Legal Action For or Against a Bankrupt

The general implications of being declared a bankrupt are generally presumed to be common knowledge, but in reality, actually do pose some complications. This article aims to ascertain these implications in the context of an undischarged bankrupt’s capacity to commence or maintain legal proceedings. The following analysis can be categorised into two; first, can one sue a bankrupt? Second, can a bankrupt sue?

Can a Bankrupt be Sued?

In the context of one seeking to sue a bankrupt, the general rule is encapsulated in Section 8 of the Insolvency Act 1967 (“IA 1967”) which stipulates that no creditor shall be able to commence or proceed with any legal action in respect of a debt unless leave has first been obtained from the Court. This is a fairly uncontentious area of the law as the rationale to such an imposition is simple. Any Court order contextualizing around a monetary sum would be ineffective against a bankrupt as the said bankrupt would unable to comply with such an order right from the start, having no money. Further, provided for in Section 8, all of the bankrupt’s assets would now vest in the Director General of Insolvency (“DGI”) for management purposes until one’s status as a bankrupt can be discharged. Therefore, a bankrupt would effectively have no control over any of his property whether movable or immovable thereby rendering any legal proceeding against him ultimately ineffective.

In contrast, the law surrounding the ability of a bankrupt to sue is significantly more contentious. Section 38 of the IA 1967 essentially provides for two circumstances. First, a bankrupt may generally maintain such an action in relation to an action concerning personal injury.

In relation to the first circumstance, the Federal Court in 2018 in the case of Akira Sales & Services (M) sdn Bhd v Nadiah Zee Abdullah & Another Appeal [2018] 2 CLJ 513 conclusively clarified the law and decided that claims such as an unfair dismissal claim, or any such claim that would originate from an industrial Court would not require the authorization of the DGI. Therefore, it is clear that where an undischarged bankrupt seeks to sue in relation to a claim that is personal in nature, he may do sue without the need to first obtain authorization or permission.

Can a Bankrupt Sue? 

Second, in order for a bankrupt to commence an action other than one for personal injury, he would first need to obtain the sanction, or in simpler terms, the authorization of the DGI.

Here, the obtaining the authorization of the DGI prior to the commencement of an action poses a few complexities of its own i.e. is any action prior to the authorization automatically invalidated? Can authorization function retrospectively? In what circumstances can action be subsequently ratified via authorization? These issues will be categorically analysed below.

On strict reading of Section 38, it seems to dictate that authorization has to be obtained first, before proceedings can be commenced. In other words, authorization would generally have no retrospective effect and any action commenced prior to such authorization would be invalid. Such an approach was taken in the case of Swiss Garden Rewards Sdn Bhd v Mohamed Ashrof Tambi bin Abdullah & Ors [2017] MLJU 844 where the Court of Appeal held that such proceedings commenced before authorization was obtained would be rendered a nullity. The Court went on to say that although authorization would generally have no retrospective effect, there would be certain circumstances in which authorization could function retrospectively as illustrated in the following cases.

The case of Winstech Engineering Sdn Bhd v ESPL (M) Sdn Bhd [2014] 3 MLJ 1 held that authorization could function retrospectively if such authorization is clear and express in its purpose. Essentially, for authorization to function retrospectively, the application for authorization must be made intending for it to ratify proceedings that have already been commenced. Further, the DGI must have made it clear that such authorization is meant to function retrospectively, effectively ratifying proceedings that have already commenced. Such an approach was then upheld and applied in the case of Reebok (M) Sdn Bhd v CIMB Bank Bhd [2018] MLJU 1116.

In a Nutshell

To summarise, it can generally be seen that a bankrupt would have no capacity to sue or be sued. This can be for various procedural reasons which amongst others include the fact that if a bankrupt were allowed to sue, he would not be able to pay costs should he lose the case, leaving the defendant in a rather prejudicial position; being forced to defend the claim while being unable to recover costs even if successful. However, there are certain exceptions to this as clarified above, where a bankrupt may be sued with leave from the Court. Additionally, the bankrupt may commence legal action for claims of personal injury directly, or any other claim, with sanction from the DGI.