On 21 November 2016, the Bankruptcy (Amendment) Bill 2016 (Bill) was tabled in Parliament. The Bill will rename the Bankruptcy Act 1967 to the Insolvency Act 1967 and will have important implications, in particular to financial institutions and corporates whose loans / debts are secured by personal guarantees, once their amendments are incorporated in the existing Bankruptcy Act 1967 (Act) and are passed and in force.

The Bill has yet been gazetted and there has not been any indication as to when it will come into force. Nonetheless, it would be prudent for financial institutions / corporates who rely on personal guarantees to keep the new changes in mind. This alert provides a summary of some of the key amendments which may affect you.

Increase in Threshold for Bankruptcy Proceedings

The Bill will increase the threshold for commencement of bankruptcy proceedings from the current RM 30,000 to RM 50,000.

Exemption of Social Guarantors from Bankruptcy

Creditors will no longer be able to commence any bankruptcy action against social guarantors, who are persons who provide, not for profit, guarantees for:

  • a loan, scholarship, or grant for educational or research purposes;
  • a hire-purchase transaction of a vehicle for non-business use; and
  • a housing loan transaction solely for personal dwelling.

More Protection for Other Guarantors

Creditors will also not be able to commence bankruptcy proceedings against guarantors (other than social guarantors) without leave (permission) of Court. To obtain leave, the creditor must show that he has exhausted all modes of execution and enforcement to recover debts owed to him by the debtor.

More Stringent Requirements for Service of Bankruptcy Papers

The Bill will require personal service of the bankruptcy notice. Substituted service will only be allowed where the creditor is able to factually show that the debtor:

  • has the intent to defeat, delay or evade personal service; and
  • leaves from Malaysia or absents himself from his house or place of business.

A New Rescue Mechanism: The Voluntary Arrangement

As a reflection to the international standard practice among developed countries such as the United Kingdom and Singapore, the Bill will introduce a new pre-bankruptcy rescue mechanism called the "voluntary arrangement" wherein a debtor can negotiate a debt settlement proposal with its creditors to avoid the effects of bankruptcy, for example, through a 5-year repayment plan. This can be done anytime before a debtor is adjudged a bankrupt. The main aspects of the new mechanism are as follows:

  • Appointment of a nominee - The debtor will appoint a nominee to oversee and supervise the implementation of the voluntary arrangement. The nominee must be either a chartered accountant, an advocate and solicitor, or such other person as prescribed by the Director General of Insolvency.
  • Application for an interim order - The debtor will then apply to the court for an interim order for voluntary arrangement, which will be for a period of 90 days that cannot be extended.
  • Protection from legal actions - Within the period of the interim order, no bankruptcy petition and legal proceedings can be commenced against the debtor except with permission from the court.
  • Meeting with creditors - During the period of the interim order, the nominee will hold a meeting will all of the debtor's creditors to secure their approval for the voluntary arrangement.
  • Approval by special resolution - The nominee will need to secure more than 50% in number and at least 75% in value of the creditors present personally or by proxy and voting on the resolution.
  • Secured creditors' rights - The rights of the secured creditors cannot be affected, however, without their consent.
  • Effect - The voluntary arrangement will then be binding on all creditors once approval is obtained.

Automatic Discharge of Bankruptcy

The Bill will also introduce a new provision allowing for automatic discharge of the bankruptcy on the expiration of 3 years from the date of submission of the debtor's statement of affairs, provided that the debtor:

  • achieves the target contribution of his provable debt; and
  • renders an account of moneys and property to the Director General of Insolvency.

Certain Bankrupts to be Allowed Discharge without Objection

Creditors will no longer be allowed to object to the discharge of certain bankrupts, including:

  • a social guarantor;
  • a bankrupt with a disability under the Persons with Disabilities Act 2008;
  • a deceased bankrupt; and
  • a bankrupt suffering from a serious illness.