What issues do we commonly face when recovering a debt?

Debts may arise from a variety of different legal contracts and arrangements.  Some of the most prevalent forms of debt include unpaid amounts under a simple loan agreement between two parties or a loan facility provided by a duly licensed bank or financial institution.  

We often come across cases where an individual or company has become aware that a debt is owed to them under a contract, agreement or loan, but is having difficulty recovering the outstanding sum for the debtor for a variety of reasons. Some common pitfalls which our corporate and individual clients face when recovering a debt include: 

• The debtor not responding to simple communication and notifications regarding the outstanding debt; 

• The debtor not being found at their address, or the address is incorrect; 

• The debtor is out of the country; 

• The debtor being bankrupt or otherwise not having access to funds to repay the debt; or 

• The debtor is refusing to comply with a notification, court summons or court order requiring repayment of the debt. 

In this article, we will cover common debt recovery tools applicable in Malaysia and some useful tips from our experience which can help to ensure that a debt is recovered effectively and expeditiously. 

What tools are available to recover a debt? 

The first step in recovering a debt is to notify the debtor of the outstanding amount, which is typically done through a letter of demand (“LOD”). The LOD typically sets out the  details of the payment due, and require the debtor to settle the outstanding amount within a reasonable timeframe, and inform them that if the debt is not settled within said timeframe, the creditor may take further actions, including but not limited to the initiation of civil proceedings. The LOD may take the form of a formal written letter, notice, email or other type of communication. While the LOD is commonly issued by the creditor’s legal counsel, it may be issued by the creditor’s authorized representative, officer or the creditor personally (if the creditor is an individual). Ideally, a lawyer can help to draft a simple LOD to ensure that the particulars of the debt are set out in and full and the lawyer can assist further to follow up on the LOD or advise the on further steps to be taken (if the debtor fails to respond or comply with the LOD). 

If the debtor fails to comply with the LOD, the creditor may pursue legal proceedings in the competent civil courts to recover the debt.  

In circumstances where the creditor intends to file a winding-up petition against a debtor company, it is a requirement that a statutory LOD should be issued first under Section 466 of the Companies Act 2016. If the debtor company fails to comply with such a notice within twenty-one (21) days, it shall be deemed to be unable to pay its financial obligations, and may be subject to a winding-up petition.  

Tips to drafting an effective LOD 

• Keep an eye on payment deadlines under any agreement and promptly issue the LOD as soon as possible after the debt falls due. If the parties maintain an amicable relationship, consider sending a courtesy reminder before escalating to a formal LOD. 

• Ensure that the letter is properly addressed to the individual or entity legally responsible for the outstanding debt. 

• Serve the letter at the debtor’s current/most recent address, or via other legally recognized means of communication. 

• Clearly articulate the details of the debt, including the amount due, the prescribed repayment timeline, procedure for payment and the designated payment method.  

• Explicitly state that failure to remit payment within the stipulated timeframe may result in legal proceedings or other enforcement actions. 

• Seek legal review from an experienced lawyer to ensure the accuracy of the LOD’s content, structure, and terminology are before issuance. 

Can I recover debts through court proceedings? 

If a debtor fails to comply or respond to an LOD, notice or other formal demand for payment, civil court proceedings may be initiated by the creditor to recover its debts. A successful civil claim may result in a court judgement ordering the debtor to repay the outstanding sum to the creditor.  

In the event that the debtor fails to respond to a court summons or does not comply with the terms of a court judgement for debt repayment, the following tools may be available to the creditor:  

• Applying for a judgement debtor summons to compel the debtor to attend court; 

• Initiating garnishee proceedings to recover the debt owed from a third party from a third party who owes money to the debtor, or from bank account of the debtor; 

• Applying for a writ of seizure and sale whereby the debtor’s property will be seized and sold on in order to satisfy the debt; 

• Filing a bankruptcy petition under the Insolvency Act 1967 against an individual debtor with an outstanding debt RM100,000 or more. Upon issuance of a bankruptcy order, the debtor’s assets shall vest in the Director General of Insolvency and be distributed among creditors; 

• Filing a winding-up petition against a debtor company which fails to comply with a summons or court judgement for debt repayment. Upon liquidation, the company’s assets shall be sold and distributed to its creditors in settlement of outstanding debts.  

Tips for debt recovery proceedings

• Choose the most appropriate legal action which is most applicable to your scenario. For example, a judgement debtor summons may not be necessary if the debtor is available and willing to attend court, and winding-up proceedings are only applicable to corporate entities. 

• Determine the appropriate court based on the claim amount: Claims below RM100,000 are heard in the Magistrates’ Court, claims between RM100,000 and RM1,000,000 fall under the Sessions Court, and claims exceeding RM1,000,000 are adjudicated in the High Court. 

• Be mindful of the limitation period applicable in respect of your claim. For most contractual or tortious legal claims, legal proceedings must be initiated within six (6) years from the due date of payment. Bankruptcy petitions against an individual may only be brought within six (6) months of the act of bankruptcy.  

• Conduct due diligence by performing background checks, insolvency or bankruptcy searches on the debtor to ascertain their details for service of documents and if they have already been declared bankrupt. 

• Engage legal counsel to advise on the most effective debt recovery strategy, provide legal representation inf court, and assist with the necessary filings and applications. 

Conclusion 

There are several avenues available for individuals and companies to recover a debt or compel compliance with a court order for debt recovery, depending on their circumstances and the complexity of the matter. The tools which are most effective for you will depend on the facts of your case.  

We strongly recommend appointing an experienced legal counsel to evaluate the claim and propose effective solutions tailored for your circumstances. Should you have any further inquiries regarding our legal services or expertise in debt recovery, please feel free to contact us.