By Esther Agbaje
Developing an Islamic bankruptcy code is important, especially as Islamic finance systems continue to exist and to grow. In Islamic finance, the ideal is that Islamic financial arrangements will not default.[1] But in the real world, bankruptcy and defaults do occur and the Islamic financial world would do well to develop a regime that adheres to Islamic principles concerning debt and repayment. Malaysia, which is a leader in Islamic financing and regulation, has a bankruptcy code that meets conventional standards, and cases are adjudicated in its civil courts.[2] This post will explore some cases concerning debt repayment and how the judgments tend to find a balance between repayment to the creditor and mercy for the debtor. The holdings in these cases can be the foundation of an Islamic bankruptcy code.
In Malaysia, parties to cases with Islamic banks sometimes raise the issue that the case should only be decided in Islamic courts.[3] In Bank Islam v. Adnan Omar, a case concerning a dispute on a loan repayment from an Islamic loan originated by the Bank Islam, the defendant brought a preliminary challenge that the case should be heard in the sharī‘a courts because the loan was an Islamic financial product. In the preliminary challenge, the Malaysian High Court held that Bank Islam was a corporate entity and as such did not have a religion, so the matter could be adjudicated in the civil court.[4] The outcome of the case was that the defendant owed the bank, but at an amount less than what the bank claimed. This is one of the precedent setting cases in Malaysia that holds that civil courts can hear cases involving Islamic banking because it is not feasible to transfer these cases to the sharī‘a courts, which would require additional legislation and the elevation of the sharī‘a courts in commercial matters.[5]
In Ng Yen Kok v. Amfinance Berhad, the court invalidated a creditor’s petition for bankruptcy of the debtor because the creditor did not give proper notice to the debtor. Amfinance filed a petition to bring Mr. Kok into bankruptcy and recover on his debts. The court invalidated both the bankruptcy notice and the creditor’s petition because they creditor did not properly serve the debtor with these documents. According to Paragraph 3 of the Malaysia Bankruptcy Act, a bankrupt defendant has seven days to comply with or respond to a bankruptcy notice,[6] but if the bankrupt defendant is not properly served by the creditor, the claim will fail.[7] This holding could show a tendency to find leniency with the debtor, who theoretically should already have knowledge of his debt, and not be obligated to repay debts of which he is unaware and not properly notified.
Malaysia’s bankruptcy law includes a provision where a debtor can apply to discharge her debts. Paragraph 33 of the Bankruptcy Act of 1967 states “A bankrupt may at any time after being adjudged bankrupt apply to the court for an order of discharge, and the court shall appoint a day for hearing the application.”[8] Though the rule states “any time,” the bankrupt must still submit information to the Director General of Insolvency about her assets in order for the courts to distribute them fairly across the creditors. If the debtor complies, the courts will likely grant the discharge, allowing for the debtor to start over. But courts will readily reject discharge petitions like in Public Bank BHD v. Choong Yew Wah if conditions are not met.
“We are fully mindful of the fact that no individual should remain a bankrupt forever for a commercial mistake made and in an appropriate case, he or she should be given another chance in life. That said…The interest of the bankrupt as an individual and the interest of the public and commercial reality at large must be weighed up for the simple reason that the society at large must not have the impression that being a bankrupt is not a serious matter.”[9]
Finally, as noted in my second post, judges in Malaysia will also hold that the debt being sought in the creditor’s petition will effectively cap the creditor at the amount she can expect to receiver from her debtor.[10] The court cases and the bankruptcy code provisions cited above appear to lean in favor of the debtor especially when the debtor is willing to work towards repayment, meeting the mercy requirement in Qur’ān 2:280.[11] In addition to the model of the US Bankruptcy Code,[12] Malaysia’s own debt recovery cases should also be a foundation for developing an Islamic bankruptcy law.
Malaysia’s Central Bank recommends instituting a sharī‘a commercial court dedicated to Islamic banking legal matters or using alternative methods for arbitration for these cases.[13] Malaysia’s High Court recently started asking lawyers to register Islamic banking and finance cases with special code number. The hope is that this will expedite these hearings and increase public confidence in Islamic finance.[14] Another recommendation from Islamic scholars is to have a sharī‘a bench in the Federal Court with sharī‘a-trained judges who can advise on Islamic financial disputes.[15] The High Court in Kuala Lumpur instituted this recommendation, but the court lacked enough properly trained judges in Islamic law to handle the caseload.[16] As Malaysia moves forward in standardizing Islamic finance across the board, judicial and Islamic finance practitioners will need to devote appropriate resources to ensure the development of an Islamic bankruptcy system in the country.
Notes:
[1] Maha-Hanaan Balala, Islamic Finance and Law: Theory and Practice in a Globalized World 147 (2011).
[2] Malaysia Bankruptcy Act (1967) http://iiiglobal.org/component/jdownloads/finish/204/1251.html.
[3] Nik Nozrul Thani, et al. Law and Practice of Islamic Banking and Finance 127 (2nd ed. 2010).
[4] Bank Islam v. Adnan Omar [1994] 3 Current Law Journal 735, Shah Alam, July 18, 1994; Thani et al., supra note 3, at 127-28.
[5] Thani et al., supra note 3, at 128; Tan Thean Chooi v. Kuwait Finance House (Malaysia) BHD & Another Case [2013] 7 Current Law Journal 404, Pulau Pinang, June 14, 2013. In this case, the High Court decided that they will not interpret the meaning of interest in an Islamic finance product since it is not covered by the Malaysia Bankruptcy Act 1967 and will be left for the legislature to decide what constitutes interests for Islamic financial products decided in civil courts.
[6] Malaysia Bankruptcy Act (1967) Paragraph 3 (1)(i), http://iiiglobal.org/component/jdownloads/finish/204/1251.html.
[7] Ng Yen Kok v. Amfinance Berhad [2013] 1 Legal Network Series 366, Putrajaya, January 4, 2013.
[8] Malaysia Bankruptcy Act (1967) Paragraph 33, http://iiiglobal.org/component/jdownloads/finish/204/1251.html.
[9] Public Bank BHD v. Choong Yew Wah [2014] 5 Current Law Journal 695, Putrajaya, February 26, 2014.
[10] Ropli Ishak v. Hong Leong Leasing SDN BHD [2014] 3 Current Law Journal 293, Putrajaya, February 17, 2014.
[11] The Noble Qur’ān 2:280 http://quran.com/2. “And if someone is in hardship, then [let there be] postponement until [a time of] ease.”
[12] See Esther Agbaje “The Need for an Islamic Bankruptcy Code.”
[13] Thani et al., supra note 3, at 128-29.
[14] Id. at 129.
[15] Id. at 128.
[16] Umar A Oseni & Abu Umar Raruq Ahamd, Dispute Resolution in Islamic Finance: A Case Analysis of Malaysia, 8th International Conference on Islamic Economics and Finance 6-7 (December 2011), available at http://conference.qfis.edu.qa/app/media/273.