A possible rise in personal bankruptcies Post-COVID19by admin
Individuals are suffering from the negative impact of COVID-19 on the labour market. As at March 2020, Malaysia’s unemployment rate spiked to 3.9%, the highest in a decade, and the number of unemployed persons increased by 17.1% to 610,500, compared to 521,300 in March 2019.1 Sobering concerns of a looming global recession could result in higher-than-expected layoffs.2
This dire outlook could burden individuals with personal financial distress which may result in an increase of personal bankruptcies.
WHAT IS BANKRUPTCY?
Insolvency refers to the factual state of a person’s inability to pay his/her debts, but who is not yet adjudicated or declared as a bankrupt by the court. Bankruptcy is the consequenceof an insolvent debtor being adjudged or declared a bankrupt by the court.
The sources of bankruptcy law include the Insolvency Act 1967 as amended by the Bankruptcy (Amendment) Act 2017, and the Insolvency Rules 2017.
The main objective of bankruptcy law is to vest the insolvent debtor’s property and assets with the Director General of Insolvency (DGI) to be distributed amongst the creditors according to their rights and priority, and to relieve the insolvent debtor of the unpaid balance of his liabilities so as to have a fresh start financially. On a policy level, bankruptcy proceedings also provide insight into the reasons of the debtor’s insolvency so that the interests of future creditors may be better protected.
Before bankruptcy proceedings can take place, an act of bankruptcy under Section 3(1) (a)-(j) of the Insolvency Act 1967 must have been committed. One of the more common types of acts of bankruptcy is where a creditor who has obtained a final judgment or final order against the debtor has served on the debtor a bankruptcy notice requiring him to pay the sum according to the judgment which must not be less than RM50,000, and the debtor has failed to reply within 7 days after service of the notice.
HOW DOES BANKRUPTCY AFFECT YOUR LIFE?
Being adjudged a bankrupt brings with it certain consequences under Sections 36 and 38 of the Insolvency Act 1967, such as the following:
- The bankrupt is disqualified from being appointed as a Sessions Court Judge, Magistrate, or a Councillor of a local authority.3
- The bankrupt cannot bring any action other than an action for personal injuries without the previous sanction of the DGI.4
- The bankrupt is under a duty to submit to the DGI an account of his income and expenditure once in every six months.5
- The bankrupt shall immediately report to the DGI all monies, property or proceeds which exceeds RM500 that come into his possession.6
- The bankrupt shall not leave the country without the previous permission of the DGI.7
- The bankrupt shall not enter into or carry on any business, or become a director of any company except with the permission of the DGI.8
- The bankrupt shall not engage in the management of any business run by family without the permission of the DGI.9
DISCHARGE OF A BANKRUPT:
The Insolvency Act 1967 provides for ways in which a bankrupt can be discharged. In essence, this allows the bankrupt to be released from his debts provable in the bankruptcy, subject to certain exceptions under Section 35 of the Insolvency Act 1967.
There are generally two ways in which a bankrupt can be discharged:
(a) Discharge by Court under Section 33 of the Insolvency Act 1967.
(b) Discharge by the DGI under Section 33A of the Insolvency Act 1967.
When it comes to the rationale behind the discharge of a bankrupt, the following extract from the judgment of the High Court in Re Mohana Sundari M Subramaniam Ex Parte United Prime Corporation Bhd  2 MLRH 71910 proves insightful:
“…the Act which allows a discharge from bankruptcy itself shows it is intended that a bankrupt have some form of relief…it seeks to balance two major conflicting concerns. On the one hand, it would be undesirable to let those who become bankrupt off the hook if they have brought about their bankruptcy by dishonest business dealings, rash and extravagance in living and if they have conducted their business affairs to the detriment of their creditors. On the other hand, it would be in the interests of society and commercial morality that people who have become bankrupt through little fault of their own but by just being caught at the wrong turn of the economic cycle be given a second chance in life.”
Fortunately, there are certain reliefs, measures, and mechanisms which an individual may take into consideration before slipping into bankruptcy.
One such mechanism under the Insolvency Act is a Voluntary Arrangement which is a prebankruptcy rescue mechanism. Under the Voluntary Arrangement, the individual appoints a Nominee who acts as an independent professional to supervise the Voluntary Arrangement, and files a court application for an interim order which lasts for 90 days. This interim order acts as a moratorium against bankruptcy and other legal proceedings. Within the 90 day period, the Nominee will hold a creditors’ meeting to secure more than 50% in number and at least 75% in value of the creditors’ approval of the Voluntary Arrangement.
In addition, Bank Negara Malaysia has made announcements on a number of regulatory and supervisory measures in support of efforts by banking institutions to assist individuals to manage the impact of the COVID-19 outbreak. For example, banking institutions will offer a deferment of all loan/financing repayments for a period of 6 months, with effect from
1 April 2020.11 Therefore, it is useful for individuals to ensure they enquire, understand, and discuss with their banking institutions on the options available for them.
Further, the Malaysian Government has also implemented several financial assistance such as the ‘Bantuan Prihatin Nasional’ measure.
The strain on the solvency of individuals from the effects of COVID-19 may bring about a rise of bankruptcy proceedings. It is thus important for individuals to weigh out the options available to provide relief to their financial distress and to be aware of the possibility and effects of being adjudged a bankrupt.
1. Key Statistics of Labour Force in Malaysia, March 2020, Department of Statistics Malaysia
3. Section 36 Insolvency Act 1967
4. Section 38(1)(a) Insolvency Act 1967
5. Section 38(1)(b) Insolvency Act 1967
6. Section 38(1)(ba) Insolvency Act 1967
7. Section 38(1)(c) Insolvency Act 1967
8. Section 38(1)(d) Insolvency Act 1967
9. Section 38(1)(e) Insolvency Act 1967
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