With the pandemic and the intermittent lockdowns throughout the last 1.7 years, the insolvency department has seen a massive increase in bankruptcy cases. Even with the moratorium on bankruptcy cases and the increase in the bankruptcy threshold amount to RM 100,000 (from RM 50,000), there were still 8,351 cases in 2020 and a further 2,954 cases for the first four months of 2021 alone.
Many small businesses are sole proprietors – individual owner will be exposed to the risk of legal proceedings and eventually bankruptcy.
With Malaysia's economic situation not yet stable, we are likely to see an increase in the number of small business owners and individuals being declared insolvent unless measures are taken. One such measure, is the voluntary arrangement.
Voluntary Arrangement - the newly introduced Rescue Mechanism
Voluntary arrangement is a rescue mechanism under the revised Insolvency Act 1967 which is devised to help individual debtors negotiate a debt repayment plan with creditors before he is adjudged a bankrupt (1). The debtor will provide a proposal to his creditors in connection to the repayment or settlement of the sum owed (2).
Malaysians who are on the brink of bankruptcy will now receive a second chance to help them manage their debts better.
However, this rescue mechanism is available to neither an undischarged bankrupt debtor, nor a limited liability partnership under the Limited Liability Partnerships Act 2012
We will now consider the steps to opt for voluntary arrangement:
1. Appointment of a Nominee
An individual debtor who has the intention to propose a settlement plan must appoint a nominee for the purpose of supervising the implementation of this voluntary arrangement.
The nominee can be a chartered accountant, an advocate and solicitor, or such other person to be determined by the Minister. The nominee appointed must register with the Director General of Insolvency (DGI) and must not be an undischarged bankrupt.
2. Application for Interim Order
Next, the debtor must obtain an interim order from the Court by way of an application (3). The debtor has to demonstrate to the Court that (i) no prior application was made by the applicant in the last 12 months, and (ii) the nominee is willing to act for such voluntary arrangement.
The interim order will only last for 90 days and may only be extended in limited circumstances for a further period of 30 days. This interim order will act as a moratorium against bankruptcy petitions and other legal proceedings.
3. Creditors’ Meeting
Within the 90-day interim order period, the nominee shall then convene a creditors’ meeting to approve the debtor’s proposal for a voluntary arrangement. In order to obtain the approval for the voluntary arrangement, the nominee needs to secure more than 50% in number and at least 75% in value of the creditors’ agreement. (4)
However, any proposal or modification to the proposed voluntary arrangement affecting the rights of secured creditors may not be passed, unless they consent.
Subsequently, the decision of the meeting has to be reported to the Court by the nominee and a sealed report containing the terms of the voluntary arrangement has to be served to the debtor and creditors.
4. Binding Effect
The proposed voluntary arrangement, if passed at the meeting, takes effect and binds all creditors who have been notified of the meeting and entitled to vote at the meeting, as if they were a party to such voluntary arrangement. (5)
In this regard, the interim order shall become invalid 30 days from the date the report was sealed by the Court. And if any bankruptcy petition has been stayed by the interim order, shall be deemed to have been dismissed unless the court states otherwise.
The voluntary arrangement shall cease upon the death of the debtor.
Review of Decision
In the event the creditor or the debtor believe that the decision of the meeting needs to be reviewed, they may do so by applying to Court for a review of the decision on the ground that (6):
(i) it unfairly prejudices the interests of the debtor or creditors, or
(ii) there was present material irregularity in connection to the meeting.
Failure to Comply
If a debtor fails to comply with any of his obligations under a voluntary arrangement, any creditor who is bound by such arrangement may file or proceed with a bankruptcy petition against the debtor for the balance of the debt due to him. (7)
Conclusion
To conclude, if you feel that your debts are piling and you would like to restructure it to avoid the repercussions of being declared bankrupt, entering into a voluntary arrangement would definitely help you achieve that goal.
With the right steps and repayment plan, you can face your debts with absolute confidence and avoid financial ruin. This, in turn, will help you build your credit worthiness and pave the way to good financial management skills in the long run.
Reference:
Section 2A to 2Q of the Insolvency Act 1967 on voluntary arrangement.
Section 2C (1) of the Insolvency Act 1967 on proposal for voluntary arrangement.
Section 2D (3) of the Insolvency Act on interim order.
Section 2I of the Insolvency Act 1967 on meeting of creditors to approve debtor’s proposal.
Section 2K (1) of the Insolvency Act 1967 on effect of approval.
Section 2L(1) of the Insolvency Act 1967 on review of meeting’s decision.
Section 20(1) of the Insolvency Act 1967 on consequence of failure to comply.
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