Judicial Management for Bankruptcy in Malaysia

Bankruptcy is a state in which an individual or a company would find themselves in if they are no longer or unable to pay for their loans or other credits in which case whatever assets that the individual or company owns will be liquidated to help fund or repay the loans. In the event where the liquidated assets still do not suffice to repay the loans or credits, they now enter into a state called bankruptcy declared by the court through proceedings instituted by the creditors. The liquidation of assets usually only happens when the individual or company is declared bankrupt by the court and the Director General of Insolvency will take charge of the properties in an attempt to reduce the debt which includes the liquidation of assets.

In Malaysia, after the recent amendments to the Bankruptcy Act 1967, bankruptcy has been recognized as insolvency and this Bankruptcy Act 1967 presides over issues of insolvency in Malaysia. Now, the question arises on whom does the Act recognize as bankrupts or also known as debtors under this Act. Section 3(3) of Bankruptcy Act 1967 answers these doubts by stating four classes of individuals which include those that are present in Malaysia, has a residence in Malaysia, or has done business in Malaysia either personally or through an agent or has been a member in a firm or partnership based in Malaysia.[1] It is important to note that it only talks about individuals as in the aspect of a natural person and it does not mention companies nor corporations.

Does that mean companies in Malaysia cannot be bankrupt? Companies in Malaysia can be bankrupt but it is known as the process of winding up and is governed by the Companies Act 2016. Companies themselves could apply for the process where if there is excess after the settling of the debts it will be divided to the shareholders and can also be instituted by the insistence of creditors as well as through the court.[2] In the case of winding up, the company can either hire a liquidator or put it in the hands of the Director General of Insolvency who will help to manage and sort the debts as well as assets of the company upon completion that can lead to the dissolution of the company. To aid companies with insolvency issues, there have been two new reforms introduced in the Companies Act 2016 which are judicial management and corporate voluntary arrangement.

Judicial management is the process where the company is entrusted to a judicial manager who is supervised by the court till a certain extent in order to revitalize the company’s finances by introducing financial outlines that have to be adhered to. This is usually granted to companies who are unable to repay their creditors but possess a reasonable probability to recover.[3] Corporate voluntary agreement on the other hand can be granted when 75 % of creditors agree to it where it is similar to the current scheme where a liquidator will be appointed with minimum court supervision to restructure the company’s debts and finances but is, however, unable to be accessed by public companies as well as companies in possession of a charged property.[4] As the introduction of the judicial management concept is relatively new there has yet to be a reported case involving judicial management to date.

As our research paper concerns more on the mechanisms of judicial management specifically we shall attempt to observe it more thoroughly. How can a company qualify for judicial management? Basically, judicial management allows the company a temporary respite or relief amidst their financial troubles however only if the company is deemed to satisfy certain criteria or requirements. The first being that there is a high chance that the company can be successfully rehabilitated through judicial management. Secondly, that there is a chance of sustaining the company even partially if not full and thirdly is where judicial management is seen as the better choice as opposed to winding up of the company. As long as the financial situation of a company is within the ambit of one of the three requirements stated, they are hence eligible to apply for judicial management.[5]