Lee Swee Seng - Advocates And Solicitors

IMPLICATIONS OF THE RECENT AMENDMENTS TO THE BANKRUPTCY ACT 1967 TO BUSINESSES

INTRODUCTION

The Bankruptcy Act 1967 (BA) saw some amendments last year. The amendments were brought about by the Bankruptcy (Amendment) Act 2003 (Act A 1197). The Amendment was given the Royal assent on 24th July 2003 and was published in the Gazette on 14-8-2003. The amendments came into force on 1-10-2003.

The proposed amendments had been publicized in the newspapers especially by the de facto Law Minister Dr. Rais Yatim for some time. The Minister had been commenting on the need to increase the threshhold level for bankruptcy proceedings that can be brought against a judgment debtor and also of the need to protect guarantors from being sued and subsequently being made bankrupts. This was because crerditors who could not find the principal debtors frequently resorted to suing the guarantors and upon obtaining judgment proceeded to make these guarantors bankrupt. The amendments that were brought about by the amendments focus primarily upon these areas as well as other areas. To businessmen and credit managers, these amendments would be areas of concern.

There are altogether sixteen amendments. But not all these amendments are crucial to businessmen and credit managers. It would be expedient to consider the major amendments, especially those that have an immediate impact on credit managers and businesses.

MAIN AMENDMENTS

1. Amendment to s. 5 (1) (a)

The amendment to the BA that has a major impact on businesses and credit managers is the amendment to s. 5 (1) (a). This section deals with the amount of debt that a judgment debtor owes to a creditor before a bankruptcy action can be commenced. Prior to the amendments the judgment debtor must owe a sum of RM10,000.00., before bankruptcy proceedinsg can be commenced. Now with the amendments to the BA the judgment debtor must owe a sum of RM30,000.00 before a creditor can commence bankruptcy proceedings against the judgment debtor.

This amendment therefore increases the threshhold level threefold. The increase in the threshhold level obviously has serious implications to businesses and credit managers. Let us consider these implications.

v A creditor can only commence an action for bigger debts, i.e. at least of RM30,000.00 and above. This then would mean that creditors would be required to grant more credit to customers who have a poor track in making payments to their creditors in order to ensure that the debt approaches RM30,000.00 , if the creditor thiks of commencing bankruptcy proceedings against a debtor in the event a judgment is taken against him. This would not make commercial sense. This does not mean that a credior can not commence bankruptcy proceeidngs against a debtor for a sum below RM30,000.00. The creditor can do so, But after getting a judgment the plaintiff-creditor wil have to wait until the jhudgment sum as well as the accrued interest and costs reach the magical figure of RM30,000.00. Furthermore this aggregation should occur within 6 years of judgment.

v Another method would be to get 2 or more creditors to join in the petition and the aggregate amount of debts owing to the several petitioning creditors amounts to RM30,000.00. The practical implication would be that a petitioner will have to look out for 2 or more creditors who are owed money by the same debtor. Then the creditor will have to ensure that the combined debt aggregatse to RM30,000.00. Having done so, then the bankruptcy proceedings can be commenced. In practical terms, the creditor will have to make inquiries about a particular debtor in the market and also find out if this particular debtor owes money to other creditors and whether other creditors had taken judgment against him. Needless to say this will take time and incur expenses on the part of the creditor. Furthermore there is no assurance that the other creditors would join in the petition or whether they are willing to share the legal costs and expenses.

v If the debt is well below RM30,000.00 then the creditor wil have to consider other forms of enforcement of the judgment sum. Order 30 of the Subordinate Courts Rules 1980 provides for three modes of enforcement:

a) Writ of seizure and sale;

b) Garnishee Proceedings; and

c) Judgment Debtor summons. Each of these modes have their own respective procedures as well as hurdles to be faced and overcome.

v Thus creditors will have to consider alternative forms of enforcement of judgments, where the judgment sum is below RM30,000.00. It has to be noted that the bankruptcy proceedings can only be commenced against individuals. The threshold level for winding up proceedings against companies still remains at RM500.00.

2. Proceeding against a Guarantor.

Section 5 of the BA has been amended by the insertion of a new sub-section, s. 5 (3) which is as follows: A petitioning creditor shall not be entitled to commence bankruptcy action against a social guarantor unles he proves to the satisfaction of the court that he has exhausted all avenues to recover debts owed to him by the debtor.

This necessitates a consideration of who or what a social guarantor is. Section 2 of the BA has been amended to include a definition of the term “social guarantor”. The definition is as follows:

“social guarantor” means a person who provides, not for the purpose of making profit, the following guarantees:

a) a guarantee for a loan, scholarship or grant for educational or research 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.

Thus this term “social guarantor” would exclude the guarantors who provide guarantees for purposes other than those provided for in s. 2 BA.. Therefore the term “social guarantor” would exclude:

- directors, since directors’ guarantees are usually given to secure loans for business purposes;

- corporations because corporate guarantees are also given for commercial purposes;

- individuals who give guarantees for businesses or credit facilities or those who give guarantees for hire-purchase of vehicles for commercial uses as well as for housing loans not menat for personal dwelling.

Where a guarantor falls within the ambit of the definition of a social guarantor, the BA by way of s.5 (3) places a barrier to the petitioning creditor from commencing a bankruptcy action against the social guarantor. But note that this section does not prevent a creditor from suing a guarantor on his guarantee, though in practice some Sessions Court judges are requiring the plaintiffs to pursue the principal debtor first before proceeding against the debtor.

If the guarantee has been given by a person who does not fall within the ambit of the social guarantor, then this section does not apply. One of the reasons why this provision was brought is was because of the number of guarantors who had stood guarantee for scholarship holders and for purchasers of vehicles on hire purchase and who have been sued when the principal debtor absconds or defaults on his payments.

This section is couched in mandatory terms, viz., shall not be entitled. Therefore the petitioning creditor cannot file a bankruptcy notice against a social guarantor because a bankruptcy action is commenced by way of a bankruptcy notice. The creditor, if he has taken judgment agaianst a defendant who comes within the definition of a social guarantor, must prove to the satisfaction of the Court that he has exhausted all avenues to recover debts owed to him by the judgment debtor. This therefore necessitates that the plaintiff as the petiionig creditor must take all measures that are available to him to recover the debts owed to him by the debtor.

The amendments to the BA have not defined what procedures would encompass the term “all avenues”. But if we are to consider the modes of execution of judgment available to the creditor, then the petitioning creditor must satisfy the Court that he has proceeded against the debtor in the following manners:

- enforcement by way of writ of seizure & sale;

- judgment debtor summons;and

- garnishee proceedings.

3. Discharge of a bankrupt

Section 33 A of the BA empowers the Director General of Insolvency [DGI] (formerly known as the Official Assignee) to discharge a bankrupt after a period of 5 years has lapsed. Section 33 B (1) of the BA requires the DGI, before issuing a certificate of discharge, to serve on each creditor who has filed a proof of debt a notice of his intention to issue the certificate. Prior to 1-10-2003, the DGI is required to attach a statement of his reasons for issuing a certificate of discharge. Now that particualr requirement is deleted. Therefore since 1-10-2003 if the DGI discharges a bankrupt from his bankruptcy the DGI need not give his reasons for issuing a certificate of discharge.

4. Introduction of s. 84A

This is a new section which confers additional powers on the Director-General of Insolvency. This section empowers the DGI to appoint officers to conduct investigations under s. 421, 422, 423 and 424 of the Penal Code. The DGI by virtue of subsection (4) also has the power to direct any creditor to render such assistance in the administration of the debtor’s estate as he deems necessary.

5. Amendment of sections 70 & 71

These sections relate to the offices held by the officers. S. 70 provides for the appointment of the Director- General of Insolvency who shall be from amongst the members of the Judicial and Legal Services. Section 71 renames the officers as Director General of Insolvency, Deputy Director General of Insolvency, Directors of Insolvency, Deputy Directors of Insolvency, Senior Assistant Directors of Insolvency, Assistant Directors of Insolvency, and Insolvency officers.

6. Amendment of s. 109- Punishment of fraudulent debtors

Accortding to s. 109 (1) any person who has been adjudged bankrupt or in respect of whose estate a receiving order has been made under the BA, shall in each of the cases following be punished with imprisonment or with fine or with both:

(m) if being an undischarged bankrupt-

(i) either alone or jointly with any other person he obtains credit to the extent of one hundred ringgit or upwards, unless he proves that before obtaining the credit he informed the person giving the credit that he was an undischarged bankrupt.

Now the limit of obtaining credit has been increased to one thousand ringgit.

CONCLUSION

There had been a lot of concerns expressed by businessmen and credit managers concerning the impact of the proposed amendmenst to the BA. At the time these concerns were expressed, the amendments were merely proposed amendments. But when we consider these amendments, now that they have come into effect, we find that quite a lot of the fears expressed have been unjustified. There were fears that guarantors could not be sued at all. Thee were even suggestions that all guarantees should include the principal debtor clause, etc. But a consideration of the esssential amendments indicate that the Government has been trying to safeguard the interests of the social guarantors without exposing them to being adjudged bankrupt. But the quantum that is necessary before a debtor can be adjudged bankrupt is however a cause for concern. This would therefore, as suggested above, need a rethinking on the part of the creditors to decide on the modes of enforcing their judgments especially when the judgment is less than RM30,000.00.