Going Bankrupt

It is no secret that the current economic outlook is bleak. As businesses suffocate, individuals bear the brunt. Each day we hear about salaries being cut, benefits chopped and jobs facing the axe. Amongst others, an individual may be impacted in the following manner:

(a) he/she may default on his/her loan(s) or debts;

(b) he/she may have guaranteed someone else’s loan/debts who then defaults on it;

(c) a sole proprietor may find it difficult to meet his/her current liabilities when they fall due.

Individuals in such situations worry about the possibility of bankruptcy. At the same time, creditors would want to know whether they can successfully bring a bankruptcy petition against such individuals.

In this article we consider the following points:

(a) the meaning and effects of bankruptcy;

(b) who may bring a bankruptcy petition;

(c) the requirements to satisfy to bring a bankruptcy petition; and

(d) whether bankruptcy proceedings can be brought against guarantors.

Bankruptcy and its effects

Simply put when an individual is declared bankrupt, all of his/her properties and assets will vest with the Director General of Insolvency (DGI). This means that the individual ‘loses’ ownership over his/her property and assets. This includes land, buildings (including homes), vehicles, stocks and shares in companies, cash held and monies kept in banks.

The exception to this are tools which the individual uses for his/her trade as well as clothes, bedding and other necessaries of the individual, their spouse and their children. However, these items must not exceed RM5,000.00 in total.

Once such property vests with the DGI, the DGI will then liquidate these assets to secure an equitable distribution amongst the creditors in accordance with their rights.

The implications and effects of a Bankruptcy Order are more easily visualised through the following info-graphic:

Who can bring a Bankruptcy Petition?

Both individuals and creditors can bring a bankruptcy petition. Simply put, a petition is a formal document that one lodges with the court to initiate bankruptcy proceedings.

A petition by individuals is known as a debtor’s petition. In this type of petition, the individual must state that he/she “is unable to pay his/her debts”. The court will then make a Bankruptcy Order.

On the other hand, there are additional hurdles that must be overcome concerning creditors’ petitions before the court will grant a Bankruptcy Order. This is discussed in further detail below.

Requirements to bring a Creditor’s Petition

We have summarized the requirements to bring a creditor's petition in the chart below:

Creditors must show that the individual had committed an act of bankruptcy. This next info-graphic sets out the various acts of bankruptcy:

Can bankruptcy proceedings be brought against guarantors?

It is not that easy for creditors to bring bankruptcy proceedings against guarantors.

Here, there is good news for social guarantors as there is a total prohibition on bringing bankruptcy petitions against them. Essentially, social guarantors are persons who provide guarantees without the intention of making a profit. This is limited to the following type of guarantees:

(a) a guarantee for a loan, scholarship or grant for educational purposes;

(b) a guarantee for a hire-purchase transaction of a vehicle for personal or non-business use; and

(c) a guarantee for a housing loan transaction solely for personal dwelling;

For non-social guarantors, bankruptcy petitions may still be brought against them. However, creditors must first obtain permission from the court. To obtain such permission creditors must satisfy the court that they have exhausted all other means to recover the debt owed by the principal debtor. This is not an easy task.

Conclusion

Being declared bankrupt may be the last thing that a person wants as it would mean that they are divested of their property and have many restrictions imposed on them. Creditors, however, will find the bankruptcy petition useful as it allows them to recoup the monies they are owed from liquidating the assets of the bankrupt.

However, certain requirements must be met before a bankruptcy petition may be brought against an individual. We have also seen that it can be difficult to bring a bankruptcy petition against a guarantor and impossible against a social guarantor.