Actually, how do bankruptcy proceedings start in Malaysia?

We are all familiar with the concept of bankruptcy and most of us dread it more than we dread our in-laws. This is because we know that bankruptcy means that you can’t do a lot of things such as owning properties like houses and cars and you can’t even travel out of the country. However, we may all be familiar with what happens after a person becomes bankrupt but not the process of becoming bankrupt.

You might have the perception that this information is only useful for lawyers but it never hurts to have more knowledge. Plus, you would be able to learn the ways you can challenge your bankruptcy in court. 

Given the complexity of this area, we will break down the law on this area into several articles. This article will touch on the issues surrounding acts of bankruptcy and the bankruptcy notice itself while other articles will touch on the debtor’s and creditor’s petition. 

Without further ado, let’s dive into this sticky area of law. 

Bankruptcy proceedings start because of what you do

You might think that this is a no-brainer because how else would you land in bankruptcy? Well, specifically, bankruptcy proceedings can only commence after certain acts of bankruptcy have been committed. What constitutes an act of bankruptcy can be found in section 3 of the Insolvency Act 1967 (“IA 1967”) (this is a recently amended law and so the link will lead you to the Bankruptcy Act 1967, you can read more about the recent amendments here).

Section 3 is a super long section covering multiples acts of bankruptcy so to avoid confusion, we will just list down the more common acts and you can read the rest on your own:

1. Failing to pay a judgment debt
2. With the intent to defeat or delay your creditors, you leave Malaysia or stay outside Malaysia
3. If you transfer your property to your trustees for the benefit of your creditors

For the purposes of this article, we will focus on the most common act of bankruptcy – failure to pay a judgment debt. But what in the world is a judgment debt?

A judgment debt comes from debt recovery

A judgment debt comes about when the person you owe money to starts legal proceedings against you and the court finds that you do owe said person and passes a judgment requiring you to pay the money you owe (judgment debt). An example of this is as follows:

Ali owes Abu RM10,000. Ali promises to pay Abu back within the year but fails to do so.

Abu then starts legal proceedings to sue Ali for the return of the RM10,000. The court finds that Ali does owe Abu RM10,000 and proceeds to pass their judgment.

Ali is now legally known as the judgment debtor and he owes a judgment debt of RM10,000.

After this judgment is passed, your creditor (the person you owe money to) would have to issue a bankruptcy notice. This bankruptcy notice serves as a notice for the debtor (you) to pay the judgment debt within 7 days. If you fail to pay the judgment debt within 7 days, you would have committed an act of bankruptcy as defined by section 3(1)(l) IA 1967:

“if a creditor has obtained a final judgment or...a bankruptcy notice under this Act requiring him to pay the judgment debt or sum ordered to be paid in accordance with the terms of the judgment or order with interest quantified up to the date of issue of the bankruptcy notice...and he does not within seven days after service of the notice...”

Following this act of bankruptcy, your creditor can then present a creditor’s petition to the court to start the bankruptcy proceedings. As mentioned above, we will cover the creditor’s and debtor’s petition in another article as there are tons of issues to look at for a bankruptcy notice. The first is...

The judgment must be final

Err...aren’t all court judgments final? Actually, there can be several scenarios where a court judgment would not be considered final but merely interlocutory. A final judgment only happens when there has been a full consideration of the merits of the case and an interlocutory judgment is where the merits of the case have not been considered. This means that if the court judgment was obtained through a concealment of facts or wilful falsehood, then the judgment wouldn’t be valid. This was found in the Malaysian case of Vijendran Ponniah v MBf Country Homes & Another while another case of Re Udos al Rigging v Seabanc Kredit also tells us that a judgment in default is not a final judgment.

This is because judgments in default are issued when you fail to attend court. When you fail to attend the court, the court would not be able to consider the merits of your case and therefore, they would pass judgment on the basis that you weren’t present in court. Hence the name, judgment in default of attendance. 

If the judgment is not final, your creditor is not allowed to issue a bankruptcy notice to you. Aside from requiring a final judgment, there are also rules on how the bankruptcy notice is to be served on you. 

The bankruptcy notice must be given to you personally

Rule 109 of the Bankruptcy Rules 1969 (unfortunately a copy of this is not available online) states that the bankruptcy notice must be personally served on you by either an officer of the Court, your creditor, their solicitor or anyone in their employment. Personal service means that must be passed to you directly. If you think that you can be sneaky and just pretend that you didn’t know that a bankruptcy notice existed by evading the personal service, you are sorely mistaken. This is due to a tiny thing called substituted service.

Substituted service happens when the creditors apply to the court to state that personal service is impossible. If the courts allow substituted service to take place, this means that they will allow the creditor to bring the bankruptcy notice to your attention via other means such as advertising in newspapers, posting in the court’s notice board, and so on. 

However, in order for creditors to use substituted services, they must prove to the court that they have tried their best to personally serve the bankruptcy notice on you. This is where Practice Note 1/68 comes in. Unfortunately a copy of this is also not available online but Practice Notes basically denote what is the usual standard practice in a certain area of law. Practice Note 1/68 in particular talks about the steps that must be taken by your creditor before the court will allow substituted service to take place. 

When acting in accordance with the Practice Note, your creditor must make 2 calls to your house (or business place if bankruptcy relates to your business) during reasonable hours on weekdays. Aside from that, each call has to be made on separate days and the second call must be made by a letter of appointment. This means that before your creditor makes the second call, he must send you a letter (at least 2 days before the proposed date to call), enclosing a copy of the bankruptcy notice and notifying you that they would call you on the stated date and time. The letter must also offer you an opportunity to pick a separate date/time to receive the call. 

This is how the Practice Note would work:

The court has passed a final judgment on Ali and bankruptcy notice has been issued by his creditor, SayaPinjamWang Sdn Bhd. 

SayaPinjamWang attempts to effect personal service on Ali and looks for him at his house. Ali does not show up.

SayaPinjamWang then makes a call on Monday at 3p.m. Ali does not answer the call.

On Tuesday, SayaPinjamWang sends out a letter to Ali, enclosing the bankruptcy notice and informing him that they would be calling him on Friday at 3p.m. They also mention that Ali is free to call them during office hours to reschedule the date and time.

Ali does not call SayaPinjamWang. SayaPinjamWang calls Ali on Friday at 3p.m as mentioned. Ali does not pick up.

SayaPinjamWang can now apply for substituted service from the courts.  

If your creditor fails to act in accordance with Practice Note 1/68, the case of Leow Boke Chooi v Asra Motor Co states that the attempt at personal service would be considered bad service. Bad service means that the court will presume that you didn’t receive the notice at all.  

If you are rejoicing over this because your creditor never bothered to drop you two calls and you think that you can challenge the validity of the notice, be mindful that this Practice Note only needs to be adhered to if the creditor knows of your whereabouts as established in the case of Re Nirmala a/p Muthiah Selvarajah. 

Now that you know when and how a bankruptcy notice can come to you, the next question is what should be on the bankruptcy notice?

The bankruptcy notice must note the exact amount you owe