The COVID-19 pandemic will undoubtedly have a significant and long-term impact on the Malaysian and global economy. Many individuals as well as businesses in Malaysia have been and will be severely affected, resulting in individuals, sole proprietors, partnerships and companies being unable to meet their debts. On the other hand, many are facing debt recovery issues as debtors will delay outstanding payment due to the economic effects of the pandemic.
As a creditor, how can you recover a debt from your debtors and how effective will that recovery process be?
Debt recovery is a process of recovering debts from individuals, businesses or companies in the event they refuse or fail to pay their debts.
In this article, we will provide an overview of the debt recovery process in Malaysia, particularly the different ways available that you can consider to recover your debts.
What can be considered a debt?
Debts may arise out of loans from financial institutions. Debts may also arise out of a friendly loan between individuals. Tenants may owe rent to their landlords and patients may owe unpaid medical bills to hospitals or clinics. As for businesses concerned with the buying and selling of goods, debts may arise from goods or property that have been delivered but remain unpaid by the purchaser. If you are a service provider, you may also sue for outstanding or unpaid fees for services rendered.
However, as with all other civil suits, you must be aware that there is a time limit to bring a debt recovery action against the debtor and you must ensure that you commence the debt recovery action within the time allowed by law. In other words, you must be mindful of the limitation period given for a person to sue for a debt.
What is a limitation period?
The limitation period is the period allowed by law for a person to bring a legal action against another. In this context, it is the time period for you to sue your debtor for the recovery of debts owed to you. According to the Limitation Act 1953, you have six years from the due date of payment to commence legal action against the debtor.
However, the limitation period for execution will be different if you have already obtained a court judgment against a debtor. If you have obtained a judgment against a debtor, but the debtor still refuses to pay according to the judgment, you may seek to enforce the judgment within 12 years from the date of judgment.
Before commencing an action
Before you decide on whether to commence a debt recovery action against the debtor, it is advisable to conduct a background search on the debtor. In cases where the debtor is a company, a company search with the Companies Commission of Malaysia (otherwise known as Suruhanjaya Syarikat Malaysia (“SSM”)) and a company winding-up search with the Malaysian Department of Insolvency (MdI) on the company debtor will tell whether the debtor has been wound up. In cases where the debtor is an individual, an NRIC search and bankruptcy search on the individual debtor will reveal whether the individual is a bankrupt. These searches will also confirm the address of the debtor for service of any legal documents.
Letter of Demand
The typical first step to commence debt recovery action is to issue a letter of demand to the debtor. A letter of demand is a letter demanding payment of the debt due and owing by the debtor to the creditor within a reasonable and specific time. The letter concludes by stating that in the event of non-payment within the time set, legal action may be taken with no further notice. A letter of demand is neither compulsory nor a requirement to commence legal proceedings, but it may be helpful. For example, the letter of demand, particularly if issued by a law firm, may result in full or part payment, initiate settlement discussions, or solicit an admission to the debt by way of a request for more time. If the debtor does not respond to the letter of demand and disputes the debt, the non-response will add credibility to the claim when the matter proceeds to court.
Debt recovery action
If there is no payment or settlement following a letter of demand, you may then consider commencing a debt recovery action against the debtor in court.
Commencing an action in Court
If the amount that you are seeking to recover is less than RM100,000, you will commence a debt recovery action in the Magistrates Court. If the debt is above RM100,000 but less than RM1,000,000, you will commence an action in the Sessions Court. If the claim sum is above RM1,000,000, you must commence an action in the High Court.
If you decide to commence a debt recovery action in court, your lawyers will file a Writ and Statement of Claim and to serve them on the debtor’s address. If the debtor (defendant) fails to appear in court or fails to respond to the suit that has been filed against him, a judgment in default may be entered against him under Order 13 of the Rules of Court 2012. If the court grants a judgment in default against the defendant, the judgment itself is deemed a court order for the defendant to pay the amount claimed under the suit.
If the debtor (defendant) does enter an appearance in court, and if the case is straightforward, a summary judgment application under Order 14 of the Rules of Court 2012 may be filed. A summary judgment application is suitable and will succeed where the defendant has no defence to the claim. A summary judgment application is decided based solely on the documents and, if allowed, will avoid the need for a full trial in which witnesses are called to court to give oral evidence.
Judgment Creditor and Judgment Debtor
Upon obtaining a judgment from the court, the person or company whom the judgment is in favour of will be referred to as the “Judgment Creditor”; the person or company whom the judgment is against will be known as the “Judgment Debtor”. The judgment creditor is then entitled to demand the sum stated in the judgment (the “judgment debt”) from the Judgment Debtor. If the Judgment Debtor refuses to pay the judgment debt, there are a few ways that you as the Judgment Creditor can consider to recover the judgment debt from the Judgment Debtor. We will discuss the different ways on how you can recover the judgment debt below.
Ways to recover the Judgment Debt
- Judgment Debtor Summons
- Garnishee Proceedings
- Writ of Seizure and Sale
- Winding-up Proceedings
- Bankruptcy Proceedings
- Order of Committal
Judgment Debtor Summons
A Judgment Debtor Summons is a summons issued by the court to be served on the Judgment Debtor to compel the Judgment Debtor to appear in court to provide information about his assets and how they can be disposed of to settle the judgment debt. The provision that governs the rules of Judgment Debtor Summons is Order 48 of the Rules of Court 2012.
Upon serving the Judgment Debtor Summons on the Judgment Debtor, the Judgment Debtor is compelled to appear in court to be orally examined under oath before the Registrar of the Court. The Judgment Debtor will be asked to explain and provide information concerning the Judgment Debtor’s financial means of repaying the judgment debt as well as the discovery of any property applicable to the payment of judgment debt. In cases where the Judgment Debtor is a company, the company’s directors or officers will be required to appear in court on behalf of the company to provide information about the company’s income and assets and to explain how they can be used and disposed of to satisfy the judgment debt.
In the event the Judgment Debtor does not appear in court for hearing despite the Judgment Debtor Summons being properly served on him, the court has the power to either: (1) order that the Judgment Debtor be arrested by issuing an order of arrest and have the Judgment Debtor brought to the court to be examined; or (2) make an ex-parte order (an order in the Judgment Debtor’s absence) against him.
Upon the examination (or non-appearance) of the Judgment Debtor, the court may order the Judgment Debtor to pay the judgment debt either in one lump sum or by instalments (“Court Order”).
In the event the Judgment Debtor fails to comply with the Court Order despite having sufficient means to satisfy the judgment debt, a judgment notice may be issued against the Judgment Debtor requiring the Judgment Debtor to be called to court again to explain why he failed to comply with the Court Order. The Judgment Debtor will also be required to show cause why he should not be imprisoned by way of an order for committal for failing to comply with the Court Order.
Another way to pursue a judgment debt is by way of garnishee proceedings under Order 49 of the Rules of Court 2012. Garnishee proceedings focus on demanding the judgment debt owed from a third party who owes the Judgment Debtor.
Garnishee proceedings are particularly useful when you have knowledge of the debt owing to the Judgment Debtor by a third party (otherwise known as garnishee) or any monies standing in credit of the bank accounts of the Judgment Debtor. You may commence garnishee proceedings against the third party (including the Judgment Debtor’s bank) by obtaining an order from the court which compels the third party to pay you the amount of any debt due or accruing to the Judgment Debtor from the third party. This process allows you to garnish or “intercept” the sum before it reaches the Judgment Debtor.
The court will set a hearing for the third party or garnishee to establish whether or not the garnishee owes any debt to the Judgment Debtor. During the hearing, the court will assess whether or not the amount garnished is disputed and other relevant factors raised by the garnishee.
Once the court grants a garnishee order, a copy of the order is served on the garnishee to recover the Judgment Debt. A garnishee order will prevail over any existing injunctions in the matter.
Writ of Seizure and Sale
A Writ of Seizure and Sale focuses on the recovery of debt from the sale of movable or immovable property. A Writ of Seizure and Sale is an option to consider if you know that the Judgment Debtor owns valuable property that can be sold and the proceeds used to pay the debt owed by the Judgment Debtor. The provision for Writ of Seizure and Sale can be found in Order 45 rule 12 of the Rules of Court 2012.
Once an order for a Writ of Seizure and Sale is obtained, the court bailiff will seize the property stated in the order. Upon seizing the property owned by the Judgment Debtor, the sheriff or bailiff will then auction the seized properties to satisfy the judgment debt owed by the Judgment Debtor. An auction of the seized property will usually be carried out within 14 days after seizing of the property.
The proceeds of the auction or sales will then be divided among the Judgment Creditors after the deduction of the necessary costs and expenses involved.
Winding-up proceedings refer to the process of dissolving a company. As part of the winding up or liquidation process, the company’s assets will be sold off and the proceeds used to settle debts of the company owed to the creditors. Winding-up proceedings are governed under the Companies Act 2016 and Companies (Winding-Up) Rules 1972. There are many situations in which a company may be subject to winding-up proceedings, the most common one being the company is unable to pay its debts to its creditors. The threshold for commencing winding-up proceedings is where a company is unable to pay its debts above RM10,000.
However, in light of the Covid-19 crisis and the enforcement of the nationwide Movement Control Order (MCO), SSM on 10.4.2020 announced that the prescribed amount of RM10,000 will be increased to RM50,000 until 31.12.2020 to ease the burden of companies facing financial difficulties and to reduce the risk of companies being wound up during this pandemic.
Before filing winding-up proceeding in court, a statutory Notice of Demand under section 466 of the Companies Act 2016 must be issued to the debtor company to demand the outstanding debt. If the Judgment Debtor fails to respond to the Notice of Demand within 21 days, there is a statutory presumption that the company is unable to pay its debts, and is therefore, insolvent. However, SSM has extended the statutory 21 days period to six months, in light of the Covid-19 crisis and enforcement of the MCO until 31.12.2020. Following the expiry of the Notice of Demand, a creditor may proceed to commence the winding-up proceeding against the debtor company by filing a winding-up petition.
Once a winding-up order is made by the court, the court will appoint a liquidator to manage the assets of the wound up company, investigate the affairs of the company, sell off the company’s assets and finally distribute the proceeds to settle debts of the company. The court will usually appoint the Director-General of Insolvency (DGI) as the liquidator. However, the court can also appoint an approved liquidator other than the DGI under Section 477 of the Companies Act 2016 as the liquidator to handle the affairs of the wound up company.
Bankruptcy proceedings only apply to individual debtors who are unable to pay a judgment debt and are governed by the Insolvency Act 1967. The threshold for commencing bankruptcy proceedings is RM50,000.
Before commencing bankruptcy proceedings, a bankruptcy notice requiring the Judgment Debtor to pay the judgment debt must be served on the Judgment Debtor. If the Judgment Debtor fails to respond to the bankruptcy notice within seven days, the Judgment Debtor has committed an act of bankruptcy. After that, the Judgment Creditor may proceed to commence bankruptcy proceedings against the Judgment Debtor.
Upon issuing a bankruptcy order against the Judgment Debtor, the assets of the Judgment Debtor will be assigned to the DGI. The DGI will then be responsible for the distribution of the Judgment Debtor’s assets among the Judgment Creditors. This is done by holding a creditors’ meeting to discuss the arrangement of the assets. The Judgment Debtor is required to submit a statement declaring his assets to the DGI for the purposes of the meeting.
There are several restrictions imposed on the Judgment Debtor once he is declared a bankrupt. For example the Judgment Debtor is not allowed to travel overseas without permission from the DGI; he is not allowed to own any assets; he is not allowed to spend more than RM1,000 on his credit card; and he is not allowed to apply for any loans.
Order of Committal
An order of committal is a court order that punishes a person (contemnor) for failing to comply with the terms of a court order by way of imprisonment, a fine or both. It is only applicable in judgment which orders a person to do an act or refrain from doing an act, typically within a specified time period. While most judgments for the payment of a debt cannot be enforced by way of an order for committal, the non-compliance of some judgements which provide for the doing of certain actions, such as the delivery of post-dated cheques by a certain deadline, may amount to contempt of court. Punishment for contempt of court is a serious matter and there are a number of requirements that must ordinarily be complied with, including the endorsement of a penal notice on the judgment and the personal service of the judgment on the Judgment Debtor or directors of the Judgment Debtor company. The court procedure for an order of committal is provided under Order 52 of the Rules of Court 2012.
Bad debts are bad for business. As a creditor, it is best to take quick action against debtors as early action typically provides the best odds for recovering the debt due. Various options for the recovery of a debt have been summarised above, but it all starts with a letter of demand.
Please contact us should you require our services and advice on recovering debts, or defending a debt recovery action made against you.
By Wong Chee En and Fung Kar Men
Note: This article does not constitute legal advice to any specific case. The facts and circumstances of each and every case will differ and therefore will require specific legal advice. Feel free to contact us for complimentary legal consultation.
 Section 6(1) Limitation Act 1953
 Section 6(3) Limitation Act 1953
 Section 90 Subordinate Courts Act 1948
 Section 65 Subordinate Courts Act 1948
 Order 13 Rules of Court 2012
 Order 48 Rules of Court 2012
 Order 49 Rules of Court 2012
 Order 45 rule 12 Rules of Court 2012
 Companies Act 2016
 Companies (Winding-Up) Rules 1972
 ‘MCO: Companies Commission Raises Debt Threshold of Companies’ dated 10.4.2020 <https://www.thestar.com.my/news/nation/2020/04/10/mco-companies-commission-raises-debt-threshold-of-companies>
 Section 466 Companies Act 2016
 Section 477 Companies Act 2016
 Insolvency Act 1967
 Section 5 Insolvency Act 1967
 Section 3(1)(i) Insolvency Act 1967