Bankruptcy Law in Malaysia: What You Need to Know About the Insolvency Act

Bankruptcy in Malaysia is governed primarily by the Insolvency Act 1967, which replaced the Bankruptcy Act 1967 following significant amendments in 2017. The changes introduced a more rehabilitative approach, raising the bankruptcy threshold and providing clearer pathways for discharge. Despite these reforms, being declared bankrupt in Malaysia carries serious consequences that can affect your ability to travel, hold certain positions and manage financial affairs. This article provides a comprehensive overview of the bankruptcy process, the rights of creditors and debtors, and the options available for those facing financial difficulty in Johor Bahru and throughout Malaysia.

What Is the Bankruptcy Threshold in Malaysia?

Following the 2017 amendments, the minimum debt threshold for bankruptcy proceedings in Malaysia was raised from RM30,000 to RM50,000 for acts of bankruptcy committed on or after 6 October 2017, and subsequently to RM100,000 under further legislative updates. This means a creditor cannot commence bankruptcy proceedings against a debtor unless the debt owed meets or exceeds the prescribed threshold. The increase was intended to prevent individuals with relatively modest debts from being subjected to the severe consequences of bankruptcy. For debts below the threshold, creditors must pursue recovery through the civil courts, including the option of filing a judgment debtor summons.

How Bankruptcy Proceedings Are Initiated

A creditor who wishes to make a debtor bankrupt must first obtain a court judgment for the debt. Once judgment is obtained, the creditor may serve a bankruptcy notice on the debtor, demanding payment within a specified period, typically seven days. If the debtor fails to comply with the bankruptcy notice, this constitutes an act of bankruptcy. The creditor may then file a creditor's petition in the High Court seeking a receiving order against the debtor. The court will hear the petition and, if satisfied that the debtor is unable to pay the debts, will issue a receiving order. The Director General of Insolvency (DGI) is then appointed as the official receiver and trustee of the bankrupt's estate.

Consequences of Bankruptcy

The consequences of being declared bankrupt in Malaysia are far-reaching and include the following restrictions:

• Travel restriction: A bankrupt must surrender their passport to the DGI and cannot travel overseas without prior permission from the DGI or the court.
• Asset vesting: All property belonging to the bankrupt at the date of the receiving order vests in the DGI, who will administer and realise the assets for the benefit of creditors.
• Employment restrictions: A bankrupt cannot act as a director of a company, cannot hold certain professional positions and may face restrictions in employment involving financial management.
• Credit restrictions: A bankrupt cannot obtain credit above RM1,000 without disclosing their bankruptcy status.
• Limited legal capacity: A bankrupt cannot commence legal proceedings without the leave of the court.

These restrictions remain in place until the bankrupt is discharged, either by the court or by the DGI. The social and economic impact of bankruptcy can be devastating, affecting not only the individual but also their family members who may rely on shared assets and income.

Discharge from Bankruptcy

The Insolvency Act 1967 provides several mechanisms for discharge. A bankrupt may apply to the court for a discharge order after a period of three years from the date of the receiving order, provided they have complied with all obligations under the Act, including filing a statement of affairs and cooperating with the DGI. The court will consider factors such as the bankrupt's conduct, the extent of the debts, whether any offences have been committed and whether the bankrupt has made genuine efforts to repay creditors.

Alternatively, the DGI may issue a certificate of discharge if the bankrupt has been adjudicated for a period of at least three years and has satisfied certain conditions, including the realisation of all distributable assets. The 2017 reforms introduced an automatic discharge mechanism for bankrupts who have served a minimum period and met the prescribed criteria, reflecting the Act's rehabilitative intent.

Voluntary Arrangement as an Alternative

Before a debtor is declared bankrupt, they may propose a voluntary arrangement under Part VI of the Insolvency Act. This involves making a proposal to creditors for the settlement of debts over a period of time, typically through instalment payments or a composition. The proposal must be approved by a majority in number representing at least 75% in value of the creditors present and voting at a meeting convened for this purpose. A voluntary arrangement can be an effective way to avoid the severe consequences of bankruptcy while providing creditors with a reasonable return. The corporate and commercial disputes team at Messrs S K Song can advise on the viability of a voluntary arrangement and assist in negotiating terms with creditors.

Seek Legal Advice Early

If you are facing financial difficulty or have received a bankruptcy notice, seeking legal advice at the earliest opportunity is critical. The lawyers at Messrs S K Song have extensive experience in insolvency matters and can advise you on the best course of action, whether that involves negotiating with creditors, proposing a voluntary arrangement or defending against bankruptcy proceedings in the Johor Bahru courts.