A Creditor’s Guide To Initiating Bankruptcy Petitions In Malaysia

Upon obtaining a judgement against an individual debtor, bankruptcy proceedings under the Insolvency Act 1967 and Insolvency Rules 2017 are, as the kids say, the ‘final boss’ of legal debt enforcement methods. 

Specifically, upon being declared bankrupt, the debtor’s assets are placed under full control of a third party who ensures all proven creditors are repaid in the right order.

For creditors considering the merits of this remedy, we dare say our guide is the most comprehensive breakdown available short of reading the Act itself, covering:

• terms related to the process

• statutory requirements

• formal steps

• what happens after bankruptcy is declared

• key considerations, and

• our practical observations

It’s a long read, but it’s a complicated subject!

Alternatively, skip the reading and get in touch for a free recovery assessment.

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Otherwise, let’s begin.

Key terms

To help readers understand the guide, we’d like to start by clearly defining six key terms.

Feel free to skip this part for now, it’s always here if you need clarification 🙂

Term	Meaning
Act of bankruptcy (AOB)	An act signifying a judgement debtor is unable to pay their debts
Bankruptcy notice	A formal notice compelling a judgement debtor to address a judgement debt within seven (7) days, and failure to comply establishes an AOB
Creditor’s bankruptcy petition	A court application filed once an AOB is established, asking to declare the judgement debtor bankrupt
Bankruptcy order (BO)	A final court order declaring the judgement debtor bankrupt and handing control of their assets to an impartial third party
Director General of Insolvency (DGI)	A government officer who takes control of the bankrupt’s assets, liquidates them, and distributes proceeds to creditors
Social guarantor	A party who guarantees a non-business loan such as for education, research, personal hire-purchase, or a housing loan for personal use
Substituted service	Alternative methods to serve a notice on a debtor who is avoiding attempts to be served personally, such as posting the document at the court's notice board

Requirements for a creditor to petition for bankruptcy

Section 5 of the Insolvency Act sets out rules for a creditor to file a bankruptcy petition against the judgement debtor or their guarantors.

Main judgement debtor

Four statutory conditions must be met:

• the amount owed is a fixed (liquidated) sum of at least (currently) RM100,000

• the debt is undisputed, typically confirmed by an existing judgment

• an Act of Bankruptcy (AOB) occurred within the last six months

• the debtor has a link to Malaysia by living here, owning a home, or doing business

Note: The debt threshold of RM100,000 was raised from the previous RM50,000 by the Insolvency (Amendment) Act 2020, and may be amended in the future. 

Maybe not that much.

Whenever you’re reading, we just have to make sure the debt exceeds the current threshold!

Guarantors

If the petition is brought against a guarantor, two additional rules apply:

• the court must be satisfied that all other reasonable recovery methods have been exhausted, including bankruptcy or winding-up proceedings against the main debtor

• social guarantors are protected by statute and cannot be made bankrupt

If all conditions are met, the creditor must still get the court’s permission before filing a bankruptcy petition against them.

Procedure for bankruptcy proceedings

Assuming we have determined a case meets all the requirements above, a bankruptcy proceeding has three main stages:

1. Serving a bankruptcy notice

2. Filing a bankruptcy petition

3. Court hearing and bankruptcy order declaration

From start to finish, a straightforward case easily takes several months, and complicated cases where the judgement debtor disputes or stays proceedings can take longer still.

Stage 1: Serving a bankruptcy notice

At this stage, we draft and serve the judgement debtor with a bankruptcy notice, giving them seven (7) days to pay the debt in full, negotiate, or dispute the claim.

Debtors who can avoid bankruptcy often settle here, making this the stage most likely for an out-of-court resolution, and as we explain later, the main use of bankruptcy actions.

Failure to comply establishes an act of bankruptcy and allows us to move to the next stage.

Stage 2: Filing a creditor’s bankruptcy petition

If the debtor ignores the notice, we proceed to file a creditor’s bankruptcy petition in the High Court, setting out:

• debt details

• proof of non-compliance with the bankruptcy notice, and

• your right to request a bankruptcy order

We must also serve the petition to the judgement debtor in person, and should they attempt to evade service, apply for it to be served via substituted service.

Stage 3: Hearing and bankruptcy order

At the hearing, the court will consider whether:

• the debt is valid and undisputed

• the bankruptcy notice was properly served, and

• an AOB has occurred

Our task here is to prepare for any objections, and if satisfied, the court may issue a bankruptcy order (BO) officially declaring the debtor bankrupt.

This marks the end of the bankruptcy proceeding, but actual debt recovery is still a ways away.

What happens after a bankruptcy order is declared

The moment a BO is declared, the DGI assumes control of all assets belonging to the bankrupt. 

Sections 8, 13, 15, 16, and 17 set out the full legal framework for what happens next, but here’s a summary of parts creditors should be aware of, in the correct sequence: 

1. As soon as possible, we file a proof of debt (POD) with the DGI on your behalf

2. The bankrupt files an affidavit with the DGI listing their partners, residences, assets, and liabilities

3. The bankrupt files a full Statement of Affairs detailing assets, liabilities, creditors, and causes of insolvency

4. As fast as possible, the DGI realises the bankrupt’s assets and distributes the proceeds to creditors according to the statutory order of priority

Regarding Step 4, the Insolvency Act requires the DGI to act as fast as is reasonably possible, and the first round of payments should be within 12 months of the BO declaration unless there are valid reasons. However, in reality, this timeline may not always be fulfilled.

Creditors’ meeting and public examination (optional)

The DGI may call for a creditors’ meeting or request a public examination in court where the bankrupt is questioned under oath by creditors. This usually happens right after the BO is declared, though it can be requested any time the DGI wishes to: 

• review and consider payment proposals offered by the bankrupt

• determine how to best deal with the bankrupt’s property

• understand the wishes of creditors regarding the administration of the estate

• examine the bankrupt’s conduct, dealings, and property under oath

• investigate potential misconduct such as fraudulent transfers

• conduct an official investigation with legal support

• allow creditors to question the bankrupt

Order of priority in debt repayment

After the DGI has first set enough money aside to cover administration costs, Section 43 of the Insolvency Act sets out the order in which debts are repaid from a bankrupt’s assets, from highest to lowest priority:

Tier 1: Preferential debts & administrative costs

• wages owed for services rendered within five months before the BO

• employer contributions due within 12 months before the BO

• tax payable within 12 months before the BO

• all amounts due under laws relating to workmen’s compensation

Tier 2: Partnership debts (if applicable)

If the bankrupt is a partner, partnership property is first applied to settle joint partnership debts, while the bankrupt’s personal property is used to settle their personal debts.

Any surplus from either pool is then combined and used to repay remaining debts, apportioned according to the partner’s share.

Tier 3: All other unsecured creditors

After preferential debts are settled, all other proven debts are paid pari passu, meaning creditors in this tier are paid proportionately based on the size of their proven claims.

For most readers, this is the category you likely fall under.

Tier 4: Post-bankruptcy interest

Any surplus remaining after Tier 1 - 3 have been paid in full is then used to pay any interest accrued after the date of the BO.

When to use a creditor’s bankruptcy petition

A creditor’s bankruptcy petition is most effective as a pressure tool to encourage solvent individual debtors to repay their debts or start negotiations.

This is because for unsecured creditors, following through with a bankruptcy petition is only effective as a debt recovery tool when the debtor has:

• substantial assets, and

• few or no tax / employee liabilities and secured creditors

In practice, most indebted individuals do not meet these conditions, while those that do are unlikely to allow themselves to be bankrupted! There is also the risk of debtors unlawfully transferring assets out to relatives and associates shortly before being made bankrupt.

Though the law technically contains ‘clawback’ provisions, these are seldom enforced due to difficulty in tracing and legal complications in clawing back transferred assets among other factors.

For creditors seeking to follow through with legal enforcement, there are often quicker, better and more direct options.

When other enforcement methods may be better

Assuming we begin with a judgment debtor summons to get an accurate appraisal of the debtor’s finances, various enforcement methods would work better based on our findings.

Finding	Recommended enforcement method
Debtor has bank accounts or cash	Garnishee proceedings
Debtor has movable assets (vehicles, equipment)	Writ of seizure and sale, charging order
Company has a signed personal guarantee from directors	Direct enforcement against guarantor

And of course, if the debtor is willing, we always encourage out-of-court settlements.

Our thoughts

In our experience, aside from the lasting damage it inflicts, forced bankruptcy is rarely effective as a direct recovery method. We personally reserve bankruptcy as a final, last resort when other more direct enforcement recovery methods are not viable.

Of course, sometimes it’s about sending a message.

Individuals facing bankruptcy are often saddled with multiple debts, and unsecured creditors—the majority of our clients—are at a disadvantage due to their low position in repayment order.

Instead, treat it as a tool against individuals for whom the threat of a petition will prompt payment or at least discussions within seven days of the bankruptcy notice being served.

That’s it from us, and we wish you a smooth debt recovery 🙂

Let Rule & Co handle your debt recovery

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If you’ve sent reminders and been ignored or simply don’t want the hassle of chasing payments, Rule & Co is a debt recovery law firm that focuses on helping creditors recover debts via legal strategies that minimise upfront cost, maximise recovery, and protect your reputation.