Many people have different ideas about bankruptcy. For some, it’s the bogey-man of the financial world for those in the very pit of debt despair. For others, they think it is a way to stop people they owe money to from hounding them. But what does it really mean?
In a three part series; RinggitPlus gets advice from bankruptcy lawyer Shamalah Selvarajah, a partner at Messrs Bodipalar Ponnudurai De Silva about bankruptcy: what it is; how it can happen to you (even without your knowledge!) and what your options are if it does.
This week, we tackle the question: what is bankruptcy?
A bad debt by any other name
“A bankruptcy proceeding is a mode of enforcing a court judgment obtained against an individual. This proceeding is usually commenced to recover monies owed by one individual to a corporation or another individual. However, the judgment sum has to be more than RM30,000 to enable a creditor to elect this mode of enforcement.”
“Once the court declares a person a bankrupt, all the assets and properties of the bankrupt shall vest in the Director General of Insolvency (DGI). The bankrupt no longer has the capacity nor the power to manage his finances. He must provide to the DGI an account of all monies and properties which are credited to and ownned by him. He will have to report to the DGI any receipt of moneies or properties exceeding RM500 which does not form part of his usual income. Further, if required by the DGI, he will need to hand over the proceeds of any sale to the DGI. The bankrupt will not be able to leave Malaysia; carry on a business or a partnership; nor manage a business, without the DGI’s permission.” Shamalah explains.
What this simply means is: Bankruptcy is a way for a company or a person to recover money you owe them through the courts and the DGI. Let’s say A borrowed RM50,000 from Bank B but never repays. Bank B can then go to the courts file a claim against A.
What the courts will then do is to hear Bank B’s claim to determine if Bank B has a case and a right to the money that Bank B says A owes them. If the court finds that Bank B has a right to the money, then Judgment would be granted against A. If A doesn’t pay the sum stipulated in the Judgment, then Bank B can begin bankruptcy proceedings against A.
A will be able to challenge the bankruptcy proceedings. The Court will hear A’s case and if the Court finds in favour of Bank B, then A will be declared a bankrupt; his assets will be frozen and the DGI takes over control and management of his finances. Until A repays all the money owed to Bank B and all his other creditors and is discharged as a bankrupt, he will have no access to his assets.
The Insolvency Department will take over any savings and monies under A’s name and will continue to monitor his income. Any money earned (minus his expenses) will have to be surrendered to repay the debt. It is also important to know that once declared a bankrupt, all A’s other creditors have a right to lodge claims with the Insolvency Department against A. They will have to show Proof of Debt (POD). The Insolvency Department will then investigate the PODs to decide which are genuine and payable. .
All monies collected from A will form a pool. If there is enough to pay all A’s creditors in full, that will be done and A would be discharged as a bankrupt. However, if there isn’t enough funds to pay off all A’s debts, A’s creditors would receive a percentage of the original debt. This is where the Insolvency Department will decide how many cents to a ringgit each creditor would receive but secured creditors will be paid before unsecured creditors.
Until the A’s debts are repaid; A will be marked a bankrupt and will not be able to leave the country nor manage a business, amongst many other restrictions.
Some terms in bankruptcy
Here is a short glossary (that is by no means exhaustive!) of common terms you may come across in the bankruptcy process.
- Debtor: the person owing money
- Creditor: the person to whom money is owed
- Secured creditor: a person to whom money is owed by way of a secured loan. If there are many creditors waiting to be repaid; a secured creditor will be repaid first before an unsecured creditor. Secured loans are loans with collateral attached.
- Unsecured credit: a person to whom money is owed by way of an unsecured loan. An unsecured creditor will have to wait until all secured creditors are repaid. Should the assets of the bankrupt not be enough to cover all loans; the unsecured creditor will most likely go unpaid.
- Special manager: the DGI can sometimes appoint a ‘special manager’ to oversee the bankrupt’s affairs. The special manager will then take the place of the DGI in keeping track of the bankrupt’s accounts.
Shamalah Selvarajah is a partner at Messrs Bodipalar Ponnudurai De Silva. She has been in practice for almost 13 years, primarily in civil litigation and has also built a reputation in the specialised filed of bankruptcy having handled matters in the High Courts and the Court of Appeal.