When dealing with a bankrupt individual, the question arises as to whether legal action can be taken against them.
Section 8(1) of the Bankruptcy Act 1967 reads as follows:
“On the making of a receiving order the Official Assignee shall be thereby constituted receiver of the property of the debtor, and thereafter, except as directed by this Act, no creditor to whom the debtor is indebted in respect of any debt provable in bankruptcy shall have any remedy against the property or person of the debtor in respect of the debt, or shall proceed with or commence any action or other legal proceeding in respect of such debt unless with the leave of the Court and on such terms as the Court may impose.”
To understand the concept of “debt provable in bankruptcy,” we turn to Section 40 of the Act, which outlines its definition. According to this section:
“(1) Demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust shall not be provable in bankruptcy.
(2) A person having notice of any act of bankruptcy available against the debtor shall not prove under the receiving order for any debt or liability contracted by the debtor subsequent to the date of his so having notice.
(3) Save as provided in subsections (1) and (2) all debts and liabilities present or future, certain or contingent, to which the debtor is subject at the date of the receiving order, or to which he may become subject before his discharge by reason of any obligation incurred before the date of the receiving order shall be deemed to be debts provable in bankruptcy.
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(6) If in the opinion of the court the value of the debt or liability is incapable of being fairly estimated the court may make an order to that effect, and thereupon the debt liability shall for the purpose of this Act be deemed to be debt not provable in bankruptcy.”
In the case of Taiping Recovery Sdn Bhd V. Bank Perusahaan Kecil & Sederhana Malaysia Sdn Berhad [2013] 1 LNS 1478, the Court of Appeal established that the granting of leave to proceed with legal action is at the court’s discretion. The burden lies with the plaintiff/applicant to demonstrate the following:
a. The debt is not a provable debt in bankruptcy.
b. If the debt is provable in bankruptcy, whether it is more convenient for the plaintiff to pursue legal action leading to a judgment or to file a proof of debt with the official assignee.
In the mentioned case, leave was granted to the plaintiff to continue their legal action against the fourth defendant, who was a bankrupt. The plaintiff sought possession of properties based on a settlement agreement that included covenants for debt repayment (secured by a consent judgment) and an additional covenant for providing security. It was also decided that this case involved complex factual issues requiring technical analysis of evidence. As a result, the Kuala Lumpur High Court was deemed the appropriate forum for determining the plaintiff’s claim, rather than the official assignee’s office.
It is worth highlighting one key takeaways from the case of Thanam Velayuthan V. Yeo Sang Chua [2022] 1 LNS 2931, which held that:
โWhether the Plaintiff’s claim is provable in the Defendant’s bankruptcy as defined under Section 40 (1) of the Insolvency Act 1967 or leave ought to be granted to the Plaintiff to continue with this suit is a matter for the Bankruptcy Court to decide upon hearing the Plaintiff and the views of the Official Assignee with whom the assets of the Defendant is vested and not for this Court to decideโ.
In conclusion, the ability to sue a bankrupt individual depends on various factors, including the nature of the debt and whether it falls within the scope of provable debts.
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