Reforming Bankruptcy Laws

I’ve always felt that the legal provisions for bankruptcy in Malaysia are too punitive. Seems like I have some company (excerpt):

...If the borrower or the guarantor (who is equally liable) has a debt of RM30,000 or more and has not been repaying that loan, the financial institution or creditor can institute bankruptcy proceedings to get their money back.

And it is tough being a bankrupt. When a person is declared a bankrupt, their existing bank accounts will be deactivated. This means they cannot withdraw money, open a new account or use their existing account unless they get permission from the Director-General of Insolvency (DGI). Their assets will be frozen and sold off to pay the debtors; they are unable to get new loans or travel overseas (unless they get written permission from the DGI) and can only use a credit of up to RM1,000 on an existing credit card. Their standing in society is damaged and they can forget about any political ambitions as they would not be allowed to stand for elections.

According to Rembau MP and Umno Youth chief Khairy Jamaluddin, who has been pushing for a review of the Bankruptcy Law to give people a second chance, Malaysia has one of the most stringent bankruptcy laws in the world...

...Calls to review the country's bankruptcy law are not new. In the past, the government has said it would look into the possibility of an automatic discharge after a certain period of time, which is the norm in most countries. Currently, the law does not allow an automatic discharge.

Thus, a bankrupt can only be released of his bankruptcy status after applying to the court for the bankruptcy order to be annulled on grounds that the debt has been settled, or apply for a discharge which would be subject to stringent requirements and with the Insolvency Department putting in a report emphasising the conduct and cooperation of the bankrupt with the department...

The law as it stands is overly weighted towards creditors rights, and far too punishing for debtors – your life is almost over if you’re declared a bankrupt in Malaysia, as it’s almost impossible to do much of anything.

There’s also a huge incentive problem, as many start-up businesses typically fail within the first couple of years, and entrepreneurs tend to take 2-3 tries before meeting any success. When the penalties for failure are so high, the tendency would be to “play it safe”. In effect Malaysia’s bankruptcy (and I include corporate restructuring laws in this) create a big disincentive to take risks and to try new things.

Tack on an education system that has emphasised compliance and conformity over individuality and critical thinking, this is obviously a millstone around the neck of creating an innovation-led business culture, or for entrepreneurship development.

I’m not going to comment about the bankruptcy phenomenon itself. To me, that points to a fundamental lack of teaching financial literacy within our education system, something I’ve pointed out before. Nor are the numbers really out of hand in relative terms, as I would expect to see a rise in the normal course of things with a growing population and increasing access to credit.

But the disincentive problem is real enough, and is something we need to tackle.