Though bankruptcy is scary for most people, there are some who advocate that embattled businessmen or individuals should consider making themselves bankrupt as bankruptcy protects them from creditors and would make it easier for them to have a fresh start financially.”
With the pandemic engulfing the globe, there is seemingly no escape for the Malaysian business community and everyone who depends on the economy — practically every Malaysian — from the consequences of frequent lockdowns, reduced demand for goods and services, business closures and the resultant unemployment except for some fortunate sectors that have been benefitted from the opportunities that this unusual time has offered.
Close to the minds of those affected is the possibility that they might not financially survive the onslaught and end up as bankrupts though the government has introduced measures to protect them, including the introduction of the Temporary Measures for Reducing the Impact of Coronavirus Disease 2019 (Covid-19) Act 2020 (Act 829) that has increased the bankruptcy threshold to RM100,000.
Though bankruptcy is scary for most people, there are some who advocate that embattled businessmen or individuals should consider making themselves bankrupt as bankruptcy protects them from creditors and would make it easier for them to have a fresh start financially.
To reduce the fear of bankruptcy, it would help if those affected can see the light at the end of the tunnel, and this is what this short write-up seeks to do, with an emphasis on the law introduced by the 2017 Amendment to the Insolvency Act, which before then was known as the Bankruptcy Act.
A bankrupt may end his bankruptcy either by way of discharge or annulment.
Annulment is always the better way to end one’s bankruptcy, if it is possible, because of its effect. When an adjudication order (the order granted by the court to make a debtor bankrupt for proceedings commenced before Oct 6, 2017) or the bankruptcy order is annulled, the bankrupt is put in a position as if there has been no adjudication. The bankruptcy is wiped out altogether as if the debtor is never a bankrupt.
An application may be filed to annul the adjudication order or the bankruptcy order if the bankrupt can prove that:
1. The order ought not to have been granted;
2. The debt has been fully settled; or
3. He has been made a bankrupt in Singapore and the distribution of his estate and effects among his creditors ought to take place in that country.
The adjudication order or bankruptcy order may also be annulled if the proposal for a composition or scheme of arrangement put forward by the bankrupt at the creditors’ meeting is accepted by his creditors and approved by the court.
Where the bankrupt is not in a position to secure an annulment, he may be released from bankruptcy by way of discharge.
Following the amendment to the Act in 2017 which came into effect on Oct 6, 2017, there are three ways a bankrupt may be discharged:
1. Discharge on the bankrupt’s application to court;
2. Discharge by the DGI; and
3. Automatic discharge.
An application for discharge to the court may be filed any time after the conclusion of the creditors’ meeting. It must be supported with a favourable report from the Director General of Insolvency (DGI) concerning the bankrupt’s conduct and affairs. In deciding on the application, the court has the task of balancing the rights of the creditors in regard to the recovery of the debts, and that of the bankrupt to have a second chance in life, and the interest of his or her family, as well as the interest of the public and commercial morality. More specifically, the court shall consider the following:
1. The age and income of the bankrupt;
2. The health of the bankrupt;
3. The duration of the bankruptcy;
4. The cause of the bankruptcy;
5. The extent of debt settled;
6. The conduct of the bankrupt;
7. The conduct of the creditor; and
8. The number of opposing creditors.
The creditor has the right to be heard and to object to the application, and the court may dismiss the application, or allow the discharge by requiring the bankrupt to pay the unsettled debts or part thereof in the form of a consent judgment.
The second mode of discharge was introduced in 1999 whereby the DGI was empowered to discharge upon the application of the bankrupt, which can only be made five years after the date of the adjudication. If the DGI is in favour of granting the application, he must serve a notice of his intention to issue the certificate of discharge on every creditor who has filed a proof of debt.
Prior to Oct 1, 2003, he had to serve together with the certificate a statement of his reasons for wanting to do so but this requirement was unfortunately repealed by the 2003 Amendment to the Act. The discharge may be challenged by the creditors, but the court may only postpone the discharge for two years. Alternatively, the decision of the DGI may be questioned by way of judicial review.
A restriction to such challenges was however introduced via the 2017 Amendment to the Act — a creditor is not allowed to object to the discharge by the DGI if the bankrupt:
1. Was adjudged bankrupt by reason of him being a social guarantor;
2. Is registered as a disabled person under the Persons with Disabilities Act 2008;
3. Has passed away; or
4. Is suffering from a serious illness certified by a government medical officer.
With regard to the first, the discharge may be unfair to other creditors if the bankrupt has multiple creditors, and he was adjudicated bankrupt based on the debt in respect of which he was the social guarantor. If instead he was made bankrupt by another creditor whose claim against him was not related to a social guarantee, his discharge by the DGI would not be immune from the creditors’ challenge.
As for the fourth, it is not clear whether there is any guideline on what serious illnesses are. If diabetes is accepted as a serious illness, then perhaps a bankrupt can get rid of his bankruptcy by eating a lot of sweet food.
The third mode of discharge, misleadingly called automatic discharge, was introduced by the 2017 Amendment to the Act. The discharge is not automatic, as it is conditional upon his payment of an amount to be decided by the DGI and his compliance with the requirements set by the DGI. In determining the amount to be paid, the DGI shall take into account:
1. The provable debt of the bankrupt;
2. The current monthly income of the bankrupt;
3. The extent to which the bankrupt’s spouse may contribute to the maintenance of the bankrupt’s family;
4. The monthly income that the bankrupt may reasonably be expected to earn over the duration of the bankruptcy;
5. The reasonable expenses for the maintenance of the bankrupt and his or her family; and
6. The bankrupt’s property which may be realised during the period of three years.
If such conditions are met, a bankrupt shall be discharged from bankruptcy on the expiration of three years from the date of the submission of his statement of affairs.
Creditors may object to the discharge, but likewise, if the court agrees with the creditors, the court may only postpone the discharge for two years.
With the introduction of the new mode of discharge, which fortunately was incorporated into our Malaysian bankruptcy law before the pandemic, debtors and bankrupts should realise that bankruptcy is not the end of the world, and bankruptcy could be the effective way to a fresh financial start.
Khoo Kay Ping is a partner with Zaid Ibrahim & Co