FINAL ASSESSMENT

LAW534 – INSOLVENCY 1

NAME: NUR FATEHAH BINTI ZOLKIFLI

STUDENT ID: 2019128527

COURSE NAME: INSOLVENCY 1

COURSE CODE: LAW 534

GROUP: LWPLK9AX

LECTURER’S NAME: DR AENI SYUHAEDA

QUESTION 1

Whether Director General of Insolvency has the power to distribute the land.

The purpose of adjudging a person to be a bankrupt is for the purpose of satisfying claims of
bankrupt’s creditors by distributing the property among the creditors. Whenever a person
has been served a bankruptcy notice against him, the property of the bankrupt will be
automatically vested upon the Director General of Insolvency by virtue of the bankruptcy
order proceeded against him. As the question concerns with the transfer of property prior to
the date of the bankruptcy order, the principle of relation back applies. The principle of
relation back is derived from Section 47(1) of the Insolvency Act whereby it says that when a
person is made a bankrupt, the Director General of Insolvency will step into his shoes and
will use his position to relate back to the time when the act of bankruptcy is
committed. In other words, bankruptcy is deemed to have commenced at the time of an act
of bankruptcy being committed upon which bankruptcy order has been served against the
bankrupt.

Based on the Doctrine of Relation Back, all the total asset of the bankrupt will be vested
under Director-General Insolvency (DGI) power. It is purpose is to make sure the assets will
be liquidated and distributed to all bankrupt creditors. According to section 47 of the IA
states that the bankruptcy of a debtor, whether the same takes place on the debtor’s own
petition or upon that of a creditor, shall be deemed to have relation back to and commence
at the time of the act of bankruptcy being committed on which a bankruptcy order is made
against him, or if the bankrupt is proved to have committed more acts of bankruptcy that one
to have relation back to and to commence within six months next preceeding the date of the
presentation of the bankruptcy petition.

This can be mean that any transaction to sell or dispose of any of the bankrupt’s assets after
the act of bankruptcy would be declared a void transaction because the bankrupt, at the
material time, had no ownership of the said asset. However, in section 54 states that once
the notice of bankruptcy has been served, transferring assets as a gift is not valid, thus the
ownership will back to the original owner and ca be vested by the DGI. However, in section
54(2) mentioned that ‘valuable consideration’ is needed in valid transaction. This means that
any asset being sold with the correct price or with market value can fall under exception of
the section 54(2).

Applying to the current case, Sanjay has been adjudged bankrupt and has sold his land to
Chor. After the bankrupt is adjudged, the Director General of Insolvency has the right and
the power over the land. The DGI has the power to distribute the said land. Apart from that,
the DGI also have power to recover the transaction that has been made for a period of 6
months before the bankruptcy took place. However, with in order for DGI to have power to
distribute the land, a condition must be fulfilled, which is the land must be sold in within the
marker value. However, Jonathan sold the land under the market value which is RM30,000.
Apart from that, Sanjay has also sold the land to the third party so the DGI can claim from
Jonathan for the land. Next, for the second issue, the supplier can take back all the stuffs.

QUESTION 2

The issue is whether Jonathan can have the bankruptcy order rescinded and annulled.

The definition of bankruptcy is referring to the legal process by which the debtor’s asset by
an order of court are taken by the Director General of Insolvency whose duty is to distribute
the assets among his creditors. Under Section 2(a) of Insolvency Act 1967, there are three
party involved in the bankruptcy and for this situation falls under social guarantor which is
stated. It provided that a person who provides, not for the purpose of making purpose of
making profit, regarding to a loan, scholarship or grant for educational or research purposes.
Section 5(3)(b) of the same Act provided that a petitioning creditor shall not be entitled to
commence any bankruptcy action against a guarantor other than a social guarantor unless
the petitioning creditor has obtained leave from the court.

Section5(4) of Insolvency Act 1967 stated that before the court granting the leave, the court
shall satisfy itself that the petitioning creditor has exhausted all modes of
execution and enforcement to recover debts owed to him by the debtor and next Section
5(7) stated that if the petitioning creditor fails to comply with the requirements of this section,
the court shall dismiss the petition. In construing section 5(4), regard must be given to
section 5(6). And section 5(6) provides that the modes of execution and enforcement that
must be exhausted include seizure and sale, judgment debtor summons, garnishment, and
bankruptcy against the borrower. It does not make sense that the reference to debtor in
section 5(4) refers to the guarantor because section 5(6) specifies bankruptcy as one
of the modes of enforcement that must be exhausted. As bankruptcy has not been
commenced against the guarantor, it makes the entire construction that “debtor” includes
the guarantor, wholly untenable and incomprehensible. The only reasonable construction
that can be accorded is that “debtor” in section 5(4) refers to the principal debtor or the
borrower.

A judgment creditor can file an application for leave under section 5(3)(b) to proceed against
a guarantor either upon the issuance of the bankruptcy notice, or even prior to that, up to
and immediately prior to the filing of a creditor's petition. The case also supported by the
decision of the Federal Court in Hong Leong Bank Bhd v Khairulnizam bin Jamaluddin
stipulates that “In the instant case the High Court, the court held that the section seeks to
introduce protection for the guarantor against whom bankruptcy proceedings are to be
brought. The protection comes in the form of ensuring that enforcement has been exhausted
in respect of the principal debtor prior to proceeding against the guarantor. It was
satisfied from the affidavit evidence that the appellant had proved that it had
exhausted all avenues to recover debts owed to him by the hirer. As such the appellant had
satisfied the requirement of section 5(3) of the Act to commence the bankruptcy action
against the respondent.”

Section 105 of the IA 1967 provides that the court may annul Bankruptcy Order on the
following grounds:

1. In the opinion of the court that the bankrupt ought not to have been adjudged a
bankrupt

Applying to the current case, Jonathan is a social guarantor as he becomes a guarantor to

his long lost friend for educational loan taken by him. In section 2 stated that a social
guarantor cannot be held liable for loan taken. Apart from that, according to section 105 of
the IA, Jonatan has never received any bankruptcy notice and not receiving it meaning that
the bankruptcy order is a null from the very beginning.
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