A VISIT TO MDI PART II: STATISTICS

Statistic on Bankruptcy Cases and Bankruptcy Fraud Cases in Malaysia

Statistics of cases were obtained from Investigation & Enforcement Unit of MdI. In Malaysia, number of bankruptcy cases has risen by 14% from year 2012 to year 2014. In 2012, a total of 19,575 persons were declared as bankrupt by court. Number of case increase to 21,987 in 2013 and later increase to 22,351 cases in the year 2014. According to MDI, as at April 30, 2015, a total of 6,017 cases has been recorded. The chart below explain the increment in number of bankruptcy recorded in Malaysia.

If compared to number of bankruptcy recorded, number of Bankruptcy Case investigated by MDI was relatively small. In the year 2012, a total of 15 investigation paper were opened for investigation. The number decrease to 10 in the year 2013 and later in 2014 decrease to 4 investigation. The following chart explain in detail:

Based on Zainol (2015), effective outreach programs were conducted by MdI that resulted in a greater contribution to the reduction of bankruptcy fraud cases. The outreach program includes awareness campaign on the roles and responsibilities of bankrupt persons. MDI also shared with us, as at to date, there are only 3 bankruptcy cases has been brought to court. 

A Visit to Malaysia Department of Insolvency (MdI): Part I

A Visit to Malaysia Department of Insolvency (MdI)

                 A Visit to MdI - Briefing Session by Puan Norina binti Zainol Abidin, Director of Investigation and Enforcement Division (centre), 

Puan Norhayati binti Abu, Investigation Officer (second from right) and 

Puan Noorhafiza binti Osman, Senior Insolvency Office (first from right)  

                                                  

On Wednesday 3 June 2015, the three of us had visited Malaysia Department of Insolvency situated at Level 2-3, Legal Affairs Building, Precint 3, Putrajaya. This visit had been planned a week before by our team member Nor Hafizah binti Marzuki. The visit was aimed to obtain information about bankruptcy fraud in Malaysia as well as to comprehend how MdI’s performed their investigation task while confronting bankruptcy fraud cases.

As we arrived we were greeted by Puan Norhayati binti Abu (Investigation Officer), Puan Noorhafiza binti Osman (Senior Insolvency Office) and Puan Norina binti Zainol Abidin (Director Investigation and Enforcement Division). Puan Norhayati, Puan Noorhafiza along with Puan Norina had brought us to a meeting room at Investigation and Enforcement Division where we had spent almost 2 hours for briefing.  

During the session, we had been briefed by Puan Norina, the Director of Investigation and Enforcement Division about the main responsibility of her division. According to Puan Norina, the main function of Investigation and Enforcement Division is to investigate the affairs of the bankrupts upon attaining an adjudication order or receiving order from court. The investigation was done towards the assets and liabilities of the bankrupts as well as the bankrupt’s behavior.  This is for the purpose of proving the debt of the bankrupt. Once the liabilities and assets of the bankrupt had been identified, the assets will be vested upon the Director General of Insolvency. The assets attained will be sold to the public where the proceeds will be channeled to the bankrupt’s creditors. 

Besides performing investigation upon receiving adjudication order or receiving order, the Investigation and Enforcement Division also liable to conduct investigation for cases from external or internal parties. The cases lingers on a bankrupt whereby they fail to file their assets and liabilities once they had been adjudicated bankrupt and also fail to disclose their actual assets. Once the investigation had accomplished, the investigation paper/report will be submit to the Attorney’s General Chamber for their further action.

A part from bankruptcy fraud and investigation, Puan Norina also managed to share with us her experience, statistics on bankruptcy fraud in Malaysia, investigation process, and opinion regarding bankruptcy fraud’s red flags as well as recommendations on mitigating bankruptcy fraud. However, we will spare this topic for tomorrow’s post. So do join us tomorrow.

Bankruptcy Fraud Case: Mr.KT v The Official Assignee of the property of Mr.KL (Part II)

Bankruptcy Fraud Case: Mr.KT v The Official Assignee of the property of Mr. KL (Part II)


The Modus Operandi 

The modus operandi for this case is transfer of assets prior and post the bankruptcy petition. As we can see, BC company  had entered judgment against Mr.KL on December 1989 which amounted to RM5.13 million. Knowing that a bankruptcy petitition will be made against him soon, Mr.KL had sold his property in Jalan Yap Kwan Seng to his son KT for RM1 million on September 1990. The transfer of the property was registered on March 1991 which was less than 6 month before the bankruptcy petition was made against him. Two years later Mr.KL had granted financial facilities to Mr.KT whereby the property was set as collateral. This somehow shows an attempt of Mr.KL to attained the property. 

Fraud Risk Indicators     

In this case the fraud risk indicators that we are able to identify are as follows:

1. Concealed his property and transferred it to his son. By doing this, Mr.KL able to retained his property from being forfeited. 
2. The act of concealing and transferring was done after judgment was filed against him on December 1989 and before bankruptcy petition was presented against him on August 1991.
3. Although had been declared bankrupt, Mr.KL had managed to grant financial facilities to Mr.KT and making the property as their collateral.

Conclusion

Transfer of asset to family members can be done either pre or post bankruptcy petition being presented. In order to transfer, perpetrators might need to concealed the property and not disclosing it to the authority once they were declared as bankrupt. The act of transferring asset can be regard as fraudulent conveyance and it is against the Bankruptcy Act.

Reference:

Bankruptcy Act 1967

Malayan Law Journal/2003/Volume October 2009

  

Bankruptcy Fraud Case: Mr.KT v The Official Assignee of the property of Mr.KL

Bankruptcy Fraud Case: Mr.KT v The Official Assignee of the property of Mr.KL 

Background of the case:

Mr.KL had a landed property which was a bungalow house situated at Jalan YKS, Kuala Lumpur. This property was held under grant number XXX lot number XX. On September 1990, Mr.KL had sold this property to his son Mr.KT for RM1 million. This was reflected on the sales and purchase agreement dated September 1990 between both of them. The transfer of title for this property was registered 6 month later which was on March 1991. On September 1993, Mr.KL had granted financial facilities to Mr.KT in which it must be secured by two separate collateral and the collateral was the said property. 

However, before this transaction took place, BC company had file a judgment against Mr.KL on December 1989 with the amount of RM5.13 million. Subsequently BC company had presented bankruptcy petition against Mr.KL on August 1991 and Mr.KL had been formally declared as bankrupt on July 1992. BC company had obtained declaratory order from the High Court which found that the transfer of the property conducted by Mr.KL was void under Section 47 and 52 of Bankruptcy Act 1967. Under Section 47 Bankruptcy Act 1967 ".....the first acts of bankruptcy proved to have been committed by the bankrupt within six months next preceding the date of the presentation of the bankruptcy petition" (p.52). Meanwhile, section 52 of Bankruptcy Act explained that if a person make any settlement of property and becomes bankrupt within 2 years after the date of his or her settlement, the settlement will be referred as void against the Director General of Insolvency. Besides that, UMBC also attained declaratory order from the High Court that placing the property as collateral to the financial facilities was regard as void. Based on Section 53B(2) of Bankruptcy Act "The Director General of Insolvency may recover the property referred to in subsection (1) or its value or the money or other proceeds therefrom from the person who acquired it from the bankrupt or from any other person to whom the person may have sold, resold or transferred the property or paid over the money or other proceeds therefrom as fully and effectually as the Director General of Insolvency could have recovered the property if it had not been so sold, transferred, disposed of, realized or collected" (p.58). 

Thus, the High Court judge had made an inference that the motion of Mr.KL transferred his property to his son Mr.KT was regard as fraudulent conveyance since the transaction had took place 26 March 1991, which was within the 6 month period preceding the date of the bankruptcy petition. According to the judge, fraudulent conveyance must not always be in tandem with an intention to delay or defeat the creditors. The act of avoiding the distribution of the insolvent's property are also regard as fraudulent conveyance. Hence, Mr.KL was convicted as performing a fraudulent conveyance under Section 3(1)(b) Bankruptcy Act. In addition, by virtue of Section 47 and 53B(2) of the Act, BC company was entitled to recover the said property from Mr.KT. 

Reference:

Bankruptcy Act 1967

Malayan Law Journal/2003/Volume October 2009

  

Mr.X Part III: Investigation Methods

Collecting evidence is important step in any investigation process. Those evidence must be taken care at all times to convince trail of cases and to preserve its credibility. A forensic accounting expert must take appropriate steps to gather and preserve relevant evidence that may lead to the ultimate conclusions of the investigation. In the case of Mr.X, various types of evidence can be presented in the court to prove the commission of bankruptcy fraud. Thus, among proposed methods can be used in collecting such evidence are as follows:

1 – Predication

Predication can be identified from various kind of sources such as regulators, auditors, employees and third parties (Golden, Skalak, Clayton, & Pill, 2011). A forensic accounting expert should conduct proper predication to anticipate an investigation. In the case of Mr.X, a complaint or inquiries from bank personnel may surface predication to commence an investigation on bankruptcy fraud.

2 – Interview

An interview is performed to elicit information regarding a crime under investigation. It involves a conversation session with a series of questions and answers (Golden et al., 2011). Effective interview may provide sufficient information to proof the crime. A forensic accounting expert must be able to persuade any targeted person to provide information including bank officers, Mr.X and his wife.

3 – Document Examination

A forensic accountant should perform document examination to obtain information regarding the bankruptcy fraud. As for the case of Mr.X, it requires thorough examination on several documents such as the Bankruptcy Order (Receiving Order & Adjudication Order) dated February 1993, ABC Bbank loan application form dated April 1996, ABC Bank overdraft facility form dated April 1996, incorporation documents of JKL Sdn Bhd dated August 1995 and other relevant documents.

4 – Surveillance

Surveillance is a legal undercover operation. This investigation technique involves observation by means of recording and watching acts, movements and physical facts of a fraud (F.Zimbelman, Albrecht, Albrecht, & Albrecht, 2012). For instance, in the case of bankruptcy fraud, an investigator may conduct surveillance method to trace the changes in lifestyle of the targeted suspect and to search the assets that belongs to the possible suspect.

REFERENCES:

F.Zimbelman, M., Albrecht, C. C., Albrecht, W. S., & Albrecht, C. O. (2012). Forensic Acounting.

Golden, T. W., Skalak, S. L., Clayton, M. M., & Pill, J. S. (2011). A Guide to Forensic Accounting Investigation. John Wiley & Sons, Inc.

http://www.kehakiman.gov.my/directory/judgment/file/S-09-207-2010.pdf.

Mr.X Part II: Fraud Risk Indicator

There are several warning signs of bankruptcy frauds. These warning signs can be used as a strong indication to initiate an investigation process. Sometimes these warning signs could exist in conditions of no fraud, thus, do not jump to conclusions simply based on these warning signs (Brown, Netoles, Rasnak, & Tighe, 1999). Among the possible warning signs in relation to the case are as follows:

1)    Failure to disclose prior bankruptcy case – Mr.X was declared a bankrupt effective on February 1993.  On April 1996, he became a guarantor for a loan facility of the ABC Bank without disclosing his bankruptcy status in the bank loan applications.

2)    Incomplete information in the bank loan application – The law requires any person who has been declared bankrupt under the Bankruptcy Act 1967, shall informed the person with whom he entered into the contract that he was undischarged bankrupt. However, Mr.X failed to do so.

3)    A history of prior litigation or post-petition litigation involving breech of contracts or fraud misrepresentation – Mr.X was originally charged with two principles charges under provisions of the Penal Code. However, the prosecution chose not offer any further evidence and subsequently he was discharged of the principle charges.

4)    Concealment of assets – Mr.X jointly with his wife had formed new company on August 1995 namely JKL Sdn Bhd. Based on the facts of case, the company belongs to his wife and he was acting as a guarantor in the overdraft and loan applications for the company to buy an apartment unit despite being declared a bankrupt.

5)    Same individuals involved in previous "failed company” – Mr.X was made a bankrupt in respect of a default judgement against him. The default judgement filed by XYZ Bank and entered in the Kota Kinabalu High Court on May 1987. In the prosecution’s case, he was the second defendant who was a guarantor for a loan facility granted to a company belonging to his wife.

REFERENCES:

Brown, J. B., Netoles, B., Rasnak, S. T., & Tighe, M. (1999). Identifying Bankruptcy Fraud. Credit Reasearch Foundation, 1–16.

http://www.insolvensi.gov.my/gallery/press-statement/the-star/182-star-02-12-10-a-g-t...

 

http://www.kehakiman.gov.my/directory/judgment/file/S-09-207-2010.pdf.

Mr.X Part I: Case Background & MO

Hello readers, 

Today we are going to discuss a case on bankruptcy fraud. This is a local case and the fraud was committed in 1996. In previous posting, we have discussed on type of bankruptcy fraud, now its time to apply those knowledge. Let's read this case together and try to identify which type of bankruptcy fraud this case can be categorized?

Case 1: Mr. X (not real name)

In the Court of Kota Kinabalu, the prosecution’s case was entered against Mr.X(respondent). Based on the background facts, the respondent was initially charged in the Sessions Court with two principal charges under provisions of the Penal Code. The first charge was for cheating under Section 420 of the Penal Code and the second charge was for false statement  under Section 199 of the same code. Besides, the Public Prosecutor had on 9 March 2010 tendered an alternative charge under Section 109(1)(m)(ii) of the Bankruptcy Act 1967.

Further, the criminal proceeding against the respondent on the two principle charges was discharged and acquitted as no any further evidence being offered by the Public Prosecutor. However, according to the judgement of the Court, the respondent pleaded guilty and convicted of the alternative offence under section 109(1)(m)(ii) of the Bankruptcy Act 1967. Therefore, the Session Court in Kota Kinabalu had on 27 September 2010 imposed a fine of RM10,000 in default a month’s imprisonment to the respondent, for failing to declare his bankruptcy status in ABC Bank loan application. 

The Session Court judge had imposed a RM10,000 fine on the respondent for not informing the ABC Bank in a loan application that he was a bankrupt. The facts leading to this court allegation are as follows: 

• On October 1991, XYZ Bank filed a Bankruptcy Notice against the respondent. The Bankruptcy Notice was served on the respondent and the affidavit of service was filed accordingly.
• Subsequently, on February 1993 the respondent was made a bankrupt as the Receiving Order and Adjudication Order were made against him.
• On April 1996, while the respondent has been adjudged bankrupt, he was engaged in the loan contract with the ABC Bank. Mr.X became a loan guarantor for his wife’s company, JKL Sdn. Bhd., in securing an overdraft facilities of RM50,000 and a loan of RM110,000.
• Thus, the legal proceeding was based on the commission of loan contract between the respondent and the ABC Bank dated April 1996. He failed to inform the bank that he was a bankrupt. Therefore, the respondent had breached the provision under section 109(1)(m)(ii) of the Bankruptcy Act 1967.

Can you identify what is the type of bankruptcy fraud?

A: False Statement

References:

http://www.kehakiman.gov.my/directory/judgment/file/S-09-207-2010.pdf.

http://www.insolvensi.gov.my/gallery/press-statement/the-star/182-star-02-12-10-a-g-t...