Debt recovery in Malaysia is important for businesses' and individuals' cash flows. This article explains the laws, the processes and how to get assistance to recover debts.
What is Debt Recovery in Malaysia?
Debt recovery in Malaysia is a legal process that a creditor uses to collect money owed by a debtor. This process involves sending a letter of demand, filing a lawsuit, and enforcing the court judgment against the debtor.
The processes will be further explained below.
It is common for businesses to have outstanding debts from their clients through their business transactions, which is usually governed by the contract law, Contracts Act 1950. Effective and successful debt recovery processes in Malaysia have a few benefits:
Better Cash flow
By having the debts paid, the cash allows the business owners to utilise the money on other parts of the business.Better relationship
It allows the relationship with the customers to grow and opens the room for more business dealings.
Under debt recovery law in Malaysia specifically the Limitation Act 1953, legal action to recover debts under a contract must be initiated within a time limit of 6 years starting from when the debt is payable. It means that if the creditor fails to initiate a legal process to recover the debt within that period, he is generally barred from recovering the debt.
Processes to Recover Debts
Here are a few steps to follow to recover the debts:
Step 1: Gather documents and conduct searches
The creditor can gather related documents such as agreements, transaction documents such as statements and invoices, and any communication with the debtor.
Furthermore, the creditor can conduct a company search or bankruptcy search through the Malaysian Insolvency Department to get the current solvency status of the debtor. This is to ensure the debt collection process is carried out smoothly.
Step 2: Issue a Letter of Demand
If the debtor still does not pay after negotiation or verbal demands, then the creditor can engage a lawyer to issue a letter of demand in Malaysia (‘LOD’) to the debtor. This letter usually contains the following:
Details of the debt: How it is owed and the outstanding amount
Specific action required: To demand outstanding payment within a certain period.
The consequences if the debtor fails to pay as required
Step 3: Commencing Legal Action for Debt Recovery
If the debtor still refuses to pay after the issuance of a letter of demand, the creditor can proceed with commencing legal action against the debtor. Depending on the claimed court, the court proceedings can be initiated in subordinate courts (Magistrates Court or Sessions Court) or at the High Court.
In commencing the legal action for debt recovery in Malaysia, the creditors can engage a lawyer to file and serve on the debtor the following court papers:
Writ of Summons
A writ of summons in Malaysia is a formal legal document requiring the debtor to appear in court to answer the creditor's claim. If the debtor does not appear in court or respond to the claim within 14 days from the service of the writ, the creditor may obtain a judgement by default against the debtor.Statement of Claim
This is a formal legal document usually served with the writ of summons. This tells the debtor what the claim is about and what the creditor claims from the debtor.
If the debtor disagrees with the claim, he has to contest the case by entering an appearance in court and then filing his defence. A defence states the debtor's response to the creditor's claim.
Then, the case will progress to a trial, and after the hearing, the judge will deliver a court judgment that decides the dispute in favour of the creditor or debtor. Alternatively, in a straightforward case, the creditor can apply for summary judgment, that is judgment obtained without trial, dispensing with the attendance of witnesses.
Any party that is dissatisfied with the judgment in a court action can appeal against the judgment to a higher court.
Step 4: Enforcing judgments
Should the creditor get a court order in his favour against the debtor to pay the outstanding debts (now known as judgment debt), he can then serve the order on the debtor to pay the judgment debt.
If the debtor still fails to pay the judgment debt, the creditor can opt for the following enforcement methods to enforce the order:
Writ of seizure and sale
With a writ of seizure and sale, the creditor, through court officers, can seize the debtor's assets and sell them by public auction. The balance of proceeds from the sale will be given to the creditor after deducting expenses incurred by the court officers.
Garnishee proceedings
Garnishee proceedings involve the debtor obtaining a garnishee order where the court orders a third party who owes money to the debtor, known as 'garnishee', to pay that money owed to the debtor directly to the creditor. The garnishee can be a financial institution that the debtor has accounts with.
Judgment debtor summons
Under a judgment debtor summons the debtor is summoned to the court to give information about their finances and assets. The creditors can use this information to enforce the judgment and recover the judgment sum.
Winding-up proceedings
Under the Companies Act 2016, a winding-up proceeding is a legal action that can be taken against a company that is unable to pay its debts, including a judgment debt. If the court allows the petition, the company will be wound up, and its assets will be sold to repay its creditors.
Bankruptcy proceedings
In a bankruptcy action, the individual debtor can be declared bankrupt, and his assets will be used to repay their creditors.
Committal proceeding
The debtor can be held liable for contempt of court for disobeying a court and can be fined or sentenced to civil imprisonment.
Tips and Assistance
The best way for debt recovery in Malaysia is to prevent any bad debts. That can happen by doing a background search on any new client. However, it is not practically possible to eliminate all possibilities of bad debts, and the next solution is to recover them.
Some may search for ‘licensed debt collector Malaysia’ and ‘top debt collection agency Malaysia’ when looking for debt collection services to recover debts. We advise engaging a lawyer for the process because:
Expertise
They understand the law and procedures. Some third-party debt collectors may use methods that may not align with the law.
Practical solution
Lawyers will be able to advise on the chances of recovering the debts in the first place and thus save the creditor’s time and effort. They can also give legal advice on the legal options for enforcing legal claims, including the appropriate enforcement action.
Conclusion
Debt recovery in Malaysia is a process that can be effectively done by following the above steps and with the assistance of lawyers. If you need any legal services or have any queries about legal proceedings, you can contact us and our team will assist you.
Frequently Asked Questions
1. Is debt collection legal in Malaysia?
Yes. Debt collection is legal in Malaysia by first sending a letter of demand, then filing a lawsuit, and then enforcing the court judgment against the debtor.
2. How long can you legally be chased for a debt in Malaysia?
Under Section 6 of the Limitation Act 1953, the limitation period for debt recovery in Malaysia is 6 years, starting from when the debt is payable.
3. Can you ignore debt recovery?
It is not advisable to do so, as the creditor can take legal action against the debtor. This may result in the debtor being liable for more expenses apart from the payment of the outstanding debts.
4. What happens after 7 years of debt?
In Malaysia, if one doesn't pay a debt for 7 years starting from when it is payable and the creditor does not take legal action to recover the debt within that period, the debt is considered'statute-barred’ under the Limitation Act 1953. Generally, it means the creditor can’t commence legal action to recover the outstanding sum.
