5 changes to Malaysia's bankruptcy law that makes it harder to become a bankrupt

As of March this year, there were 293,086 bankrupts (with Selangor topping the list) in Malaysia. The number of bankrupts increased by 13.9% last year compared to 2015 and the bulk of this is made out of citizens aged between 25 and 44.

Though it may sound hard to believe, one in four is as a result of hire-purchase agreements for vehicles. So, cars and motorbikes which are the lifeblood of the working class heroes today may also be the banes of their existence.

As such, Datuk Seri Azalina Othman proposed various amendments to the existing Bankruptcy Act 1967 ("BA 1967") which was approved by Parliament this year. To avoid confusion, the BA 1967 is now known as the Insolvency Act 1967 ("IA 1967") and these changes were made using the Bankruptcy (Amendment) Act 2017 ("BAA 2017")

To make it clearer, we will look at the old law (BA 1967) followed by the new law (IA 1967) after the BAA amendments.

The most obvious change is that the BA 1967 got a name change and is now known as the Insolvency Act 1967 ("IA 1967") following the changes made under section 4 of the BAA 2017.

What is the difference between being insolvent and being bankrupt? Being insolvent means that you are unable to pay off your debts while being bankrupt is when you have been served with bankruptcy papers and have been formally made a bankrupt by the courts.

The BAA 2017 has just came into force on 06 October 2017 and the Insolvency Department is now working towards releasing 50,000 bankrupts from bankruptcy. This means that the changes listed below are already in effect. All technicalities aside, let us get to the meat of the issue: how do these changes make it harder someone to become a bankrupt?

1. You need to owe more money to be declared a bankrupt

Old law (BA 1967)

Under the old BA 1967, the minimum required for a creditor (the person you owe money to) to serve bankruptcy papers to an individual was RM30,000. To put it in perspective, RM30K today is roughly what you would owe the bank after putting your down payment for a Perodua Axia. Which sounds pretty insane because the Axia is regarded as many to be one of the cheapest options out there. RM30K would have been a lot of money in the 1960s when the Act first came into force but given the forty-odd years that have passed, change is sorely needed.

New law (IA 1967)

Given this antiquated threshold, the government saw fit to jack up the bar and as amended by the IA 1967, the amount needed for you to be declared a bankrupt now stands at a minimum of RM50,000:

Section 12(a) BAA 2017:

Section 5 of the principal Act is amended...by substituting for the word 'thirty' the word 'fifty'.

This means that it will now be harder for you to be declared a bankrupt and perhaps, this move was meant to address the surprising fact that many Malaysians are in financial poverty due to car loans.

2. Social guarantors can no longer be declared bankrupt

Now you might be familiar with what a guarantor is but what exactly is a social guarantor? A social guarantor is defined under the Insolvency Act 1967 as those who do not profit from loans and provide guarantees to loans such as educational loans, hire-purchase loans and housing loans. These are typically family members or friends who in the past, due to defaults in the another's loan repayment, would have to face bankruptcy as well.

Old law (BA 1967)

Actions against social guarantors used to be allowed when a creditor has exhausted all other means to recover a debt owed to him as stated in section 5(3) BA 1967:

...creditor not entitled to commence any bankruptcy action against a social guarantor unless he proves to the satisfaction of the court that he has exhausted all avenues to recover debts owed to him...

New law (IA 1967)

Under the amendments provided for in section 12(b) BAA 2017, the IA 1967 no longer allows social guarantors to be declared bankrupt.

Bankrupts can petition to be made a non-bankrupt but their creditors are allowed to object to this. The new law places a cap on this by disallowing objections against members of the public who are deceased, disabled or suffering from a serious illness as certified by a Government Medical Officer.

On the other hand, if you are a guarantor OTHER than a social guarantor, this law will not apply to you. However, you would be entitled to extra protection where creditors are not allowed to take an action against you unless they have obtained leave from the court (this means seeking permission from the court).

Section 3 IA 1967:

A petitioning creditor shall not be entitled to commence any bankruptcy action - (a) against a social guarantor; and (b) against a guarantor other than a social guarantor unless the petitioning creditor has obtained leave from the court.

Section 4 IA 1967:

Before granting leave referred to in paragraph 3(b) [non-social guarantors], the court shall satisfy itself that the petitioning creditor has exhausted all modes of execution and enforcement to recover debts owed to him by the debtor.

This means that social guarantors now enjoy blanket immunity whilst the other kinds of guarantors are better protected by making actions against them a last resort. This is a fantastic provision as you can in the pie chart above, guarantors make up 10% of all bankruptcy proceedings in Malaysia.

Beyond that, not allowing objections to certain groups of society has been termed as a humanising element by certain parties wherein the shame of bankruptcy no longer haunts such individuals.

3. You can stop being a bankrupt automatically

Old law (BA 1967)

Under the old law, you can petition to be a non-bankrupt after five years provided that there are no objections from your creditors. Whether or not you would be released from bankruptcy depends on the Director General of Insolvency's discretion.

Section 33A BA 1967:

The Director General of Insolvency may, in his discretion...issue a certificate discharging a bankrupt....

New law (IA 1967)

You can now be automatically discharged if you meet certain requirements laid out in section 33C of the IA 1967.

The two important points to be noted in section 33C IA 1967 are:

(i) There is now an automatic discharge, subject to good behaviour (making payments towards your debt and submitting a full accounting of your moneys and property), instead of being at the mercy of the Director General's discretion

(ii) The timeline has been reduced to three years from five years.

Section 33C IA 1967:

A bankrupt shall be discharged...on the expiration of three years from the date of submission of the statement of affairs...(a) if the bankrupt has achieved amount of target contribution of his provable debt; and (b) if the bankrupt has complied with the requirement to render an account of moneys and property to the Director General of Insolvency.

4. You can now negotiate your way out of bankruptcy

Old law (BA 1967)

No such mechanism exists.

New law (IA 1967)

Section 8 BAA 2017 inserts the following into section 2c(1) IA 1967:

A debtor may propose a voluntary arrangement to his creditors any time before he is adjudged bankrupt.

At this juncture, you might be wondering why you would want to propose any kind of arrangement with your creditor, and what in the world is a voluntary arrangement.

A voluntary arrangement basically allows you to be your own hero by making arrangements to stop yourself from being a bankrupt before it happens.

This arrangement is a preemptive measure where if you ever find yourself steeped in debt, you can propose to your creditors a debt repayment plan e.g a five year repayment plan. Summarising the procedure, as a debtor (someone who owes money to another person), you need to appoint a nominee (someone who is listed in the IA 1967 such as a registered accountant, a lawyer etc.) and seek for an interim order (temporary court order) of 90 days. During this interim order, your nominee must gain the approval of creditors for the voluntary arrangement to take place.

This is provided for under section 2c(2) IA 1967:

A debtor who intends to propose a voluntary arrangement shall - (a) appoint a nominee to act in relation to the voluntary arrangement or for the purpose of supervising the implementation of the voluntary arrangement...

In essence, it can be argued that this amendment allows debtors more freedom to dictate the terms of their repayment and prevent the crippling effects of bankruptcy such as the prohibition of overseas travel except in limited situations and not being allowed to own property.

5. Now you will definitely be informed of your bankruptcy status

Old law (BA 1967)

A common complaint of many bankrupts today is that they were unaware that they had been served bankruptcy papers. This is because section 3(2) BA 1967 merely states that notices have to be served in a "prescribed manner" leading to an odd situation where you could be a bankrupt and not even realise it. This is due to the fact that the papers were not delivered personally to the debtor but were delivered through a substitute service.

A substitute service is essentially passing over the documents through a court-approved friend or family member, by publishing it in the local newspapers, sending it via mail, or leaving it at your workplace.

New law (IA 1967)

Section 9(b) and (c) BAA 2017 amends this undesirable situation and now section 3(2A) IA 1967 provides that bankruptcy notices need to be served personally to a debtor and a substituted service can only be used when the creditors manage to prove to the courts that you had tried to avoid getting served:

...creditor can prove to the satisfaction of 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.

You can no longer be declared a bankrupt without your knowledge! Unless you were already trying to run away.

Yay! If I am bankrupt now, does this mean I am no longer a bankrupt?

Unfortunately, the BAA 2017 does not apply to people who already have bankruptcy petitions against them. This means that it does not apply to cases before the coming-into-effect of the BAA 2017.

Section 60(1) BAA 2017:

This Act shall not apply to a debtor or bankrupt against whom a receiving order or adjudication has been made before the coming into operation of this Act.

With this being said, bankrupts who fall under the exceptions provided for in section 33B(2A) IA 1967 (bankrupts who are deceased, living with disability or suffering from serious illness) can still seek a discharge from bankruptcy PROVIDED that they fulfill the minimum five year requirement as per the old BA 1967 and not the three year requirement under the new IA 1967.

This ban against current bankrupts also also applies to social guarantors who have pending bankruptcy proceedings against them. Hence, they cannot rely on the added protection brought about by the BAA 2017 amendments.

What can I do to prevent myself from falling into bankruptcy?

If you ever find yourself caught in a financial pickle, you can head over to Agensi Kaunseling dan Pengurusan Kredit ("AKPK") for free financial counselling and debt management.

If you are unsure of your current financial status, the government has launched an app that enables you to check your bankruptcy status. Otherwise, you can always proceed to the Department of Insolvency's website or their head office in Putrajaya and pay a nominal fee in order to find out where you stand.