What is Bankruptcy?
Bankruptcy is a legal process that can be initiated against an individual who has failed to meet their financial obligations, typically after a creditor has obtained a court order or judgment. Bankruptcy procedures are governed by the Insolvency Act, 2023, and the Insolvency Rules, 2017 (referred to as the ‘Act’ and the ‘Rules’ respectively, where applicable). Often considered the final step in enforcement actions, bankruptcy carries significant consequences. The seriousness of a bankruptcy order should not be underestimated, making it essential to fully understand the processes involved in bankruptcy proceedings.

Bankruptcy Notice
Although bankruptcy proceedings can arise from various circumstances outlined in Section 3(1) of the Act, this article will primarily focus on the most common situation, which is addressed in Section 3(1)(i) of the Act. Section 3(1)(i) of the Act reads as follows:
“if a creditor has obtained a final judgment or final order against him for any amount and execution thereon not having been stayed has served on him in Malaysia, or by leave of the court elsewhere, 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, or to secure or compound for it to the satisfaction of the creditor or the court; and he does not within seven days after service of the notice …”

i. What Must the Bankruptcy Notice Contain?
When a creditor applies to the Court for the issuance of a bankruptcy notice, the application must include the following:

• A sealed copy of the judgment or order upon which the bankruptcy notice is based.
• A sealed copy of the relevant writ or originating summons.
• If the claim arises from an agreement (such as a sale and purchase agreement), a copy of the agreement must be provided.
• A copy of the bankruptcy notice itself.
  (See: Rules 89 & 90 of the Rules)

ii. Considerations When Preparing a Bankruptcy Notice
A bankruptcy notice can be set aside if there are non-compliances, especially given the strict procedural requirements in bankruptcy proceedings due to its quasi-penal nature. Key factors to consider when drafting a bankruptcy notice include:

1. The bankruptcy notice must be based on a final order or judgment that has not been stayed.
2. Under the new Act, bankruptcy proceedings cannot be initiated against a social guarantor.
3. Ensure that all sums stated in the bankruptcy notice are accurately and clearly quantified. Simply stating the interest as a percentage is not sufficient; the exact amount must be specified.
4. Interest must be calculated and included up to the date of issuance of the bankruptcy notice.

iii. Service of the Bankruptcy Notice
A bankruptcy notice is valid for only 3 months from the date of issuance. The creditor must ensure that the bankruptcy notice is personally served on the debtor. Once the notice is served, the debtor has 7 days to respond. If the debtor fails to do so, they will have committed an Act of Bankruptcy.
(See: Rule 97 and Rule 109 of the Rules)
If a creditor is unable to personally serve the bankruptcy notice on the debtor, they may file a summons in chambers and request an order for substituted service. This would allow the creditor to bypass the requirement for personal service and use an alternative method of serving the bankruptcy notice.
(See: Rule 110 of the Rules & Order 62 Rule 5 of the Rules of Court, 2012)
In applying for a substituted service, the Court must be satisfied with the following:

• There is a practical impossibility of personally serving the bankruptcy notice.
• The proposed method of substituted service is effective in bringing the proceedings to the debtor’s knowledge.
  (See: Re S Nirmala A/P Muthiah Selvarajah T/A Shamin Properties; Ex Parte The New Straits Times Press (Malaysia) Bhd [1988] 2 MLJ 616)
  If the Court is satisfied with the application, it will grant the order for substituted service. The creditor can then proceed to serve the bankruptcy notice in accordance with the order. Once served, the debtor will have 7 days to respond to the bankruptcy notice. Failure to do so will result in the debtor committing an Act of Bankruptcy.

Creditor’s Petition
If the debtor fails to respond to the bankruptcy notice within the 7-day period and there is no opposition or application to set aside the notice, the creditor may proceed to file the Creditor’s Petition (the ‘Petition’) against the debtor.
Under Section 5 of the Act, the requirements and conditions for filing a Petition are briefly summarized as follows:

• The debt owed must be RM100,000.00 or more (previously RM50,000).
• The debt must be a liquidated sum, either due immediately or at some future time.
• The petition must be filed within 6 months from the Act of Bankruptcy.
• The debtor must be domiciled in Malaysia or any State, or have been within one year before the date of the Petition’s presentation.
  Each Petition must be accompanied by an affidavit verifying the contents of the Petition. This affidavit must be affirmed by the creditor or someone on the creditor’s behalf who has knowledge of the relevant facts. To avoid any potential technical objections, it is important that the affidavit is affirmed immediately after the Petition is presented.

The Hearing
Once all the above requirements are complied with, the Court will schedule a date for the hearing of the Petition. The hearings are typically conducted by the Senior Assistant Registrar, who would have overseen the proceedings from the first case management session through to the hearing itself.
At the hearing, the Court may require evidence to prove the debt owed to the creditor, the existence of the Act of Bankruptcy, and that the Petition was properly served on the debtor (especially if the debtor fails to attend the hearing). The Senior Assistant Registrar, under the Act, has the authority to make the following orders:

1. Issue a Bankruptcy Order pursuant to Section 4 of the Act.
2. Dismiss the Petition due to procedural irregularities or if the Court believes that the debtor can satisfy the debt based on the debtor’s arguments.
3. Stay the Petition pending an appeal of the judgment or order that was relied upon in the bankruptcy proceedings.
   (See: Section 6 of the Act)
   For clarity, the Bankruptcy Order is the final order made by the Court, officially declaring the debtor as bankrupt. Following this, the debtor’s property and assets will be vested with the Director General of Insolvency (DGI), who will then distribute the assets to creditors that submit a valid proof of debt to the DGI.

Opposing & Setting Aside
During the proceedings, the debtor has the right to file affidavits in opposition and to submit a summons in chambers to request that the proceedings be set aside.

i. The Affidavit in Opposition of the Bankruptcy Notice
Upon being served with the bankruptcy notice, the debtor may file an affidavit in opposition within 7 days of service. The debtor can challenge the bankruptcy notice on the grounds that they have a counterclaim, set-off, or cross-demand that equals or exceeds the amount claimed in the bankruptcy notice.
(See: Rule 93 of the Rules)
Upon the filing of the affidavit in opposition, an Act of Bankruptcy will not be deemed to have occurred within the 7-day period until the Court has addressed the debtor’s opposition. If the Court agrees with the debtor’s position, the bankruptcy notice will be set aside. However, if the Court disagrees, the bankruptcy notice will remain valid, and an Act of Bankruptcy will have occurred. The Court will then issue directions for the presentation of the Petition.
It is important to note that under this method of opposition, the debtor can only challenge the bankruptcy notice on the grounds that there is a counterclaim, set-off, or cross-demand that equals or exceeds the amount claimed in the notice.

ii. Setting Aside the Bankruptcy Notice
If the debtor intends to challenge the bankruptcy notice on grounds other than those mentioned above, they must file a summons in chambers, supported by an affidavit.
(See: Rule 17 of the Rules)
Some common grounds on which the Court may consider a setting aside application for a bankruptcy notice include:

• The sum claimed in the bankruptcy notice does not align with the terms of the judgment or order it is based on.
• The sum claimed in the bankruptcy notice is excessive.
• The interest was not specifically quantified in the bankruptcy notice.
• The bankruptcy notice is filed against a social guarantor.
• Procedural irregularities, such as issues with the service of the bankruptcy notice.
  Following the Court’s directions, parties will exchange affidavits, and a hearing will be held where the Court will decide whether the bankruptcy notice should be set aside.

iii. Show Cause against the Petition
Upon being served with the Petition, the debtor has two options to oppose it. The first option is to show cause against the Petition. To do so, the debtor must file a Notice of Intention to Show Cause, as prescribed in Rule 116 (along with Form 45) of the Rules.
This notice will outline the grounds on which the debtor intends to challenge the Petition during the hearing. Common grounds for showing cause typically involve issues related to the debt reflected in the Petition.

iv. Setting Aside the Petition
If the debtor intends to set aside the Petition based on non-compliance with the Rules, the debtor may file a summons in chambers, supported by an affidavit, in accordance with Rule 17.
At this stage, the debtor may raise the following contentions in seeking to set aside the Petition:

• The Petition was presented more than 6 months after the Act of Bankruptcy.
• The Petition or the affidavit verifying the Petition is irregular.
• The debt amount is below the prescribed statutory threshold (RM 50,000).
  A separate hearing date will be scheduled by the Court to consider the application to set aside the Petition before the hearing of the Petition itself. If the debtor is successful in this application, the Court will likely order that the Petition be set aside, and the creditor will need to begin the bankruptcy proceedings again.
  It is important to note that challenges related to a counterclaim, set-off, or cross-demand cannot be raised at this stage, as such challenges are only permitted during the bankruptcy notice stage, not at the Petition stage.

Conclusion
While this article does not cover every aspect of bankruptcy proceedings, it provides a sufficient overview of the general steps involved, from initiating bankruptcy proceedings to the Court’s pronouncement of the Bankruptcy Order. To assist in understanding the process, the flowchart below summarizes the key steps in bankruptcy proceedings.