for a housing loan transaction solely for personal dwelling.

Besides that, a creditor is also prohibited from commencing bankruptcy proceedings against a guarantor (other than a social guarantor) unless he has obtained leave from the court. Before granting the leave, the court must satisfy that the creditor has exhausted all modes of execution and enforcement to recover the debts owed to him by the debtor. In other words, the creditor shall have commenced all execution proceedings which include seizure and sale, judgment debtor summon, garnishment and bankruptcy or winding up proceedings against the borrower before applying for leave of court to commence bankruptcy proceedings against the guarantor. 

No Objection for Discharge of Certain Bankrupts

Under the Bill, a creditor is prohibited from objecting to the discharge of the following categories of bankrupts:

a) a person who was adjudged bankrupt because he was a social guarantor;
b) a bankrupt with a disability under the Persons with Disabilities Act 2008;
c) a bankrupt who has passed away; and
d) a bankrupt suffering from a serious illness certified by a Government Medical Officer.

Automatic Discharge of Bankrupt 

A bankrupt will be entitled to automatic discharge from bankruptcy after 3 years from the date of his submission of a statement of affairs provided that he has achieved an amount of target contribution of his provable debt and has complied with the requirement to render an account of moneys and property to the Director General of Insolvency.

The creditor may however object to the discharge on the following grounds:

a) the bankrupt has committed an offence under the Bankruptcy Act 1967 or under certain provisions of the Penal Code relating to fraudulent disposition or concealment of his property to prevent the distribution to creditors;
b) the automatic discharge would prejudice the administration of the bankrupt’s estate; or
c) the bankrupt has failed to co-operate in the administration of his estate.

Establishment of Insolvency Assistance Fund 

The Bill introduces a fund to be known as the Insolvency Assistance Fund to be administered and controlled by the Director General of Insolvency for the following purposes:

a) for payment of all costs, fees and allowances to advocates or other persons in any proceedings on behalf of a bankrupt’s estate or to recover assets of the estate;
b) for payment of such costs and fees in the administration of a bankrupt’s estate as the Director General of Insolvency may determine;
c) for payment of any expenses to provide an efficient and effective administration of a bankrupt’s estate that meets an appropriate standard of service; or
d) for such other purposes as may be prescribed.

Source : Messrs. Tay & Partners

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