There appears to be some confusion regarding passports and citizenship. First, some Malaysians think that if you do not have a passport, or your passport is cancelled, then you are no longer a Malaysian citizen. Next, some Malaysians think that it is unlawful for the government to cancel your passport.
You do not need a passport to be a citizen whether in Malaysia or in any other country in the world. A passport is merely a travel document. Millions in Malaysia and billions all over the world are citizens but do not posses a passport.
The passport that you are issued is not your property but the property of the government. That is clearly stated on your passport. Hence a passport is not a right but a privilege. And you can lose this privilege under certain circumstances or if you misuse your passport.
Bankrupts plus directors of companies or owners of businesses who defaulted on their EPF contribution can be barred from leaving the country. And if they still try to leave the country their passports can be impounded. The same goes for those who have evaded paying their income tax and are on the blacklist.
If these people still need to leave the country for special reasons, such as for medical treatment, then they will need a letter of permission before they can leave the country. Sometimes they might even be asked to place a security to ensure they return to the country. If not the immigration will impound their passports at the exit point.
Sometimes this also applies to those facing trial and who are free on bail. The court can ask that the passports of the person on bail be impounded if the court feels that the person is a flight risk or if the prosecution demands it be done.
In the 1970s a friend of mine lost his passport and he was barred from being issued a new one for five years. In the 1970s, the Immigration Department viewed losing your passport as a serious offence and even if you needed to leave the country the Immigration would issue a single-trip passport valid for only one year, but only if you can prove it is important for you to leave the country.
This confusion needs to be cleared up because there are Malaysians who think that once your passport is cancelled or impounded then you are no longer a Malaysian citizen. That is not so or else probably ten million or more Malaysians would not be citizens since they do not posses a passport.