*ERA OF BUSINESS ENVIRONMENT!
HOW MALAYSIAN LAW INTERACTS IN BANKRUPTCY
PROCEEDINGS.
Surianom Binti Miskam
Dr. Nor ‘Adha Binti Abdul Hamid
Faculty of Management & Muamalah,
Selangor International Islamic University College (SIIUC),
Bandar Seri Putra, 43000 Kajang,
Selangor.
[email protected]
[email protected]
[email protected]
Abstract
This paper aims to discuss generally the interaction of Malaysian law in business
environment in two perspectives: First, the legal structure which indirectly forming the
organizational forms of business line, and second, the legal rules and institutions which
carry public policy implications for business people, such as the regulation and the
bankruptcy legislation. The reason is that law is relevant in business environment since it
upholds the security of property rights that most economists regard as fundamental to the
principles of free and voluntary exchange. The law also places a range of restrictions on
what business people and the parties they interact with are allowed to do. The paper is not
however intended to be exhaustive. Among others which will not be covered are issues
relating to intellectual property rights, patent protection and several other features of the
legal framework that affect business people. The above-mentioned two perspectives are
given special focus.
1.
The Legal Structures of Business Organisations
Every business carried out by entrepreneurs operates as some form of legally recognized
organisations. The form of business organisation that an entrepreneur prefers may have
some significant implications as the business goes forward. What form of business is
“best” depends on the characteristics of the business and its owner.
1.1
Sole Proprietorship
The sole proprietorship as the name speaks is a business owned and managed by one
individual. One of its attractive features is the minimum of formalities and legal
requirements. The entrepreneur selecting this form of business organisation has to
contribute for the capital and of course he retains all the business profits without having
to make any public disclosure of trading figure at the end of the year. The fact that he is
the sole owner of the business puts him in total control of the business operation and
enable him to respond quickly to changes and demands in the market.
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1.2
Partnership
Every partnership in Malaysia is subject to the Partnership Act 1965 and the Registration
of Businesses Act 1956. Section 3 (1) of the Partnership Act 1962 defines partnership is
the relation which subsists between persons carrying on business in common with a view
of profit. In a partnership the partners share the capital contribution, business’s assets,
liability and profits according to the terms of the partnership agreement. All the partners
are personally liable for the debts of the business even if those debts were incurred by one
partners’ misappropriation of money or dishonesty without authority from the other
partners.
The Act states that members of a partnership shall be between 2 to 20 persons only
except for partnership involving professionals where no such limitation applies. Any
proceedings in which the partnership may involve are brought or defended in the name of
the members of the partnership not in the name of the firm itself. A partnership may be
dissolved by agreement amongst the partners. It may exist for a fixed term or for as long
as the partners wish and it dissolves automatically on the retirement, death or bankruptcy
of a partner. The law does not require the partnership to disclose or public any financial
records with the Registrar of Businesses every year.
1.3
Procedure for registration of sole proprietorship and partnership
The law requires that every sole proprietor and partnership in Malaysia must be
registered under the Registration of Businesses Act 1956 (Revised 1978). The application
for registration must be made to the Registrar of Businesses who is the Chief Executive
Officer of the Companies Commission of Malaysia (CCM). Registration is a strong prima
facie of the existence of partnership but it does not estop the other person from denying
the existence of partnership.
Section 5 of the Registration of Businesses Act 1956 requires that an entrepreneur shall
not later than thirty days from the date of the commencement of the business to file an
application to the Registrar for the registration of the business either in the form of sole
proprietorship or partnership. The application must be made in the prescribed form by
stating the name of the business, the nature, the date of commencement of the business,
the address of the place of business, the particulars of the partnership agreement, full
names of associates of the business, their positions and dates of entry into the business
and such other information as the Registrar may require. Upon application and payment
of prescribed fee, the Registrar shall register the business for a period which shall not
exceed five years and issue a certificate of registration for the business.
The registration shall expire on the date stated in the certificate unless renewed by the
Registrar or upon the termination of the business. Where a business has been terminated,
the sole proprietor or the partners responsible for the business shall notify the Registrar of
such termination within thirty days of the termination as provided under section 5D of the
Act. In the case where a business terminates upon the death of an associate and there is
no surviving associate or person responsible for the business, the personal representative
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or the next of kin of the deceased associate is required to notify the Registrar of the death
within four months from the date of such death in the prescribed form.
Section 12 (1) states that any person who carries on business without first having the
business registered with the Registrar or continues to carry on any business after the
expiry of the period of registration commits an offence which is punishable with a fine
not exceeding fifty thousand ringgit or to imprisonment for a term not exceeding two
years or to both.
1.4
Company
Entrepreneurs may also opt to incorporate a company as their business organization to
carry out their business. Section 14 (1) of the Companies Act 1965 provides that any or
more persons associated for any lawful purpose may by subscribing their names to a
memorandum and complying with the requirements as to registration laid down under
Act.
The law regulating the formation and registration of companies in Malaysia is provided
under the Companies Act 1965. The Companies Act 1965 was passed by the Parliament
to enable any 2 or more persons to form a body corporate by registering a company and
upon its registration, the company being a corporation will have a separate legal entity of
its own. The Act further prescribes the conditions that have to be complied with to obtain
registration and the rules that have to be observed to protect members, creditors and the
public against the risks associated with companies.
Sections 16 (5) of the Act provides that on and from the date of incorporation specified in
the certificate of incorporation, a new legal entity is created which is distinct from its
members and the company will have its own powers, rights and obligations for the law
will regard a duly incorporated company as a legal person in its own right. Thus upon
incorporation the company is capable of performing all the functions of an incorporated
company and is capable of suing and being sued on its own name. The company shall
have perpetual succession and have a common seal as well as the power to acquire, hold
and dispose of property.
The Act requires that a company must have at least 2 members and no maximum number
of members is prescribed except in the case of a private company which must have not
more than 50 members. The liability of the members can be limited and it depends on
types of company and it case of a company limited by shares, the liability of the company
is limited to the amount, if any, unpaid on the shares.
A company incorporated under this Act can only be dissolved in accordance with the due
process of law by way of winding up or struck off the register. A company may live on
regardless even without directors and without members. A company is able to raise funds
in much in the same way as an individual including the power to borrow money and it
can also raise fund by offering the shares and debentures to the public.
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The Act must however be read together with subsidiary legislations namely the
Companies Regulations 1966 and the Companies (Reduction of Capital Rules). In
addition, there are various other statutes in Malaysia relevant to the formation and
regulation of companies including the Securities Commission Act 1993, the Securities
Industry Act 1983 and the Companies Commission of Malaysia Act 2001 and subsidiary
legislations namely the Securities Commission Guidelines made under the Securities
Commission Act 1993.
1.5
The procedure for incorporation of company in Malaysia
The procedure for the incorporation of a company in Malaysia starts from the moment the
entrepreneurs select the company name they intend to use which is subject to certain
requirements and restrictions under the Act itself. Prior to registration an intended
company must apply to the Company Commission of Malaysia for search as to the
availability of the proposed name. However the Registrar of Companies has discretion to
reject a proposed name which in his opinion is either undesirable or a name which is
identical or nearly resembles the name of other existing companies or a name which has
been reserved or a name that the Minister of Trade and Consumer Affairs has directed the
Registrar not to accept as listed under Gazette Notification 716 dated 18 December 1996
as amended by Gazette Notification 11200 dated 30 August 2001 unless prior approval
has been obtained from the Minister.
A public limited company must have the word “BERHAD” or “BHD” and a private
limited company must have the word “SENDIRIAN” or “SDN” as part of its name
inserted immediately before the word “BERHAD” or “BHD”.
During the three months period for which the proposed name is reserved, the
entrepreneurs must lodged with the Registrar the company’s Memorandum of
Association and Articles of Association which must contain the names of at least two
persons who are to be the first directors and the name of the secretary. The persons
responsible must also lodge a declaration of compliance by the first secretary together
with a copy of identity card in Form 6 of the Companies Regulations and a statutory
declaration by the first directors and promoters in Form 48A of the Companies
Regulations with a copy of identity cards and in the case of public company the directors
are required to lodge Form 46 to state the details of their qualification shares. All
documents must be lodged with the Registrar together with the copy of the name
approval letter and duplicate copy of Form 13A returned by the Registrar. The first
secretary must then execute Form 48F and be filed in the minute book attached to the
minutes of the first board meeting or be attached to the Register of Directors, Managers
and Secretaries. No filing fee is required for the lodgment of incorporation documents but
fees payable for registration of a company is determined according to Second Schedule of
the Companies Act 1965.
The Registrar will review the documents and when he is satisfied that all the documents
are in order, he will register the Memorandum and Articles of Association and issue the
certificate of incorporation to the company in Form 8. The issuance of certificate entitles
a private company to commence business and exercising its borrowing powers while a
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public company with share capital cannot commence business until it receives the
certificate for commencement of business in Form 23 of the Companies Regulations.
The entrepreneurs must know the form of business organisations available to them as
well as the advantages and disadvantages of each organisation before they register their
business under the relevant laws in Malaysia and they should also be aware of the rules
and regulations governing business organisations to ensure that all technical and
procedural requirements of the law are strictly adhered to and complied with to avoid
legal action from being taken by the authority for failure to comply with those
requirements.
Apart from the requirements under the abovementioned laws, every entrepreneur must
also determine whether the business activities require licence, permit or letter of authority
from relevant bodies before the business commences depends on the types and natures of
business of the organisations.
2.
Registration of businesses and companies in Malaysia
The statistic provided by the Companies Commission of Malaysia shows that 3 306 530
businesses which comprise of sole proprietors and partnerships have been registered with
the Commission until the end of year 2007 while 799 585 companies have been
registered in which 795 353 are local companies whereas 4 232 are foreign companies.
Total Number of Companies and Businesses Registered in Malaysia
Local Companies
Foreign Companies
Total Number
of Companies
Total Number
of Businesses
Up to 31 December
2006
752 074
4172
756 426
3 280 853
Q1 2007
9 831
10
9 841
59 000
Q2 2007
11 318
17
11 335
58 167
Q3 2007
11 128
10
11 138
56 158
Q4 2007
11 002
23
11 025
52 361
Grand Total
795 353
4 232
799 585
3 506 539
•
Businesses – sole proprietor and partnership
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3.
The institution
The Companies Commission of Malaysia (CCM) was established on 16 April 2002 by
virtue of the Companies Commission of Malaysia Act 2001 (CCMA) to take over all the
functions and responsibilities of the Registry of Companies and Registry of Businesses.
With the establishment of CCM, the Registry of Companies and Registry of Businesses
under the Ministry of Domestic Trade and Consumer Affairs ceased to exist. The
Registrar of Companies and Registrar of Businesses as provided under the Companies
Act 1965 and Registration of Businesses Act 1956 continued whereby the Chief
Executive of CCM shall be the Registrar of Companies and Registrar of Businesses.
The functions and responsibilities of CCM as provided under section 17 of CCMA
include, amongst other things:
1. To ensure that the provisions of CCMA and the laws specified in the First
Schedule namely the Companies Act 1965, the Trust Companies Act 1949, the
Kootus Fund (Prohibition) Act 1971 and the Registration of Businesses Act 1956
are administered, enforced, given effect to, carried out and complied with;
2. To act as agent of the Government of Malaysia and to provide services in
administering, collecting and enforcing payment of prescribed fee or any other
charges under the laws specified in First Schedule;
3. To regulate matters relating to corporations, companies and business in relation to
the laws specified in First Schedule;
4. To encourage and promote proper conduct amongst directors, secretaries,
managers and other officers of a corporation and self-regulation by corporations,
companies, businesses, industry groups and professional bodies in the corporate
sector;
5. To enhance and promote the supply of corporate information under any laws
specified in the Acts and to create and develop a facility whereby any corporate
information received by or filed or lodged with, the CCM may be analysed and
supplied to the public;
6. To carry out research and commission studies relating on any matters relating to
corporate and business activities;
7. To advise the Minister of Domestic Trade and Consumer Affairs generally on
matters relating to corporations, companies and business in relation to the laws
specified in the Act and;
8. To carry out all such activities and do all such things as are necessary or
advantageous and proper for the administration of CCM or for such other purpose
as may be directed by the Minister.
4.
The Bankruptcy/Insolvency Law in Malaysia
The laws governing bankruptcy proceedings are enumerated in the Bankruptcy Act 1967
and the rules of procedure in respect of the Act is set out in Bankruptcy Rules 1969.
Malaysia bankruptcy law is based on the English Bankruptcy Act 1914 as amended. The
object of the Bankruptcy Act 1967 is:
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“(a) to secure fair and equal distribution of available property among the creditors; (b) to
free the debtor from his debts so that he can make a fresh start as soon as he is discharged
by the court; (c) to deter people from rashly incurring debts they cannot pay; (d) to vest
the debtor’s assets in the Director General of Insolvency for equal distribution to
creditors; and (e) finally to discharge the debtor from bankruptcy and restore his civil
status.”
Rule 276 of Bankruptcy Rules 1969 states that in the absence of any rule regulating any
proceedings under Bankruptcy Act 1967 or Bankruptcy Rules 1969 the Rules of The
High Court 1980 shall apply. In Bankruptcy Amendment Act 2003 (Act A1197) which
came into force from 1st. October 2003 has made various amended provisions of the Act
and has introduced major changes. It can be summarised as follows:
(1) The title of ‘Official Assignee’ now substituted as ‘Director General of
Insolvency’.
(2) To commit an act of bankruptcy the debtor must owe the creditor or joint creditors
a sum of RM30,000.00. Before the amendment it was RM10,000.00.
(3) The tem ‘social guarantor’ has been introduced.
(4) The creditor cannot commence bankruptcy proceedings without exhausting all
avenues to recover debts owed to him by the debtor.
(5) The interest rate claimable against the estate of the bankrupt has been capped.
(6) A new section 84A is inserted in the Act to give Director General of Insolvency
extensive powers.
(7) The Director General of Insolvency can appoint Investigating Officers for the
purpose of section 421 to 424 of the Penal Code having power of arrest; to detain
upon arrest; to investigate; to enter search and seize etc.
A person against whom a bankruptcy petition is presented must be a debtor. Under Rule 3
of the Bankruptcy Rules 1969 the ‘debtor’ includes any debtor proceeded against under
the Act, whether adjudged bankrupt or not and also includes a firm of debtors in
partnership. Hence, partnership is subject to the provisions of Bankruptcy Act. Under
section 133(b) of Bankruptcy Act 1967 a firm may act by any of its members. Section 98
provides that a creditor whose debt is sufficient to entitle him to present a bankruptcy
petition against all the partners of a firm may present a petition against any one or more
partners of the firm without including the others. It must be emphasised that an
adjudicating order can be made against the firm under section 24 of the Act. A firm can
be a partnership or sole-proprietorship. If it is sole-proprietorship then it will be more
appropriate to commence proceedings against the person rather than the firm.
As for Incorporated Companies under the Companies Act 1965, they are not subject to
Bankruptcy Act. As for corporate judgment debtors, the Companies Act and the Rules
and Regulations govern winding-up/liquidation proceedings. Hence, Incorporated
Companies can be wound up if they are insolvent pursuant to the Companies Act and
Winding Up Rules.
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In Malaysia bankruptcy proceedings is a form of execution proceedings to enforce a
judgment obtained against the defendant who has defaulted payment on the judgment.
Bankruptcy proceedings have a foothold on the platform of a judgment, which is a
prerequisite for filing a Bankruptcy Notice.
In order to initiate bankruptcy proceedings against an individual judgment debtor, the
minimum amount of the judgment debt due and outstanding must be RM30,000. If the
judgment debt is less than the minimum statutory amount, the judgment creditor would
not have recourse in bankruptcy against the judgment debtor. As against a corporate
judgment debtor, the judgment creditor may institute winding-up proceedings. Only the
High Court has original jurisdiction against in bankruptcy and winding-up proceedings.
4.1
The procedures
It involves filing an ex-parte Request for Issue of Bankruptcy Notice supported by the
original judgment, which gave rise to the judgment debt and a Bankruptcy Notice
directing the judgment debtor to show cause within 7 days why Adjudicating and
Receiving Orders should not be made against him/her. It must be shown to the court that
there has been a default in the payment of the judgment debt. These cause papers will
bear the official seal of the court and need to be served personally on the judgment debtor
or by substituted service upon prior leave of court having been obtained. Adjudication
Order is the order of the court, which effectively makes the debtor bankrupt. Until the
order is made the debtor is not a bankrupt. Whereas Receiving Order is the order of the
court made for the protection of the estate. The receiving order when made, deprives all
creditors, whose debts are provable in bankruptcy of any remedy or action therefore,
unless with the court’s leave, and on such terms as the court may impose. The Director
General of Insolvency immediately becomes the receiver of the eebtor’s property.
The Bankruptcy Notice is issued by the court in which a bankruptcy petition against the
debtor be filed. In Practice Direction 3 of 1993 states that:
“Semua kes kebankrapan hendaklah difailkan di Mahkamah di dalam negeri dimana
Siberhutang Penghakiman bermastautin.”
“Bagi kes-kes kebankrapan yang difailkan di Mahkamah selain daripada Mahkamah yang
dinyatakan di atas, Mahkamah yang berkenaan hendaklah menasihatkan pihak yang
memohon (petitioner) untuk memfailkan kes-kes berkenaan di Mahkamah dimana
Siberhutang Penghakiman bermastautin.”
Practice Direction 3 of 1993 which came into force on 1st. April 1993 makes it clear that
all petition ought to be filed in the state in which the petitioner resides and that in the case
of the petition being filed before the coming into effect of this Practice Direction, the
petitioner ought to apply in writing to transfer the petition to the court of the state where
the debtor resides.
Immediately upon instituting the bankruptcy proceedings, all the assets of the judgment
debtor vest in the Official Receiver. Bank accounts are ‘frozen’ and cannot be operated
by the judgment debtor and everything comes to a standstill.
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Upon service of the Bankruptcy Notice and if no cause is shown, a Bankruptcy/Creditors’
Petition is filed and is issued by the court with an endorsement of a date for the hearing of
the bankruptcy claim. The judgment debtor/respondent may respond to the petition by
filing an Affidavit to show cause or object to the proceedings. These papers and all cause
papers filed in the matter need to be served on the Official Receiver as well. The matter is
then heard before a High Court Judge. The Official Receiver is present in these
proceedings. Upon conclusion of the proceedings, if the court finds in favour of the
judgment creditor, Adjudicating Order and Receiving Order would be granted. Thereafter
the judgment creditor must file a Proof of Debt with the Official Receiver.
The adjudication of the bankruptcy must be advertised in the national newspapers and in
the Federal Gazette promptly to give notice to all curent and prospective creditors. All
other creditors who were not parties to the initial claim or the bankruptcy proceedings
may now file their Proof of Debt. Subsequent to the adjudication of bankruptcy, any
action either by or against the bankrupt can only be initiated with leave of the Official
Receiver.
The Official Receiver then carries out investigation through his/her office and collects all
relevant information pertaining to the judgment debtor’s assets and liabilities to
determine the extent of the estate of the bankrupt. The bankrupt is also required to file a
Statement of Affairs with the Official Receiver.
The Official Receiver then holds periodic Creditors’ Meetings and finalizes the
distribution of the estate of the bankrupt. The Adjudicating and Receiving Orders remain
until the judgment debtor’s debts are fully settled in which case the judgment debtor may
be discharged. In some circumstances, the Official Receiver will seek the consensus of
all the creditors who have filed their respective Proofs of Debt to grant the judgment
debtor a discharge where it is evident that there is absolutely no way the judgment debtor
is going to be able to pay and settle off all his assets.
The bankruptcy proceeding can be summarised as follows:
Serve Copy of Judgement on Judgement Debtor
(Giving 14 days to pay judgement sum)
If no payment made, File Request for Issue of bankruptcy notice, and bankruptcy notice
Bankruptcy Notice valid for 3 months. If not served Bankruptcy Notice on Judgement
Debtor, to renew for another 6 or 12 months by applying to court
Extract bankruptcy notice – by personal service or substituted service
Notice Served
If no response, File Creditors’ Petition within 6 months after service of bankruptcy notice
Notice
File and extract Creditors’ Petition
Serve Creditors’ Petition through personal Service or Substituted Service
Petition Served – Once it is served before hearing of Petition:
(1)
Serve all documents on OA
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(2)
File Affidavit of service of Documents on OA
Adjudicating and Receiving Order granted. Judgement Debtor adjudicated Bankrupt and
Director General of Insolvency appointed.
File Proof of Debt
Creditors Meeting
Distribution of dividends in order of priority
One pertinent consequence of an adjudication of bankruptcy is that the judgment debtor
‘loses’ his identity immediately upon Adjudicating and Receiving Orders being made
against him. His passport would be impounded and he would not be permitted to travel
out of the country. The immigration authorities are kept duly informed of the bankruptcy.
The bankrupt will not be able to own any property, motor vehicle, have any bank
accounts or receive any independent income or operate any business in his name. He is
only entitled to apparel and basic living needs. To circumvent this several bankrupts
purchase property in the names of their nominees or operate businesses in the nominee’s
name and go on as such without the least concern to pay off the debts and discharge the
bankruptcy.
5.
Conclusion
There are a number of disqualification and disabilities which arises as a result of the
adjudication order. For example, if a person is adjudged bankrupt he is disqualified from
becoming a session judge or magistrate or nominated or elected to or holding or
exercising the office of councillor of a local authority. The disqualification will cease if
the adjudication of bankruptcy is annulled, or obtains from the court his discharge with a
certificate to the effect that his bankruptcy was caused by misfortune without any
misconduct on his part.
In other circumstances, the adjudged bankrupt must once in every six months render
account to the Director General of Insolvency for all moneys and property he had
received for his own use in the preceeding six months. He must also pay over the money
to the Director General of Insolvency less his family and maintenance expenses. He must
also immediately inform the Director General of Insolvency of any money or property
received which is valued more than five hundred ringgit. Furthermore, he:
“(a) cannot leave Malaysia without the previous sanction of the Director General of
Insolvency or of the court; (b) must not enter into partnership or become director or carry
on any business or directly or indirectly take part in the management of any company and
cannot be in the employment of any of the following persons namely his spouse, a lineal
ancestor or a lineal descendent of his or a spouse of such ancestor or descendent; or a
sibling of his or a spouse or such sibling, without the previous permission of the Director
General of Insolvency.”
Any breach of the above will make him liable for contempt of court and shall be punished
accordingly on the application of the Director General of Insolvency.
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Entrepreneurs are also subject to the above-mentioned law and regulations in case the
business carried out by them suffers loss making the business unable to pay debts owed
to the creditors which is the common ground for such procedure. But of course the
process and procedure depends on the forms of business organisation chosen by the
entrepreneurs when they commence the business.
REFERENCES
Amirudeen Hamid Sultan, Anwardeen Hamid Sultan, 2005, Janab’s Series To ‘Law,
Practice And Legal Remedies’, Volume II, Janab (M) Sdn. Bhd., Kuala Lumpur.
Chan & Koh on Malaysian Company Law: Principles and Practice, 2006, Ben Chan,
Philip Koh & Peter SW Ling, Second Edition, Sweeet and Maxwell Asia
Concise Principles of Company Law in Malaysia, 2005, Shanty Rachagan, Janine Pascoe
and Anil Joshi, KL, Malayan Law Journal
Essentials of Entrepreneurship and Small Business Management, Thomas W. Zimmer
and Norman M Scarborough, Fourth Edition, Pearson Education International US
Kang Shew Meng, 2005, Handbook on Company Secretarial Practice in Malaysia, Fourth
Edition, KL, Lexis Nexis
Principles of Company Law in Malaysia, 2002, Shanty Rachagan, Janine Pascoe and Anil
Joshi, KL, Malayan Law Journal
Partnership Law in Malaysia, 1998, Dr Samsar Kamar Latif, KL, International Law Book
Services
Principles of Partnership Law in Malaysia, 1998, Dr El. Gaily Ahmed El – Tayeb, KL,
International Law Book Services
Small Business, Entrepreneurship and Enterprise Development, 2002, Graham Beaver,
Edinburgh Gate, Harlow, Essex, Pearson Education Ltd
http://www.ssm.com.my
Statutes
Bankruptcy Act 1967
Bankruptcy Rules 1969
Bankruptcy Amendment Act 2003
Companies Act 1965 (Act 125)
High Court Rules 1980
Partnership Act 1961 (Act 135)
Registration of Businesses Act 1956 (Revised 1978) (Act 197)
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