A family is about to lose its home. Not because it cannot pay. Because it is forbidden to pay.

The arrears are small — about fifteen thousand ringgit.¹In one example, a solicitor’s notice issued on behalf of the chargee bank, dated 27 April 2026, put the arrears at RM14,979.06. The family stands ready. They will clear the arrears and keep up the instalments. The bank, one imagines, would be glad of the money. Yet the money cannot change hands. A letter from the Director General of Insolvency (DGI) appears to confirm this.

This is not a story about a clever fraud. It is a story about a section read too quickly.

Begin with the ordinary

A man buys a house. He borrows from a bank. He charges the house to the bank as security.

Years pass. Then misfortune arrives, as it does — and he is made a bankrupt.

Nothing about that is unusual. Nor is what the family wants to do next. They want to keep paying the loan and keep the roof. Banks have accepted such payments for as long as there have been banks.

What the law actually does

Here is what happens when a man goes bankrupt. His property passes to the Director General of Insolvency, who holds it for the creditors.²Insolvency Act 1967 (Act 360), s 8(1)(b): on the making of a bankruptcy order all the property of the bankrupt vests in the Director General of Insolvency, who becomes its receiver, manager, administrator and trustee. All of it — save one important thing.

The one thing is the secured creditor. The Act protects the bank in the plainest words it owns. Bankruptcy, it says, “shall not affect the power of any secured creditor to realize or otherwise deal with his security … as if this section had not been passed.”³Insolvency Act 1967 (Act 360), s 8(2): the section “shall not affect the power of any secured creditor to realize or otherwise deal with his security as he would have been entitled to realize or deal with it if this section had not been passed”. As if nothing had happened. The bank keeps every right it had the day before.⁴This reflects the orthodox principle that a secured creditor stands outside the collective distribution in respect of its security: see K Balasubramaniam (liquidator of Kosmopolitan Credit & Leasing Sdn Bhd) v MBf Finance Bhd [2005] 1 CLJ 793 (FC); and generally R Goode, Principles of Corporate Insolvency Law.

So a charged house is not free estate property. It is not the Director General’s duty to administer or to sell. The Department said so itself, and said it correctly. Its own letter records that the property “does not vest” in the Director General, and that the bank must exercise its own rights as chargee.⁵Letter from a State Insolvency office to the bankrupt, dated 31 December 2025, para 3: the charged property is secured property that “does not vest” in the Director General of Insolvency, and the chargee must exercise its rights under s 8(2), Schedule C of Act 360 and Chapter 3, Part 16 of the National Land Code 1965.

That is the law, stated well. And then, in the very next breath, it is unstated.

The first stumble

Having said that, the house is not his, and the bank must act, the same letter says the bank may not accept payment from the bankrupt. Any payment received, it adds, must be handed to the Department. The authority given is section 115(3).⁶Ibid, para 4: the chargee “is not allowed to accept any payment from the bankrupt” under s 115(3), and any payment received after the date of bankruptcy is to be surrendered to the Department.

Let us read section 115(3) slowly. Reading it slowly is the whole of the matter.

It punishes a person who, “knowing that a bankruptcy order has been made,” deals with “any part of the property of such bankrupt, with intent to defeat the order.”⁷Insolvency Act 1967 (Act 360), s 115(3): it is an offence for “any person who, knowing that a bankruptcy order has been made against a bankrupt, removes, conceals, receives or otherwise deals with or disposes of any part of the property of such bankrupt, with intent to defeat the order”. Two ingredients, then. Property of the bankrupt. And an intent to defeat the order. Take away either, and the section has nothing to bite.

Now hold the family’s payment against that test. A sister’s money, from a sister’s account, is a sister’s property — not the bankrupt’s.⁸Insolvency Act 1967 (Act 360), s 2 defines “property” as the property of the debtor; and s 38(1)(b) permits a bankrupt to retain what is spent on “the necessary expenses of maintenance of himself and his family”. A relative’s own funds are not the bankrupt’s property at all. And the purpose is not to defeat anything. It is to keep the family in its home and the loan alive. Far from defeating the creditors, such a payment helps them. It shrinks the secured debt. It shrinks the shortfall the other creditors would otherwise share.

A section aimed at the man who spirits away his assets has been turned on the family trying to save its house. That is not what it says. It is the opposite of what it says.

The comedy of contradiction

If the first letter stumbled, the second fell.

Some months later a second letter came, from another arm of the same Department of the DGI. It refused the family’s appeal to keep paying. The reason given was memorable. The appeal could not be considered, it said, “so long as the asset is not surrendered to this Department for realisation.”⁹Letter from the Insolvency Department (Bankruptcy Division) to the bankrupt, dated 25 May 2026, para 2: the appeal to continue the monthly instalments “could not be considered so long as the asset is not surrendered to this Department for realisation”.

Read the two letters together and admire the symmetry. Letter one: the house is secured, it does not vest in us, the bank must deal with it. Letter two: hand the house to us, so that we may sell it. One office disclaims the asset. The other demands it. Same Department. Same file. Same bankrupt, holding both letters, wondering which to believe.

He might, out of kindness, have kept a third fact to himself. The Act nudges the bank to sell within a year, or lose its interest.¹⁰Insolvency Act 1967 (Act 360), s 8(2a): a secured creditor is entitled to no interest after the bankruptcy order if he does not realise his security within twelve months of the order. So the Department’s stance pushes toward the very outcome the statute laboured to avoid — a forced sale that helps no one, least of all the creditors it exists to serve.

The invitation to sue

The second letter closed with an invitation. If the parties were dissatisfied, they could “obtain an appropriate court order.”¹¹Putrajaya letter (as above), para 3: dissatisfied parties “may obtain an appropriate court order”.

Consider the man receiving that advice. He is a bankrupt. He has, by definition, no money. And by the same Act, he cannot even walk into court without permission — for an undischarged bankrupt may maintain no action without the Director General’s own sanction.¹²Insolvency Act 1967 (Act 360), s 38(1)(a): an undischarged bankrupt is “incompetent to maintain any action” (save one for personal injury) “without the previous sanction of the Director General of Insolvency”.

So the office that misread the section invites the penniless man to sue — and must first give him leave to sue — that a judge may tell him what the section already says. It is a perfect circle. One could almost frame it.

No villain, only haste

Let us be fair, for fairness is the point.

There is no villain here. No malice, no scheme. There is a template, a busy desk, and a section read at speed. This is how errors of law are usually born — not in wickedness, but in haste. The Act runs to many sections. The officer carries many files. The wonder is not that a line slips. It is that so few do.

The cure is small. It is a better letter.

The four sentences that were missing

A single, careful letter would have settled everything. It needed to say four things, and only four.

First, that the bank’s rights as secured creditor are untouched, and the Department does not interfere with them.¹³Insolvency Act 1967 (Act 360), s 8(2). 

Second, that money which is truly the bankrupt’s, received after the order, must be accounted for to the estate.¹⁴Insolvency Act 1967 (Act 360), ss 38(1)(b) and 55: moneys belonging to the bankrupt and received after the order are to be accounted for to the estate. 

Third, that section 115(3) bites only on the bankrupt’s property, dealt with to defeat the order — and not on a relative’s honest payment from a relative’s own purse.¹⁵Insolvency Act 1967 (Act 360), s 115(3). 

Fourth, that any surplus, after the bank is paid, comes home to the estate.¹⁶The 31 December 2025 letter invokes s 55(5) for surplus. Section 55(5) in terms concerns money and securities held by an officer, banker, attorney or agent of the bankrupt which he may not lawfully retain. The surplus reaches the estate because the secured creditor is entitled only to its debt, its interest and its proper costs; what is left over is the bankrupt’s, and so the estate’s.

Four sentences. The home stands. The bank is paid. The creditors do better. Nobody goes to court.

The reading, not the rule

We are often told the law is an ass. It is a comforting thing to say, and usually untrue. The law here was neither ass nor enemy. It was, in fact, rather wise. It protected a family’s home and a bank’s security in the same breath.

The ass, if we must find one, was the reading — not the rule.

And the Director General is not beyond correction. Under sections 86 and 87 of the Act, the court keeps an eye on him. It may confirm, reverse or modify what he decides, and it takes cognizance of how he conducts himself.¹⁷Insolvency Act 1967 (Act 360), ss 86 and 87: a person aggrieved by an act or decision of the Director General may apply to the court, which may confirm, reverse or modify it; and the court “shall take cognizance of the conduct of the Director General of Insolvency”. He answers to the Act, as we all do. The Act asks only to be read.

Read the section.

Then let the family pay.

 

∞§∞

 

This article is written for a general readership and does not constitute technical or legal advice. Readers with legal questions are encouraged to seek independent legal advice.

The author thanks KN Geetha, TP Vaani, JN Lheela, and Lydia Jaynthi at GK Legal. Our gratitude to Getty Images of Unsplash for the image.

Claude, Anthropic’s AI, smoothed the drafting; Perplexity Pro checked the facts. The argument, the views, and the errors remain the author’s.

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