From Demand Letters to Court Actions: Debt Recovery in Malaysia

Introduction

Debt recovery is an important aspect of financial transactions, ensuring that creditors can recover funds lent or owed. In Malaysia, the legal landscape for debt recovery is both complex and evolving, reflecting the need to balance creditor rights with debtor protections. This article explores the multifaceted methods of debt recovery available under Malaysian law, examining statutory frameworks, and the judicial & extrajudicial mechanisms.

Limitation Period

Limitation period refers to the legally prescribed timeframe within which an individual must initiate legal proceedings against another party. Specifically in the context of debt recovery, there is a limitation of six (6) years from the payment's due date for a creditor to file a lawsuit against the debtor to reclaim debts owed[1].

On the other hand, if a creditor has already secured a Court judgment against a debtor which the debtor has failed to comply with the payment order, the creditor is allowed to enforce the Court judgment up to 12 years from the judgment date[2].

Pre-Legal Action Stage

A.        Due Diligence

Before initiating debt recovery proceedings at Court, it is crucial to perform a comprehensive background check on the debtor. For individual debtors, identity search and a bankruptcy search should be conducted to determine if the debtor has been declared bankrupt. These searches are also helpful in ascertaining the debtor’s current address, which is necessary for the service of any legal documents.

Whereas if the debtor is a company, a company search with the Companies Commission of Malaysia (Suruhanjaya Syarikat Malaysia) will provide information about its operational status. Furthermore, a winding-up search through the Malaysian Department of Insolvency (MdI) can identify whether the company is under liquidation. This background information is vital to assess the debtor’s financial standing and the feasibility of recovering the debt.

B.        Letter of Demand

Further, prior to the commencement of legal action in Court, it is common to send a letter of demand to the debtor. This letter formally requests payment of the outstanding debt within a specified, reasonable timeframe. It also warns the debtor that failure to pay within this period could lead to legal action without any further notice.

While issuing a letter of demand is not mandatory or legally required to begin Court proceedings, it can be a strategic move. A demand letter, especially when sent by a law firm, might prompt the debtor to pay either fully or partially, open settlement negotiations, or acknowledge the debt by asking for more time. Moreover, if the debtor fails to respond and/or disputes the debt, their silence can strengthen the creditor’s position in Court by demonstrating an apparent lack of defence against the claim.

Legal Action in Court

Once the deadline specified in the Letter of Demand has passed, the creditor may then initiate legal proceedings by filing a Writ together with a Statement of Claim. The venue in which a debt recovery suit is to be filed is subject to the amount of the debt being pursued, as below: -

 ·       Defendant fails to enter appearance

When a legal action is filed at the Court, and if the debtor (defendant) fails to respond to the legal action initiated against them, the Court may issue a default judgment in favour of the creditor. In other words, the judgment itself is deemed a Court order against the defendant to pay the amount claimed under the suit.

·       Summary Judgement

If the debtor appears in Court and if the case is straightforward, the creditor (plaintiff) may make an application for Summary Judgment. In a Summary Judgement Application, the Court relies solely on documentary evidence and, if approved, eliminates the necessity for a full trial where witnesses are required to testify in person. Summary Judgment is appropriate and likely to be granted when the debtor lacks a valid defence to the claim.

·       Full Trial

If the debtor appears in court and there are unresolved issues that cannot be decided solely based on documentary evidence, parties must proceed with a full trial. During the trial, witnesses from both parties will be called to give evidence. The Court will then deliver its judgment at the end of the trial.

Enforcement of Judgement

Once a court judgment is delivered, the judgment creditor has the right to demand the amount specified in the judgment, known as the “judgment debt,” from the judgment debtor. If the judgment debtor fails to settle the judgment debt, the following options are available for the judgment creditor to enforce the judgment and recover the debt: -

            (a) Bankruptcy Proceedings

Bankruptcy proceedings can be initiated against individual debtors who are unable to pay a judgment debt of above RM100,000.00[3]. In this regard, a judgement debtor will be declared a bankrupt pursuant to a Court order on the creditor’s petition or debtor’s petition. All the unsecured property belonging to the bankrupt will be vested on the Director-General of Insolvency (“DGI”), distributing them among creditors through a creditors' meeting. A bankrupt faces stringent restrictions such as needing permission to travel overseas, owning assets, spending over RM1,000 on credit cards, and applying for loans.

            (b)  Judgement Debtor Summons (“JDS”)

A Judgment Debtor Summons compels the judgement debtor to appear in Court and disclose their assets for settling the judgment debt[4]. 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. Failure to appear can lead to arrest or an ex-parte order. The Court may then order repayment in a lump sum or instalments. Non-compliance despite means to pay may result in a judgment notice requiring a court appearance to explain, potentially leading to imprisonment for contempt of court.

            (c) Garnishment

Garnishee proceedings allow the judgement creditors to recover the judgment debt from a 3^rd party who owes money to the debtor[5]. This method is useful when you have knowledge of the debt owing to the judgment debtor by a 3^rd party (“garnishee”) or any monies standing in credit of the bank accounts of the judgment debtor. By obtaining a Court order, creditors can compel the 3^rd party, including the judgment debtor’s bank, to redirect the owed amount to them before it reaches the debtor. A hearing will be held by the Court to determine the validity of the debt owed by the judgement debtor. Once granted, the garnishee order is served on the garnishee to recover the judgment debt, overriding any existing injunctions.

           (d) Writ of Seizure and Sale

A Writ of Seizure and Sale allows creditors to recover debt by selling the judgement judgement debtor's movable and/or immovable property. This option is suitable when the debtor possesses valuable assets that can be sold to settle the debt[6]. Once granted, a court bailiff seizes the specified property, which is then auctioned (usually within 14 days) after property is seized, to satisfy the judgment debt. Proceeds from the sale, after deducting expenses, are distributed among the creditors.

           (e) Winding-Up Proceedings

Winding-up proceedings involve the dissolution of a company, where its assets are sold to settle debts owed to creditors[7]. These proceedings are initiated when a company is unable to pay debts exceeding RM50,000[8]. Upon Court order, a liquidator, often the DGI, is appointed to oversee asset management, debt settlement, and final dissolution of the company.

            (f) Order of Committal

           A Court order that penalizes a person (referred to as the contemnor) for failing to comply with a Court order, potentially resulting in imprisonment, a fine, or both[9]. This order applies to judgments mandating specific actions or refraining from certain actions within a specified timeframe. While most debt payment judgments do not warrant committal, failure to fulfil obligations like delivering post-dated cheques on time may constitute contempt of court. It must be noted that obtaining an order of committal under the law requires strict adherence to specific legal requirements

Conclusion

In conclusion, debt recovery in Malaysia provides creditors with a range of legal avenues to collect unpaid debts. Each method follows specific legal guidelines, ensuring creditors have effective tools to recover debts under Malaysian law. Understanding these options is essential for creditors to pursue successful debt recovery strategies.

* Please note that this article is not intended as legal advice for any particular case. Since the facts and circumstances of each case vary, specific legal advice is recommended. You are welcome to reach out to us for a free legal consultation tailored to your situation.

If you have any queries, please contact the author, Ng Jack Ming (njm@jclegal.com.my) or partner, Yap Jia Cheng (yjc@jclegal.com.my).