Bankruptcy: You have been served a bankruptcy notice, now what?

What is a Bankruptcy Notice?

For an individual to be adjudicated a bankrupt, a debtor must first commit an “Act of Bankruptcy” under Section 3 of the Insolvency Act 1967. It is common practice for creditors to satisfy this pre-condition under Section 3(1)(i) of the Insolvency Act whereby a creditor would issue a “Bankruptcy Notice”, demanding a debtor to pay a judgement sum stated in the notice within 7 days after the service of the Bankruptcy Notice. 
*A sample of this Bankruptcy Notice can be found in Form 34 of the Insolvency Rules 2017.

Why did this occur?

Section 3(1)(i) first requires a creditor to obtain a judgement against a debtor. If you are unaware of the legal proceedings stated in the Bankruptcy Notice, it is likely that the creditor has served the cause papers to your last known address and had obtained a judgement uncontested due to your absence (a Judgement in Default).

What can you do?

Upon receiving a Bankruptcy Notice, you may within the 7 stipulated days, elect to settle the debt and file an affidavit under Rule 93 of the Insolvency Rules 2017, in accordance with Form 36 of the Insolvency Rules.

Alternatively, you may instead file a notice of application and an affidavit in support under Rule 17 of the Insolvency Rules requesting the High Court to exercise their powers under Rule 93 of the Insolvency Act to set aside the Bankruptcy Notice by disputing the Bankruptcy Notice.

There are numerous grounds that a debtor may rely on when disputing a Bankruptcy Notice, a few examples of these grounds are: - 

1. The judgement stated in the Bankruptcy Notice is not considered as “Final”¹;
2. The Bankruptcy Notice was served 3 months after the date it was issued²; or
3. The sums stipulated in the Bankruptcy Notice is not fully quantified³.

What if you have failed to make payment or failed to dispute the Bankruptcy Notice within the stipulated 7 days?

Upon the expiry of the 7 days stipulated in the Bankruptcy Notice, the creditor will instruct their solicitors to file a Creditor’s Petition. Under Section 5(1) of the Insolvency Act, the following conditions must be met for a Creditor Petition to be valid: - 

1. You currently owe a creditor or multiple creditors at least an aggregate sum of RM100,000.00;
2. This aggregate sum of RM100,000.00 or more is payable immediately or is to be paid in the future;
3. The creditor petition was presented within 6 months of the Act of Bankruptcy (for our purposes, within 6 months from the expiry of the 7 days stipulated in the Bankruptcy Notice); and
4. You are currently residing in Malaysia or you own a business in Malaysia.

At this stage, you would not be able to challenge the validity of the Bankruptcy Notice⁴, therefore you will be required to either show cause against the Creditor’s Petition or to challenge a Creditor’s Petition.

To show cause against the Creditor’s Petition would be akin to providing reasons⁵ why you should not be adjudicated a bankrupt, which is either because you had settled the debts owing or you have sufficient proof to show you are in actuality solvent⁶. Following Rule 117 of the Insolvency Rules 2017, you are required to file an Affidavit in accordance with Form 45 in the Insolvency Rules 2017.

To challenge a Creditor’s Petition, you are essentially stating that the Creditor’s Petition are not filed in compliance with provisions under the Insolvency Act 1967 or Insolvency Rules 2017 such as presenting the Creditor’s Petition 6 months after the Act of Bankruptcy⁷ (for our purposes, after 6 months from the expiry of 7 days stipulated in the Bankruptcy Notice) or the debt owing under the Creditor’s Petition is lesser than the statutory amount of RM100,000.00⁸. The procedure to challenge a Creditor’s Petition is set out under Rule 17, whereby you would need to file a Notice of Application and an Affidavit in Support stating your grounds in opposing the Creditor’s Petition⁹.

Conclusions

There are many intricacies and nuances in a bankruptcy proceeding which cannot be adequately covered in this short introductory article. However, the main takeaway of this article is that the law would only favour the parties who takes the proactive action in exercising their rights or opposition at the earliest given opportunity. 

DISCLAIMER

This article does not constitute as professional legal advice and therefore no reliance should be given to it. It is recommended that you seek actual profession legal advice in relation to your matter, as specific facts and circumstances may change the applicability of this articles.

 

Article by Chua Jeungru (Pupil-in-Chambers)
Edited by XXX (Partner)
04 April 2023
 

¹ It was held in Re Udos ak Riging, ex p Seabanc Kredit Sdn Bhd [1994] 3 MLJ 383 a Judgment in Default is not final until the expiry of the period to appeal.

² Rule 94 and Rule 96 of the Insolvency Rules 2017

³ It was held in Low Mun v Chung Khiaw Bank Ltd [1988] 1 MLJ 263 that the total amount payable must be quantified so the debtor can comply with the 7-day time period stipulated in the Bankruptcy Notice.

⁴Dato' Sri Teong Teck Leng v Jupiter Securities Sdn Bhd [2003] 4 CLJ 34

⁵ The courts in Dato' Sri Teong Teck Leng v Jupiter Securities Sdn Bhd [2003] 4 CLJ 34 states that “to show cause” is similar to filing defence in a civil suit.

⁶ The courts in OCBC Bank (M) Bhd v Sethu a/l Ambalagara Thevar [1998] 3 MLJ 769 held that the debtor was solvent because he was able to produce 2 banker’s draft on the day of the hearing of the petition which can absolve him of his obligations under the Bankruptcy Notice.

⁷ Section 5(1)(c) of the Insolvency Act

⁸ Section 5(1)(a) of the Insolvency Act

⁹ The courts in Dato' Sri Teong Teck Leng v Jupiter Securities Sdn Bhd [2003] 4 CLJ 34 states that “to challenge” is similar to filing striking out a writ and statement of claim and you are required to follow the procedure under Rule 17 of the Insolvency Rules 2017