Introduction 

Imagine receiving a Bankruptcy Notice based on a judgment obtained against you.

You subsequently discover that the judgment was entered in default and that there may be valid grounds to set it aside. Naturally, you file an application in the original court proceedings seeking to challenge the judgment.

However, before that application can even be heard, the creditor proceeds with bankruptcy proceedings against you.

Can the bankruptcy proceedings be suspended while the challenge to the underlying judgment is being determined?

The answer is yes.

Section 97 of the Insolvency Act 1967 provides the Malaysian Courts with a broad discretion to stay bankruptcy proceedings where there is “sufficient reason” to do so.

Recently, our firm successfully obtained a stay of bankruptcy proceedings on behalf of a judgment debtor whose application to set aside the underlying default judgment was still pending before the Sessions Court.

The case serves as an important reminder that bankruptcy proceedings should not always proceed merely because a judgment exists. Where the validity of that judgment remains under active challenge, the Court may intervene to preserve the status quo pending the resolution of that challenge.

What Is A Stay Of Bankruptcy Proceedings?

A stay of bankruptcy proceedings is an order made by the Bankruptcy Court suspending the continuation of bankruptcy proceedings either temporarily or indefinitely.

The effect of such an order is that the bankruptcy process is effectively placed on hold.

No further steps may be taken until the stay is lifted or until the occurrence of an event specified by the Court.

Importantly, a stay does not extinguish the creditor’s rights.

Rather, it temporarily postpones the bankruptcy process in circumstances where fairness and justice require the Court’s intervention.

The Legal Framework

The relevant provision is Section 97 of the Insolvency Act 1967 which provides as follows:

“The court may at any time, for sufficient reason, make an order staying the proceedings under a bankruptcy petition, either altogether or for a limited time, on such terms and subject to conditions as the court thinks just.”

At first glance, the provision appears deceptively simple.

However, the phrase “sufficient reason” has been the subject of judicial consideration and forms the cornerstone of any application under Section 97.

The provision confers a wide discretion upon the Court.

Unlike other applications involving stays of execution, Parliament deliberately chose not to impose a rigid or restrictive test.

Instead, the Court is empowered to determine whether the circumstances of a particular case justify suspending the bankruptcy process.

Is “Sufficient Reason” The Same As “Special Circumstances”?

One of the most common misconceptions is that an applicant seeking a stay of bankruptcy proceedings must demonstrate “special circumstances.”

This is incorrect.

The distinction was clarified by the High Court in Re Rosli Abdul Kadir; Ex Parte Bank Kerjasama Rakyat Malaysia Berhad [2008] 5 CLJ 691.

In that case, the Court expressly held that the test of “sufficient reason” under Section 97 is distinct from the more onerous requirement of “special circumstances” which frequently arises in conventional applications for a stay of execution.

The Court observed that bankruptcy proceedings occupy a unique position within the legal system.

Where bankruptcy proceedings are postponed, the judgment creditor is not deprived of all remedies.

The creditor remains free to pursue various other methods of execution and enforcement available under the law.

For that reason, the Court concluded that it would be incorrect to import the stricter requirement of “special circumstances” into Section 97.

This distinction is significant.

It lowers the threshold for applicants seeking a stay and reflects the potentially severe consequences associated with bankruptcy.

The Decision In Re Thangarajoo Vyran 

The same principle was subsequently affirmed in Re Thangarajoo Vyran; Ex Parte Denko Industrial Corporation [2013] 1 CLJ 286.

The High Court reiterated that an applicant under Section 97 need only establish “sufficient reason” and is not required to satisfy the higher burden ordinarily associated with stay applications.

The case reinforces the proposition that bankruptcy proceedings should not be viewed as ordinary enforcement proceedings.

Given the serious implications of bankruptcy, the Courts are prepared to exercise their discretion where fairness requires the proceedings to be temporarily suspended.

Can A Pending Application To Set Aside Judgment Constitute “Sufficient Reason”?

The short answer is yes.

In practice, one of the most common situations giving rise to a stay application occurs where the debtor is actively challenging the judgment which forms the basis of the bankruptcy proceedings.

This frequently arises where:

  • A default judgment has been entered;
  • An application to set aside the default judgment has been filed;
  • An appeal against the judgment is pending; or
  • There is an ongoing challenge to the validity of the judgment debt itself.

In such circumstances, the debtor may argue that the foundation of the bankruptcy proceedings remains uncertain.

After all, if the judgment is subsequently set aside, the very basis upon which the bankruptcy proceedings were commenced may disappear entirely.

The Courts have recognised that it would be unjust in certain circumstances to allow a debtor to suffer the consequences of bankruptcy before the validity of the underlying judgment has been conclusively determined.

Why The Courts Take This Issue Seriously

Bankruptcy is not merely another form of debt recovery.

A bankruptcy order carries significant legal and practical consequences.

Among other things, a bankrupt individual may face:

  • Restrictions relating to financial affairs;
  • Difficulties obtaining financing and credit facilities;
  • Limitations on business activities;
  • Reputational consequences;
  • Restrictions affecting property transactions; and
  • Various statutory obligations imposed under insolvency legislation.

These consequences may affect not only the debtor but also the debtor’s spouse, children, business interests and overall livelihood.

Accordingly, where there is a genuine challenge to the judgment forming the basis of the bankruptcy proceedings, the Courts generally approach the matter with caution.

The objective is to ensure that a person is not unnecessarily subjected to the consequences of bankruptcy before the legal basis for doing so has been firmly established.

The Practical Balancing Exercise

Every application under Section 97 ultimately involves a balancing exercise.

On one hand, a judgment creditor is entitled to enforce a valid judgment and recover monies lawfully owed.

On the other hand, a debtor should not be exposed to the severe consequences of bankruptcy where there exists a bona fide challenge to the underlying judgment.

The Court therefore considers factors such as:

  • Whether the challenge to the judgment is genuine;
  • Whether the challenge has been brought promptly;
  • Whether the challenge appears arguable;
  • Whether the creditor will suffer prejudice if the proceedings are temporarily stayed; and
  • Whether justice requires the preservation of the status quo pending the disposal of the challenge.

Ultimately, the Court’s discretion is guided by the interests of justice.

Our Recent Success 

In a recent matter handled by our firm, bankruptcy proceedings had been commenced on the basis of a default judgment obtained by a financial institution.

Upon learning of the judgment, our client filed an application to set aside the default judgment in the Kuala Lumpur Sessions Court.

Recognising that the application directly challenged the very foundation of the bankruptcy proceedings, we applied under Section 97 of the Insolvency Act 1967 for a stay pending the disposal of the setting aside application.

The Bankruptcy Court accepted that the pending challenge to the default judgment constituted sufficient reason under Section 97 and granted the stay sought.

The decision ensured that our client would not be exposed to the potentially serious consequences of bankruptcy before the validity of the underlying judgment had been determined.

Key Takeaways

Several important lessons emerge from the authorities and from practical experience. First, bankruptcy proceedings are not immune from judicial scrutiny merely because a judgment has been obtained.

Secondly, the applicable threshold under Section 97 is “sufficient reason” and not “special circumstances.”

Thirdly, a bona fide application to set aside a default judgment may constitute sufficient reason for the Court to stay bankruptcy proceedings.

Finally, prompt action is essential. Debtors who delay in challenging judgments or seeking appropriate relief may find it significantly more difficult to persuade the Court to exercise its discretion in their favour.

Conclusion

 Section 97 of the Insolvency Act 1967 provides an important safeguard against premature or unjust bankruptcy proceedings.

Where the judgment forming the basis of the bankruptcy proceedings remains under active challenge, the Court possesses a broad discretion to suspend the bankruptcy process pending the determination of that challenge.

The Malaysian Courts have consistently recognised that the test is one of “sufficient reason” rather than the more demanding requirement of “special circumstances.”

For debtors facing bankruptcy proceedings based upon judgments that are still being contested, Section 97 may provide a valuable avenue for temporary relief.

If you have received a Bankruptcy Notice or are facing bankruptcy proceedings, it is crucial to obtain legal advice immediately. The applicable timelines are strict, and early intervention can often make a significant difference to the outcome of the matter.

 

We recently acted for a client in obtaining leave under Section 471 of the Companies Act 2016 to commence proceedings against a wound-up company.

The intended proceedings arose from investments made by our client into an Islamic Redeemable Cumulative Preference Shares (“RPS-I”) investment instrument issued by the company prior to its winding up.

Following the company’s failure to redeem the investment, concerns arose regarding the utilisation of the investor monies and whether the funds had in fact been applied in the manner represented to investors.

As a result, our client intended to commence proceedings for pre-action discovery to obtain financial and transactional documents belonging to the company.

The intended discovery was sought, inter alia, to determine:

  • how the investor monies had been utilised;
  • whether the monies had been diverted or dissipated;
  • whether the company had been used as a facade by persons controlling it; and
  • whether there existed viable causes of action against the company and/or its former directors.

Importantly, the intended proceedings were not merely for the recovery of a debt.

The contemplated proceedings involved investigative and declaratory elements, including the possible tracing of funds and potential claims against persons controlling the company. As such, the intended proceedings went beyond matters ordinarily capable of being dealt with through the proof of debt process in the winding up.

 Legal Principles

In support of the application, reliance was placed inter alia on the Court of Appeal decision in Mesuntung Property Sdn Bhd v Kimlin Housing Development Sdn Bhd [2014] 7 CLJ 202.

In Mesuntung, the Court of Appeal reaffirmed that two principal considerations govern the exercise of the Court’s discretion in granting leave to commence proceedings against a wound-up company.

First, the applicant must demonstrate that the intended claim cannot be adequately dealt with within the winding up proceedings themselves.

This principle is significant because section 471 is not intended to completely insulate a wound-up company from legal scrutiny. Rather, it exists to prevent the company’s assets from being unnecessarily depleted by frivolous or unmeritorious litigation.

Accordingly, where the intended proceedings involve remedies or disputes which cannot properly be resolved through the ordinary winding up process, leave may be granted.

In our case, the intended proceedings concerned pre-action discovery, investigations into the utilisation of investor monies, and the potential pursuit of claims extending beyond a mere proof of debt. These issues necessarily required factual investigation and adjudication beyond the scope of the winding up proceedings.

Second, the applicant must demonstrate a prima facie case.

Importantly, the Court of Appeal in Mesuntung clarified that a prima facie case in this context does not require the applicant to conclusively prove the entirety of the intended claim at the leave stage.

Rather, the relevant consideration is whether there exists a serious dispute warranting judicial determination and whether the intended claim is frivolous, baseless or plainly unsustainable.

In the present matter, concerns surrounding the representations made to investors, the utilisation of the investment monies, and the role played by those controlling the company raised serious issues requiring proper investigation and determination.

The Decision

The High Court granted leave under section 471 to commence the intended proceedings.

The decision serves as a reminder that while the winding up regime protects the orderly administration of a company’s assets, it does not operate as a blanket shield against legitimate claims requiring judicial scrutiny.

This is particularly so in cases involving allegations concerning the misuse or dissipation of investor funds, breaches of duties, or circumstances requiring investigation into the conduct of those controlling the company.

A trustee does not have an unfettered right to resign. The office carries fiduciary obligations and the court retains supervisory control over its proper administration. As such, resignation must be justified by what the law recognises as reasonable cause.

This principle originates from M’Ewan v Drummond 1857 D 936 and has been applied in Malaysia, including in Lai Kiat Yeong v HSBC (Malaysia) Trustee Berhad [2025] CLJU 418. The inquiry is an objective one. The question is whether the circumstances justify the trustee’s release from office.

The Legal Position

In M’Ewan v Drummond , the court recognised that a trustee may be permitted to retire where the continuance of the trusteeship is no longer consistent with the proper administration of the
trust. The focus is not on convenience, but on whether the trustee can continue to discharge its duties in accordance with its fiduciary obligations.

This approach has been adopted locally. The Malaysian courts have consistently treated reasonable cause as the controlling threshold. A trustee who seeks to resign must demonstrate that the circumstances have reached a point where continuation is no longer tenable.

Decision of the High Court

In a recent matter before the High Court in Kuala Lumpur, our Client, a professional trustee, sought to resign on the basis that the surrounding circumstances no longer permitted the proper discharge of its duties.

The court accepted that the position of the trustee had been sufficiently affected such that continuation was no longer viable. The requirement of reasonable cause was therefore satisfied.

Observations

The decision reaffirms that resignation is not a matter of choice but of justification. The court will examine whether the trust can continue to be properly administered with the trustee remaining in office.

Where the position of the trustee has been compromised, the court is prepared to permit resignation. At the same time, the court may grant further orders to protect the trust property and preserve the integrity of the arrangement.

Conclusion

The requirement of reasonable cause remains central to any application by a trustee to resign. It reflects the balance between the duties owed by the trustee and the reality that, in appropriate cases, continuation is no longer possible.

A trustee who seeks to step down must therefore be able to demonstrate that the circumstances justify that course.

Introduction

A Mareva injunction remains one of the most powerful interim remedies available in civil litigation. Its purpose is straightforward: to prevent a defendant from dissipating assets so as to frustrate the enforcement of a future judgment.

In Malaysian practice, the jurisdiction to grant a Mareva injunction arises under Order 29 of the Rules of Court 2012, read together with the Court’s inherent jurisdiction. While the remedy is discretionary, the courts have consistently emphasised that it is a protective, not punitive measure.

Given its intrusive nature, the applicant must satisfy a stringent legal threshold before such relief will be granted.

This article outlines the governing principles applied by Malaysian courts when determining whether a Mareva injunction ought to be granted.

The Nature and Purpose of a Mareva Injunction

A Mareva injunction restrains a defendant from removing or disposing of assets within the jurisdiction pending the disposal of the action. The injunction does not determine ownership of the assets nor does it give the plaintiff priority over other creditors. Its sole function is to preserve the status quo so that any eventual judgment is not rendered nugatory.

Because of its potentially severe consequences, particularly where it restricts a defendant’s ability to deal with property, courts exercise caution when granting such relief. The jurisdiction must therefore be invoked only where there is credible evidence that assets may be dissipated.

The Governing Legal Principles

Malaysian courts have adopted well-established principles when considering an application for a Mareva injunction. In essence, the applicant must demonstrate the following:

  1. A good arguable case on the merits;
  2. Assets within the jurisdiction;
  3. A real risk of dissipation of those assets; and
  4. That it is just and convenient to grant the order

These requirements reflect the balancing exercise undertaken by the Court between protecting the plaintiff’s prospective judgment and preventing undue hardship to the defendant.

Good Arguable Case

The first threshold requires the applicant to demonstrate a good arguable case.

This does not require proof on a balance of probabilities. Instead, the applicant must show that the claim is more than merely speculative or arguable. The court must be satisfied that the claim carries a realistic prospect of success.

In practice, this is usually established through the pleadings and supporting affidavit evidence. Where documentary evidence supports the claim, particularly in commercial disputes involving contractual breaches or misappropriation of funds, courts are generally prepared to find that this requirement has been met.

However, the Mareva jurisdiction will not be exercised where the underlying claim is tenuous or speculative.

Assets Within the Jurisdiction

The applicant must also demonstrate that the defendant possesses assets against which a judgment may ultimately be enforced.

These assets may take various forms, including:

  • bank accounts
  • real property
  • shares or securities
  • receivables or other choses in action

Importantly, the applicant is not required to identify every asset with precision. It is sufficient if there is credible evidence suggesting the existence of assets within the jurisdiction.

Where the defendant’s assets are opaque or concealed through corporate structures, courts may nonetheless infer their existence based on surrounding circumstances.

Real Risk of Dissipation

The most critical element in any Mareva application is the risk of dissipation.

The applicant must demonstrate that there is a real risk that the defendant will remove, conceal, or dispose of assets in order to defeat a potential judgment.

This risk must be grounded in evidence. Mere suspicion or speculation is insufficient.

Courts typically look for indicators such as:

  • prior attempts to transfer assets
  • movement of funds between related entities
  • sudden disposal of property
  • lack of transparency in financial dealings
  • conduct suggesting dishonesty or bad faith

Evidence that assets have already been moved or concealed will significantly strengthen the application.

Conversely, where the defendant is a well-established entity with a stable commercial presence, the court may be less inclined to infer a risk of dissipation absent compelling evidence.

The “Just and Convenient” Requirement

Even where the above elements are satisfied, the court retains a residual discretion to determine whether it is just and convenient to grant the injunction.

In exercising this discretion, courts may consider factors such as:

  • the proportionality of the order sought
  • the potential prejudice to the defendant
  • whether the order would effectively paralyse legitimate business operations
  • the adequacy of alternative remedies

A Mareva injunction should not operate as an instrument of oppression. The order must therefore be carefully tailored so that it preserves assets without unnecessarily interfering with legitimate commercial activity.

For this reason, Mareva orders commonly include carve-outs allowing the defendant to meet ordinary living expenses, legal fees, or legitimate business costs.

The Cross-Undertaking in Damages

Another fundamental safeguard in Mareva applications is the requirement that the applicant provide a cross-undertaking in damages.

Through this undertaking, the applicant agrees to compensate the defendant should it later be determined that the injunction ought not to have been granted.

The cross-undertaking serves as a critical balancing mechanism, ensuring that plaintiffs seek such relief responsibly and only where genuinely justified.

Conclusion

A Mareva injunction is a powerful mechanism designed to safeguard the integrity of the judicial process. By preventing the dissipation of assets, the remedy ensures that successful litigants are not left with hollow judgments.

However, the jurisdiction is exercised with considerable caution. Applicants must demonstrate not only a credible claim, but also a genuine risk that assets will be placed beyond the reach of the court.

Ultimately, the grant of a Mareva injunction reflects the court’s careful balancing of competing interests: protecting the plaintiff’s prospective judgment while avoiding unnecessary interference with the defendant’s property rights.

Where the evidential threshold is met, the courts will not hesitate to intervene to preserve assets pending the final determination of the dispute.

When a company faces financial trouble, Judicial Management under the Companies Act 2016 (“CA 2016”) can provide a vital lifeline. It allows a company to restructure, protect its assets, and continue operating under the supervision of a court-appointed judicial manager. During this period, a moratorium stops creditors from enforcing debts without the court’s permission, giving the company a chance to put forward proposals that could benefit all stakeholders.

While secured creditors clearly have the right to oppose JM applications, the position of unsecured creditors has long been uncertain. Courts have taken different approaches:

  • On one side, Leadmont Development Sdn Bhd v Infra Segi Sdn Bhd [2019] 8 MLJ 473 suggested that unsecured creditors generally do not have standing to intervene JM applications based on the strict reading of the provisions in CA 2016.
  • On the other side, Goldpage Assets Sdn Bhd v Unique Mix Sdn Bhd [2020] MLJU 2013, Gigatech Engineering Sdn Bhd v EnGreen Sdn Bhd [2022] MLJU 2822, and Novabrite Lighting Sdn Bhd v Emrail Sdn Bhd (Bataranee Construction, proposed intervener) [2024] MLJU 298 recognised that unsecured creditors may intervene when their legal rights are directly affected. These cases emphasise fairness and the importance of protecting all creditors whose interests may be impacted by a JM application.

In the recent Shah Alam High Court decision in Ace Holdings Berhad v Koperasi Telekom Pahang Berhad & Ors [2025] CLJU 1679 and In Re: Ace Holdings Berhad; Amiliah Lathy Mohamed & Ors (Intervener) [2025] CLJU 1565 , where our Managing Partner represented several of the proposed interveners, the Court allowed unsecured creditors holding redeemable preference shares to intervene in the proceedings. The Court found that their legal rights were directly affected by the JM application, justifying their intervention.

However, the Court of Appeal in Desa Tiasa Sdn Bhd v CME Group Berhad & Anor [B02(IM)62604/2023] held that unsecured creditors do not have standing to intervene in JM applications. The decision in Desa Tiasa is still unsettled, as it is pending review at the Federal Court following the grant of leave to appeal.

It is noteworthy that ACE Holdings is currently appealing the High Court’s decision in light of the Desa Tiasa decision and the hearing for the appeal before the Court of Appeal is fixed on 28.01.2026.

This unresolved issue underscores the importance of careful planning in JM proceedings for both creditors and companies. The Federal Court’s decision of Desa Tiasa will provide much-needed clarity on the rights of unsecured creditors in corporate rescue in Malaysia.

Written by: Muhammad Azraai Bin Mohamed Yunos (Managing Partner)