Recent statistics from the Malaysian Department of Insolvency (MDI) showed that there has been an 11% increase in the average number of monthly bankruptcies from 2012 to 2013. This would appear to be an alarming issue to address as it implies that more Malaysians are becoming unable to pay their debts. We set out below some frequently asked questions about bankruptcy in Malaysia.
What is bankruptcy?
Simply put, bankruptcy is a legal proceeding that takes place when an individual is unable to settle their debts. A person will be made a bankrupt when he/she has been so judged by a court of law.
How does someone become a bankrupt?
There are two methods in which the court order for bankruptcy may be granted.
- Creditor’s petition – A creditor may commence bankruptcy proceedings against an individual by serving them with a bankruptcy notice. (For debts exceeding RM30,000 and arising from a final judgment)
- Debtor’s Petition – An individual may voluntarily seek a court order to be made a bankrupt. (No minimum amount of debt required)
Generally speaking a person can only be made a bankrupt if they have first committed an act of bankruptcy. There are different types of acts of bankruptcy, but the most common is a situation where a person has a final judgment ordered against him and he fails to comply with a bankruptcy notice requiring him to settle the judgment. (The bankruptcy notice is a demand for the debtor to pay the debt within 7 days from service of the bankruptcy notice)
If the debtor does not settle the payment the specified timeframe, he would then be said to commit an act of bankruptcy. Following an act of bankruptcy, a creditor petition may be presented to the court. If the court grants the petition, they will grant an Adjudication Order which means the debtor is officially adjudged a bankrupt. The court will also grant a Receiving Order to empower the Director General of Insolvency to take over the property and assets of the bankrupt.
Who can be made a bankrupt in Malaysia?
An individual who:
- was personally present in Malaysia; or
- ordinarily resided or had a place of residence in Malaysia; or
- was carrying on a business in Malaysia either personally or by means of an agent; or
- was a member of a firm of partnership which was carrying on a business in Malaysia.
What are the differences between a secured and unsecured creditor?
A secured creditor is a person whom money is owed by way of a secured loan. For example, if you take a housing loan from a bank, the bank will be a secured creditor because they will usually register a charge on your property as security in the event you default on your loan.
In the event a person is made a bankrupt, his secured creditors will get priority over unsecured creditors.
What will happen to your assets and property if you become a bankrupt?
When a person becomes a bankrupt, his/her assets will vest with the Director General of Insolvency (DGI). The DGI will then administer the bankrupt’s assets and sell or dispose them to repay the outstanding debts.
How would being a bankrupt affect my life?
- Overseas travel -You will need to surrender your passport. However, you may still apply to travel overseas under special circumstances (eg: medical condition, performing haj etc)
- Directorship -You are disqualified from being a director of a company or corporation and you cannot engage in the management of any business or trade run by your spouse, children or relatives.
- Banking accounts – You can only open a bank account with the approval of the Official Assignee for crediting your monthly income.
- Assets and properties -The Insolvency Department will administer all your assets, trace and monitor your conduct. You need to submit an account of your income and expenditure once every six months, and report all monies or property exceeding RM500 that comes into your possession.
- Legal Proceedings -You cannot commence any legal proceedings (other than an action for damages relating to personal injury) without sanction of the DGI.
- Disqualifications -You cannot be appointed as a Sessions Judge or Magistrate, be nominated or elected for office of councillor of local authority, be a trustee under any written law, or be a member of parliament.
- Income and Salary -The court may order you to pay part of your wages or income to the DGI.
- Credit Card – You can only use your credit card up to a value of RM1,000.
Is there a possibility a person can be declared bankrupt without his knowledge?
Generally speaking, before a person can be adjudged a bankrupt, he will have to be personally served with the relevant court papers. However, sometimes he will not receive these court papers due to various reasons (eg: the court documents are sent to his old address). If the creditor is unable to serve the court papers on the individual personally, they have an option to apply to Court for “substituted service”. This means the court papers will be advertised in the newspaper (among other things) and it will be deemed as if the person received the court papers personally. Therefore, if you did not read the newspaper on the days the advertisement is made, you may not be aware that legal proceedings are pending against you.
Is there an automatic discharge for bankruptcy, assuming I settle all my debts?
Malaysian law doesn’t allow for automatic discharge of bankruptcy. The bankrupt has to make an application to be discharged.
How can I be discharged from Bankruptcy?
There are three main ways as to how a bankrupt can have his bankruptcy discharged:
- Apply for the Court’s order to be annulled – The Court will grant an annulment of the bankruptcy order in the event they are of the view that the bankrupt should not have been adjudged a bankrupt or where the debts of the bankrupt have been paid in full.
- Apply for a court discharge -It is mandatory for the bankrupt to get a report from the Insolvency Department emphasizing the conduct and the cooperation of the bankrupt. Only the person with good conduct may apply for a court discharge.
- Apply to the DGI – This application can only be made if 5 years has lapsed from the date the bankruptcy order was made. This is up to the discretion of the DGI and they will take into account various factors such as the cause of bankruptcy, age of the bankrupt, assets of the bankrupt, and his conduct.
After I was made a bankrupt, I inherited a lot of money. Can I make direct payment to a creditor to settle my debt?
A bankrupt is not allowed to make direct payment to the creditor and all payment has to be made through the DGI. The payment made by the bankrupt will be credited into the estate account and distributed to the creditors who have filed in Proof of Debt according to priority.
Someone has taken out bankruptcy proceedings against me – can I quickly transfer my property to my wife or family members to save my assets?
There is no point in doing this if you are trying to defeat, hinder or delay your creditors. Under the Bankruptcy Act, any settlement or transfer of property shall be void against the Director General of Insolvency if the settler becomes a bankrupt within 2 years after the date of settlement. If the settlor becomes bankrupt within 5 years after the date of settlement, the settlement or transfer of property will be void unless the parties can show that the settlor was able to pay all his debts at the time of making the settlement without the aid of the property.
The only exception is where (a) the settlement was made before or in consideration of marriage or (b) if the settlement was made to a purchaser in good faith and for valuable consideration.
How do I get out of debt before I am made a bankrupt?
Bankruptcy is usually the result of poor financial knowledge and/or management. Some parties turn to professionals or self help guides on financial management to assist them with getting out of debt. However, as a law firm, we do not provide any assistance on personal financial management and can only assist with legal issues arising from bankruptcy.
How can I find out if I am a bankrupt?
You may conduct an online search at the Insolvency department’s official portal. A fee of RM12 will be charged. Alternatively, you may visit the Insolvency Headquarters office at Putrajaya to conduct the search. A fee of RM10 is payable via cash.
If you have any queries, please feel free to contact us.