A Guide to Voluntary Arrangements Under Part 1 of the Insolvency Act 1967

What is a voluntary arrangement?

It is a composition in satisfaction of a debtor’s debt or a scheme of arrangement of a debtor’s affairs. Simply put, it is a compromise between the creditors to allow the debtor to pay off his debts in a specific and agreed manner.

Section 2C of the Insolvency Act 1967 (“Act“)

How can the debtor initiate a voluntary arrangement?

The debtor can file an ex-parte application for an interim order for voluntary arrangement in Form 4, supported by an affidavit in support in Form 5 of the Insolvency (Voluntary Arrangement) Rules 2017 (“Rules“).

Rule 7 of the Rules

Form 5 of the Rules requires the following matters to be included in the affidavit:-

(a) the list of creditors and the estimated amount owed;

(b) the particulars of any execution or legal processes that have been commenced against the debtor;

(c) a statement that in the past 12 months, the debtor did not file a similar application for an interim order for voluntary arrangement; and

(d) the written consent of the nominee.

In addition, there must be full and frank disclosure of all the material facts, failing which the interim order may be set aside.

Dalam Perkara: Lim Cheng Pow v Maybank Investment Bank Berhad & Anor [2020] 1 LNS 1956

What are the conditions to be met?

First, the debtor must not have filed a similar application 12 months prior.

Second, the nominee appointed by the debtor is willing and able to act.

Third, the application is made before the debtor is adjudged bankrupt.

Fourth, the debtor is not a limited liability partnership.

Fifth, if the debtor is a firm, consent from all or the majority of the partners has been obtained.

Upon receiving the debtor’s application, and subject to the above conditions, the Court shall make an interim order for voluntary arrangement.

Sections 2B, 2C and 2D of the Act

What are the effects of an interim order?

First, no bankruptcy petition may be made or proceeded with against the debtor.

Second, no other proceeding, execution, or legal process may be commenced or continued against the debtor without leave of the court.

Third, the interim order for voluntary arrangement is only valid for a period of ninety days and the period cannot be extended.

Sections 2D and 2E of the Act

Who is a nominee?

Save that he is an officer of a body corporate established under the Central Bank of Malaysia Act 2009, a nominee must be qualified in any of the following manners and registered with the Director General of Insolvency:-

(a) a registered chartered accountant under the Accountant Act 1967;

(b) an advocate and solicitor admitted and enrolled under the Legal Profession Act 1976; or

Sections 2F and 2G of the Act

What are the powers and duties of the nominee?

First, the following, among others, are the main powers of the nominee:-

(a) to preside a meeting of creditors for the purposes to approve debtor’s proposal;

(b) to require any information from the debtor and his creditors with respect to debtor’s affairs which is necessary for the tabling of debtor’s proposal for a voluntary arrangement;

(d) to admit or reject proof of debt as a whole or in part;

(e) to do all such things including the carrying out of works necessary for the implementation and supervision of the voluntary arrangement; and

(f) any other power that is given by the terms of voluntary arrangement as agreed between debtor and creditor.

Rule 5 of the Rules

Second, the duties of the nominees are as stated below:-

(a) to report to the debtor and his creditors upon the progress of the voluntary arrangement; and

(b) if applicable, to inform the Director General of Insolvency of his disqualification to act as a nominee as required under the Act.

Rules 6 of the Rules

What happens after the interim order for voluntary arrangement is granted?

There must be meticulous compliance with the procedures set out below (Dalam Perkara: Lim Cheng Pow v Maybank Investment Bank Berhad & Anor [2020] 1 LNS 1956).

First, the debtor shall notify the nominee of the commencement date of the interim order within 7 days.

Section 2D(4) of the Act

Second, after the nominee is notified, the nominee shall notify all of the debtor’s creditors within 7 days of such notification by the debtor.

Section 2D(5) of the Act

Third, the debtor must submit a statement of affairs in Form 7 to the nominee within 14 days from the date of the interim order.

Rule 9 of the Rules

Fourth, every creditor shall file a proof of debt in Form 8 within 21 days after being notified by the nominee.

Rule 10 of the Rules

Fifth, the nominee shall prepare the debtor’s proposal in Form 9 within 21 days of receiving the statement of affairs from the debtor,

Rule 11 of the Rules

Sixth, the nominee, after preparing the debtor’s proposal, shall summon the meeting of creditors within 14 days. Notice of the meeting shall be circulated to all creditors specified in the debtor’s statement of affairs.

Rule 12 of the Rules

Seventh, the creditors may resolve to approve the proposed voluntary arrangement with or without modification. The proposal can only be approved by way of a special resolution. Only creditors who have filed their proof of debt are entitled to vote.

Section 2I of the Act and Rule 15 of the Rules

Eighth, the nominee (who is also the chairman) shall prepare a report in Form 12 and file a copy in the court within 7 days from the date of the meeting.

Rule 18 of the Rules

What happens if the proposal is approved?

If the proposal is approved, it binds every creditor who had notice of and was entitled to vote at the meeting, irrespective of whether he was present or represented.

Section 2K(1) of the Act

Furthermore, any pending bankruptcy proceedings shall be deemed to have been dismissed, unless the Court orders otherwise.

Section 2K(3) of the Act

It is also important to note that the debtor cannot enter into a credit facility during the effective period of the voluntary arrangement, unless all the creditors agree and the person giving the credit is informed of the voluntary arrangement.

Section 2K(4) of the Act

What happens if the proposal is rejected?

If the proposal is rejected, and the court receives a report from the nominee to that effect, the court may then set aside any interim order. Consequently, the moratorium on all proceedings against the debtor will be lifted, and any bankruptcy petition against the debtor may proceed.