Some may be unaware of committing an act of bankruptcy

Contributed by Messrs & Partners founder Eunice Tan Mui Lee

THE increase in the number of bankrupts in the country is a cause for concern. Businessmen, credit card holders, car owners, investors and guarantors receive bankruptcy notices when they fail to pay their debts to creditors.

And there are those who invested in properties a few years ago but have no holding power.
Some may not even know they have been adjudged to be bankrupts.

A classic example is when a person fails to open a bank account because he has been made a bankrupt. But he has no knowledge of his bankrupt status. So how did it happen?

What is bankruptcy?

Bankruptcy is a legal process initiated by an individual or company due to his or her inability to settle debts. The people or party who provide the loan to the individual is known as the creditor and the person who is unable to settle the debt is known as a debtor.

When the debtor is not able to settle the loan, the creditor can serve the debtor a bankruptcy notice after obtaining a final judgment or final order against the debtor from the court, provided there is a minimum threshold of RM30,000 of provable debt.

Why you may not know

According to the governing law, the Bankruptcy Notice shall be made by way of personal service.

What will you do when you receive the notice? Ignore it? Put it aside? Can you avoid receiving it?

Avoiding the notice is of no use because the creditor may apply to the court for vide substituted services, whereby the notice can be served by publishing it in a local newspaper and by posting the notice at your last-known address and at the court’s notice board.

Through vide substituted services, you may not know that the notice has been served legally. After that, the creditor may proceed with filing a creditor petition (CP) against the debtor, which is to be served by way of personal service.

If the debtor continues to ignore the notice, the CP will be deemed legally served and thereafter you are adjudged as a bankrupt without your knowledge.

Joint liability of guarantors

Another common misunderstanding is that joint guarantors may think they can discharge their duty once they have paid their portion of the debt.

In fact, the guarantor may be sued for bankruptcy as well if the remaining guarantors do not settle their portion of the debt.

Guarantors are jointly and severally liable, i.e. either one or all of the guarantors have to settle the debt.

So if one of the guarantors does not pay the debt, you as a joint guarantor can also be sued as a bankrupt. You will face the same difficulties as discussed above if you ignore the notice and petition.

Negotiate for settlement

To avoid all the unnecessary issues, the debtor is advised to receive the notice personally. After that, the debtor may negotiate with the creditor for settlement.

If that fails, you have to seek professional help to respond to the notice within seven days from the date of the personal service, failing which you are deemed to have committed an act of bankruptcy pursuant to Section 3 of the Bankruptcy Act 1967.

However, committing an act of bankruptcy does not automatically mean that the debtor will be made a bankrupt. During this period, the notice can be set aside if there are some valid grounds that are acceptable by the court.

Following an act of bankruptcy by the debtor, the creditor is entitled to present a bankruptcy petition in court. The service of the petition shall be made by way of personal service.

If you intend to show cause or challenge the petition, you need to file a notice with the registrar three days before the day on which the petition is to be heard.

Upon the hearing of the CP, the Court may make a receiving order. Once a receiving order is made, the Director General of Insolvency (DGI) shall thereby be constituted as receiver of the property or affairs of the debtor. At the time of making receiving order, the court shall adjudge the debtor bankrupt vide an Adjudicating Order.

Upon a debtor being adjudicated a bankrupt, the bankrupt has to give up all his belongings and assets and he or she is not allowed to travel overseas without the permission of DGI.

The bankrupt also cannot operate any business nor become a company director and have to pay a certain percentage of his monthly income to the DGI to repay the debt. The bankrupt does not have any locus to initiate any legal proceeding either.

However, the bankrupt can be discharged if he or she has settled his or her debt in full to the creditors or the creditors accept the repayment scheme offered by the bankrupt. Then, the bankrupt can apply to the court to obtain an order of discharge.

In the event that there is misleading information status as a bankrupt is published in CTOS or any database from public record or the Companies Commission of Malaysia, the words published are defamatory and a legal action can be initiated for damages. As such, if anyone of you who is not a bankrupt but it is shown in the public access or any paid service provider that you are bankrupt, you may initiate a legal action against the provider for defamation and claim for damages.

In order to reduce the number of bankruptcy cases, the Bankruptcy (Amendment) Bill 2016 was tabled for its First Reading before Dewan Rakyat of the Malaysian Parliament last year.

Based on the Bill, few amendments have been catered such as the increase of the minimum threshold to RM50,000, single order bankruptcy, voluntary arrangement as a pre-bankruptcy rescue mechanism, a more restrictive way to obtain substituted service, absolute protection for a social guarantor and automatic discharge.

This amendment will provide greater protection for debtor especially social guarantors and reduce the number of bankruptcy cases.

Eunice Tan is the founder of LegalMakeover and Messrs Eunice Tan & Partners.

The views expressed in the article is entirely her own.