Trevor Padasian provides an overview of the Bankruptcy (Amendment) Bill 2016.
 
The Bankruptcy (Amendment) Bill 2016 (“the Bill”) was tabled for its First Reading before the Dewan Rakyat of the Malaysian Parliament on 21 November 2016. The debate on the Bill will continue when Parliament reconvenes in March 2017. It is, arguably, the most drastic revamping of the Bankruptcy Act 1967 (“Act”) since the Act came into force on 30 September 1967.
 
In the months leading up to the tabling of the Bill, it was reported in the local media (e.g. see articles published in The Sun Daily, 8 March 2016, 12 August 2016, 5 September 2016, 27 October 2016 and 14 November 2016) that the Government intended to amend the Act to provide greater protection for debtors. As reported, the Government’s principal objectives in seeking to do so are to: (a) reduce the number of bankruptcy cases; (b) provide an opportunity for a debtor to rearrange his debts; (c) reduce the period before a bankrupt may be discharged from his bankruptcy; and (d) increase the minimum threshold for the presentation of a bankruptcy petition.
 
The objective of reducing the number of bankruptcy cases may have been triggered by alarming statistics which showed that a total of 95,799 debtors had been declared bankrupt between 2012 and August 2016 (The Sun Daily, 14 November 2016).
 
This article provides an overview of the major amendments which are to be introduced under the Bill. For the purpose of this article, the Bill will be referred to as “the Amendment Act”.
 
CHANGE OF NAME
 
The name of the Act will be changed to the Insolvency Act 1967. It should be noted that unlike some other jurisdictions, such as the United Kingdom and New Zealand, where the Insolvency Acts deal with the insolvency of both individuals and companies, the Act will regulate only insolvency and bankruptcy of an individual and a firm. Insolvency of companies in Malaysia will continue to be regulated under the Companies Act 1965 (and in due course, the Companies Act 2016).
 
MINIMUM THRESHOLD INCREASED
 
The minimum threshold for presentation of a bankruptcy petition will be increased from RM30,000 to RM50,000 under the Amendment Act. Although no rationale is provided for the increase, it appears from media reports that it is to give “protection to the people” and is in line with the “debtor-centric” thrust of the amendments.
 
SINGLE ORDER BANKRUPTCY
 
The Amendment Act also introduces a single order for bankruptcy, i.e. the bankruptcy order, in place of the existing receiving and adjudication orders.
 
When a receiving order is made, the Director General of Insolvency (“DGI”) becomes the receiver of the debtor’s property. The receiving order protects the debtor’s property from being dissipated but does not have the effect of making the debtor a bankrupt. The debtor is made a bankrupt only upon the issue of an adjudication order (Hong Leong Bank Bhd v Khairulnizam Jamaludin [2016] 7 CLJ 335 at para 33, page 346 FC).
 
Although the receiving and adjudication orders are usually made simultaneously, the making of an adjudication order does not necessarily follow the making of a receiving order. If the debtor satisfies the court that he is in a position to offer a composition or make a scheme of arrangement acceptable to his creditors, then an adjudication order will not be made (Re: Tan Sri Kishu Tirathraj; ex parte Affin Bank Berhad [2007] 2 MLJ 53 at para 28, pages 62-63). This existing flexibility may be removed by replacing the receiving and adjudication orders with a single bankruptcy order.
 
VOLUNTARY ARRANGEMENT
 
The Amendment Act introduces the concept of a “voluntary arrangement”, a pre-bankruptcy rescue mechanism, which provides the debtor with the opportunity to rearrange his debts with his creditors before he is adjudged a bankrupt.
 
A debtor may initiate a voluntary arrangement with his creditors by: (a) appointing a nominee (“nominee”), who must be a registered chartered accountant, an advocate and solicitor or a person approved by the Minister upon the recommendation of the DGI, to supervise the implementation of the voluntary arrangement; and (b) applying to the court for an interim order of voluntary arrangement (“interim order”).
 
The High Court will make an interim order upon receipt of an application for an interim order if there is no previous application for an interim order and the nominee is willing to act in relation to the proposal. An interim order operates to stay all bankruptcy and other legal proceedings against the debtor and is valid for 90 days, and may only be extended in limited circumstances for a further period of 30 days.
 
The debtor must submit a proposal (“proposal”) for approval by his creditors during the subsistence of the interim order. The voluntary arrangement is subject to the approval by a majority in number and at least three-fourths in value of the creditors at a meeting of creditors, or in writing, and voting on the resolution. If the proposal is not approved by the creditors, the court may set aside the interim order.
 
If a debtor fails to comply with any of his obligations under a voluntary arrangement, any creditor who is bound by such arrangement may file or proceed with a bankruptcy petition against the debtor for the balance of the debt due to him.
 
The provision for an automatic issue of an interim order under the Amendment Act may be contrasted with the position under Section 48 of the Singapore Bankruptcy Act (Cap. 20) where the High Court, upon receipt of an application for an interim order, is required first to determine whether it would be appropriate for such an order to be made for the purpose of facilitating the consideration and implementation of the debtor’s proposal.
 
SUBSTITUTED SERVICE
 
The requirements under Rules 109 and 110 of the Bankruptcy Rules 1969 for a bankruptcy notice and creditor’s petition to be served personally on a debtor will be expressly incorporated into the Act pursuant to the Amendment Act.
 
The Amendment Act introduces more specific provisions in relation to substituted service. The new provisions allow the court to grant an order for substituted service of a bankruptcy notice or a creditor’s petition on a debtor if the creditor satisfies the court that the debtor, with intent to defeat, delay or evade personal service: (a) departs out of Malaysia or being out of Malaysia remains out of Malaysia; or (b) departs from his dwelling house or otherwise absents himself, or secludes himself in his house or closes his place of business.
 
ABSOLUTE PROTECTION FOR SOCIAL GUARANTOR
 
Currently, a creditor may commence a bankruptcy action against a “social guarantor”, i.e. a person who provides, not for the purpose of making profit, a guarantee for: (a) a loan, scholarship or grant for educational or research purposes; or (b) a hire-purchase transaction of a vehicle for personal or non-business use; or (c) a housing loan transaction solely for personal dwelling, only if he satisfies the court that he has exhausted all avenues to recover the debts owed to him by the principal debtor.
 
The Amendment Act will absolutely prohibit bankruptcy proceedings against a social guarantor.
 
OTHER GUARANTORS
 
As a result of the amendments, other guarantors (not being social guarantors) will have the same protection currently accorded to social guarantors under the Act. A creditor must obtain leave of the court before commencing any bankruptcy action against a guarantor.
 
To obtain leave, the creditor must satisfy the court that he has exhausted all modes of execution and enforcement (including seizure and sale, judgment debtor summons, garnishment, bankruptcy or winding up proceedings) to recover the debts owed by the principal debtor. Based on current case law in relation to social guarantors, the application is by way of affidavit evidence and the court, after considering the contents of the affidavit, has a discretion to determine whether all avenues against the borrower have been exhausted (Hong Leong Bank Bhd v Khairulnizam Jamaludin [2016] 7 CLJ 335 at para 23, page 344 and para 35, page 346 FC).
 
This new requirement sets a high bar for the commencement of bankruptcy actions against non-social guarantors.
 
PROHIBITED OBJECTIONS TO DISCHARGE OF BANKRUPT
 
Currently, a bankrupt may be discharged if a certificate of discharge is issued by the DGI under Section 33 of the Act (“certificate of discharge”) after five years from the date of the receiving and adjudication orders. A creditor may object to the issuance of such a certificate. The Amendment Act prohibits objections against the discharge of a bankrupt who: (a) was adjudged a bankrupt because he was a social guarantor; or (b) has a disability under the Persons with Disabilities Act 2008; or (c) who has passed away; or (d) is suffering from a serious illness certified by a Government Medical Officer. It is to be noted that the Amendment Act does not provide any guidance as to what constitutes “serious illness”.
 
AUTOMATIC DISCHARGE
 
The Amendment Act introduces provisions for an automatic discharge of a bankrupt upon the expiry of three years from the date of submission of the statement of affairs by the bankrupt if he has: (a) achieved an amount of target contribution of his provable debt; and (b) complied with the requirement to render an account of moneys and property to the DGI.
 
The Amendment Act sets out the factors that the DGI may take into account in determining the target contribution. These factors include, amongst others, the amount of the provable debt of the bankrupt, the current monthly income of the bankrupt, his prospective monthly income over the duration of the bankruptcy, his educational and vocational qualifications, age and work experience, the effect of the bankruptcy on his earning capacity and the prevailing economic conditions.
 
Before an automatic discharge can be effected, the DGI must serve a notice of discharge on each of the bankrupt’s creditors not less than six months before the expiry of three years from the submission of the statement of affairs, but not earlier than one year before the expiration of the aforesaid 3-year period.
 
A creditor may, within 21 days of being served with a notice of discharge, object to the automatic discharge by applying to the court to suspend the discharge only on one or more of the following grounds:
 
(a)     the bankrupt has committed any offence under the Act or under certain provisions of the Penal Code relating to fraudulent disposition or concealment of property to prevent distribution to creditors;
 
(b)     the discharge would prejudice the administration of the bankrupt’s estate;
 
(c)     the bankrupt has failed to co-operate in the administration of his estate.
 
The creditor’s application must be served on the DGI and the bankrupt and the court is required to hear the DGI and the bankrupt before making an order. The Amendment Act does not address the consequences of the bankrupt’s absence at the hearing.
 
The court may either dismiss the application and approve the automatic discharge or suspend the discharge for two years. In the case of suspension, the bankrupt must continue to fulfil his statutory duties and obligations and will be automatically discharged at the end of the 2-year period.
 
The amendments by their wording suggest that the automatic discharge after a suspension of two years is not conditional upon the due fulfilment by the bankrupt of his duties and obligations during that period.
 
As mentioned earlier, the Act presently only permits the DGI to issue a certificate of discharge after five years from the date of the receiving and adjudication orders. If the court upholds an objection from a creditor, no certificate of discharge can be issued by the DGI within two years. After the 2-year period, there is no automatic discharge and it is up to the DGI to commence fresh proceedings for the issue of a certificate of discharge (which may be objected to by the creditors).
 
The Malaysian Courts have had various opportunities to consider the factors that have to be taken into account when dealing with challenges to an application for the issue of a certificate of discharge. These cases may provide helpful guidance by way of analogy as the new provisions also confer a discretion on the DGI to discharge a bankrupt vide the issue of a certificate of automatic discharge.  
 
In Re Benny Ong Swee Siang; Ex p United Overseas Bank (Malaysia) Bhd [2016] 3 CLJ 1001, page 1006-1007, the High Court held that the DGI does not have an absolute discretion to issue the certificate of discharge and his discretion must be exercised reasonably and with due consideration as demanded by public interest, reason and justice. A contrary view has been laid down in other cases, for instance, Re Endon Tamseran; Ex P Parkash Singh Wasawa Singh [2009] 8 CLJ 379, pages 385-386, where the court has held that the DGI has practically unfettered discretion in dealing with an application for the issue of such a certificate. However, the view in Re Benny Ong Swee Siang is to be preferred.
 
In Mayban Finance Bhd v Lee Kee Sen [2014] 10 CLJ 543, pages 546-547, the High Court said that the DGI had the burden of justifying that the discharge is warranted and just in the circumstances of the case. What is just depends on whether a delicate balance could be achieved between the interests of the bankrupt to free himself from the chains of bankruptcy and the right of the creditors to receive the judgment sum. This is consistent with the pronouncements by the Court of Appeal which has said that although in an appropriate and deserving case a bankrupt may be discharged from his bankruptcy, he should not be discharged at the expense of commercial morality and public perception on bankruptcy law in the country. In allowing a discharge, the court must be very cautious in balancing between the interest of the bankrupt as an individual and the interest of the public and commercial reality at large (Lim Hun Swee v Malaysia British Assurance Bhd & Ors and Other Appeals [2010] 8 CLJ 680 at pages 696-697). The Court also cautioned that society at large must not be given the impression that being a bankrupt is not a serious matter (Public Bank Bhd v Choong Yew Wah [2014] 5 CLJ 695 at 706).
 
Although the Lim Hun Swee and Public Bank cases dealt with conventional applications to the court for discharge, the Court of Appeal’s pronouncements are arguably applicable to an application for the issue of a certificate of automatic discharge. In the context of the amendments, the DGI’s discretion will still have to be exercised according to the established principles at both stages of the process: (a) when deciding whether to issue a notice of discharge; and (b) when responding to a proposed automatic discharge.
 
EFFECTIVE DATES OF THE AMENDMENTS
 
Except for the amendments that relate to prohibited objections to the discharge of a bankrupt which have retrospective effect, the provisions of the Amendment Act are applicable only to debtors who are adjudicated bankrupt after the coming into operation of the Amendment Act.
 
All proceedings, actions or other matters required to be done under the Act which are pending immediately before the enforcement of the Amendment Act will be continued or concluded under the Act as it stood before the coming into operation of the Amendment Act.
 
CONCLUSION                      
 
The amendments under the Amendment Act are far reaching and will go some way in meeting the Government’s objectives set out in the second paragraph of this article, particularly in providing greater protection for debtors, specifically social guarantors, and reducing the number of bankruptcy cases. Certain provisions may hopefully be fine-tuned, for example, to provide the criteria to assist the courts in deciding whether a judgment creditor has exhausted all modes of execution and enforcement to recover the debts owed by the principal debtor. It remains to be seen whether the amendments would have the effect of dampening the risk appetite of and changing the types of security acceptable to financial institutions and other creditors.