Debt Collection in Malaysia

Debt collection in Malaysia begins with a legal and commercial assessment of the debtor’s solvency, business activity, payment history, documentary evidence of the debt, pending court cases, existing judgments, enforcement exposure and the possibility of disputing the claim. This assessment determines whether recovery should start with negotiations, proceed directly to court, rely on an existing foreign judgment, or focus first on assets located in Malaysia.

At this stage, it is important to identify whether the debtor is an individual, a Malaysian company, a foreign company carrying on business in Malaysia, a guarantor or another party liable under the transaction. For a company debtor, the creditor should review its registered status, business operations, receivables, bank exposure, assets, court history and signs of inability to pay debts. For an individual debtor, residence, business activity, connection with Malaysia and available assets may affect the choice between court proceedings, enforcement and bankruptcy.

The creditor should also review the contract, invoices, delivery documents, service acceptance records, statements of account, correspondence, acknowledgements of debt, partial payments, guarantees, securities, jurisdiction clauses and governing law clauses. If the debtor has no ongoing court cases or outstanding judgments, remains commercially active and has a realistic ability to pay, it may be advisable to begin with the out-of-court debt collection stage.

The out-of-court stage involves settlement negotiations with the debtor to reach voluntary payment, agree on a repayment schedule or find another lawful commercial solution, such as return of goods, transfer of the debt to a third party, set-off, exchange of services or restructuring of payment terms.

Communication with the debtor should begin after sending a documented notice by mail, email, telephone, instant messenger or another available business channel. The creditor should keep proof of delivery, replies from the debtor, payment promises, objections, reconciliation documents and any written statements that may confirm acknowledgement of the debt or refusal to pay.

The main objective at this stage is to identify the persons who can make payment decisions, determine whether the debtor admits or disputes the debt, record the debtor’s position and assess whether voluntary payment is realistic. If the debtor ignores the demand, disputes the debt without sufficient grounds, delays payment, transfers assets or if the initial assessment shows that negotiations are ineffective, the creditor should proceed to judicial debt collection in Malaysia.

Before initiating judicial collection, the creditor should assess the limitation period. Under the Limitation Act 1953, an action founded on contract generally cannot be brought after the expiration of six years from the date on which the cause of action accrued. In debt claims, this is usually connected with the due date for payment, breach of the payment obligation or the payment schedule agreed by the parties.

The limitation period may be affected if the debtor acknowledges the debt or makes a partial payment. Where the creditor relies on acknowledgement, it should be in writing and signed by the debtor or by a person authorised to sign on the debtor’s behalf. A partial payment of the principal debt or interest may also be relevant for calculating a fresh accrual of the right of action.

Malaysian law provides for judicial debt collection through ordinary court proceedings and procedural mechanisms that may allow a creditor to obtain judgment without a full trial where the defendant has no real defence.

The courts of first instance are the Magistrates’ Court, the Sessions Court and the High Court. The Magistrate’s Court has jurisdiction over debt collection cases up to RM100,000.00, the Sessions Court over RM100,001.00 to RM1,000,000.00, and the High Court over claims exceeding the monetary jurisdiction of the subordinate courts.

Judicial debt collection is carried out by filing a statement of claim with the court. The court then checks whether the claim complies with procedural requirements. If the claim meets the requirements, the court registrar registers it and issues an order to summon the defendant. The term of validity of the order to summon is 6 months from the date of its registration.

If it is not possible to serve the order on the defendant within 6 months, the plaintiff may apply to the court to extend its validity. If the defendant is outside Malaysia, the creditor may also need to consider service out of jurisdiction, especially where the claim has a sufficient connection with Malaysia, the contract was made through an agent in Malaysia, Malaysian law applies, or the parties agreed on Malaysian jurisdiction.

If the plaintiff is a non-resident of Malaysia, the court may order security for costs depending on the circumstances of the case. This means that a foreign creditor should consider possible cost security when planning litigation strategy and budget.

Once the order is received, the defendant must file a notice of appearance with the court. The plaintiff must serve the defendant with a copy of the claim within 14 days of the defendant’s appearance. If the notice of appearance is not filed within the time limit and the plaintiff’s statement of claim seeks only a fixed sum from the defendant, the court may enter a final judgment against the defendant for an amount not exceeding the amount claimed in the statement of claim.

If the amount is not fixed, the court may enter an interlocutory judgment and assess the amount payable at a later stage.

If the defendant has appeared in court and intends to defend the claim, the defendant must file a defence within 14 days of receiving a copy of the plaint. After receiving the defendant’s defence, the plaintiff must file a reply to the defence within 14 days.

Every pleading of a party shall contain only a brief statement of the material facts relied upon by that party in support of the claim or defence, and not the evidence by which those facts are to be proved. This is important in debt claims because the statement of claim should clearly set out the contractual basis of the debt, the amount due, the due date, breach of payment obligation, interest or penalties claimed and the documents on which the creditor relies.

Any allegation of fact made by a party in his pleading shall be deemed to have been admitted by the adverse party unless denied by that party in his pleading. A denial may be made either by express denial, by implied denial or by a plea of inadmissibility.

If the defendant has no real prospect of defending the claim, the plaintiff may apply for summary judgment against the defendant. This route may be useful where the debt is supported by clear documentary evidence, such as a contract, invoices, delivery records, service acceptance documents, statements of account, written acknowledgements, partial payments or correspondence confirming the obligation to pay.

The plaintiff’s application must be supported by an affidavit establishing the facts on which the claim is based, including allegations based on information or belief where the sources and reasons are indicated. Notice of the application and a copy of the affidavit must be served on the defendant within 14 days. The defendant may object to the application by affidavit or in any other manner that satisfies the court. If the court finds the plaintiff’s application justified, the court decides in favor of the plaintiff. Otherwise, the court dismisses the application and continues to consider the case in the general manner.

If the case requires full consideration, the court sets hearings for the trial. During the trial, the court hears the positions of the parties, carries out measures to disclose and examine information and evidence of the parties. After the court has established all the facts, the court concludes the hearing and makes a decision on the merits of the dispute.

A decision of the Magistrates’ Court or the Sessions Court may be appealed to the High Court within 14 days of the decision being accepted. The decision of the High Court may be appealed to the Court of Appeal, subject to statutory requirements, including the monetary threshold where the amount of the claim is less than RM250,000. The time limit for filing an appeal is 30 days from the date of the judgment appealed against.

A decision of the Court of Appeal may be appealed to the Federal Court of Malaysia if it involves an issue of general principle decided for the first time or an issue of importance on which further argument and decision of the Federal Court would be of public benefit. To appeal against a decision of the Court of Appeal, an application for leave to appeal must be made to the Federal Court within one month from the date of the decision. If the application is granted, the interested party may appeal. The decision of the Federal Court is not subject to further appeal.

In international debt recovery cases, the creditor may already have a foreign court judgment before taking recovery steps in Malaysia. The next step depends on whether the judgment falls within the statutory registration mechanism for reciprocating countries or whether the creditor must bring a Malaysian action based on the foreign judgment.

Under the Reciprocal Enforcement of Judgments Act 1958, certain final and conclusive money judgments from superior courts of reciprocating countries may be registered in the High Court of Malaysia. After registration, the judgment may be enforced in Malaysia as if it were a Malaysian judgment, subject to the debtor’s right to challenge registration on the grounds allowed by law.

If the foreign judgment is not covered by the reciprocal enforcement regime, the creditor may rely on the common law route by bringing an action on the foreign judgment in Malaysia. In that scenario, the foreign judgment becomes the basis of a Malaysian claim, and the creditor should assess jurisdiction, finality of the judgment, the amount payable, possible defences and the debtor’s assets in Malaysia before choosing the recovery route.

Once the judgment has become final, the creditor should commence enforcement proceedings and select the enforcement measure according to the assets identified in Malaysia. A judgment may be enforced for 12 years, while arrears of interest on a judgment are subject to a shorter limitation period.

The creditor’s claims may be satisfied through enforcement measures such as seizure and sale of the debtor’s movable or immovable property, garnishee proceedings against debts owed to the judgment debtor, charging orders over securities or shares, appointment of a receiver, and examination of the judgment debtor to obtain information about assets and income.

For practical recovery, the creditor should not rely only on the existence of a judgment. Bank accounts, receivables, shares, business assets, real estate, securities and debts owed by third parties may determine whether enforcement can lead to actual payment.

An alternative option for debt recovery is to use bankruptcy or corporate insolvency proceedings, depending on the legal status of the debtor. If the debtor is an individual, a creditor may file a bankruptcy petition where the debt is based on a judgment, the debt is a clearly defined amount payable immediately or at a certain time in the future, the statutory threshold is met, and the debtor has a sufficient connection with Malaysia. The current threshold for a creditor’s petition against an individual debtor is not less than RM100,000.

If the debtor is a Malaysian company, the relevant insolvency route is usually winding-up rather than individual bankruptcy. Under the Companies Act 2016, a company may be treated as unable to pay its debts if a creditor to whom the company is indebted in a sum exceeding RM50,000 serves a statutory demand at the company’s registered office and the company neglects for 21 days to pay, secure or compound the debt to the creditor’s reasonable satisfaction. This route is especially relevant where the company debtor has stopped payments, has no realistic repayment plan or uses delay tactics while continuing to hold assets or receivables.

In insolvency proceedings, it may be necessary to review transactions made by the debtor before bankruptcy or winding-up. Such review may include sale or transfer of the debtor’s property by fraudulent means, transactions at an undervalue, assignments of existing or future book debts, gratuitous transactions, preferences given to selected creditors, transfers to related parties and other dealings that reduce the estate available for creditors.

When reviewing such transactions, it is important to assess whether the transaction was voluntary, whether it was made in favor of persons connected with the debtor, whether it was connected with an intention to hide assets, whether it gave preference to certain creditors, and whether the timing of the transaction falls within the relevant insolvency period. If a transaction is successfully challenged, money, property or proceeds connected with the transaction may be brought back into the debtor’s estate and used to satisfy creditor claims and cover the costs of the insolvency process.

For a creditor, insolvency should be assessed as a strategic recovery tool rather than as an automatic final step. It may be useful where individual enforcement is ineffective, assets were moved before recovery, several creditors compete for the same assets, or a company debtor’s inability to pay debts makes winding-up more effective than ordinary enforcement.

If you need support with debt collection in Malaysia, Grandliga can assist at each stage of the recovery process: debtor and document assessment, out-of-court negotiations, settlement structuring, Malaysian court proceedings, recognition of foreign judgments, enforcement, bankruptcy analysis, company winding-up strategy and coordination of cross-border recovery steps. Contact us to review the debt documents and determine the most suitable recovery route for your case.

# DEBT COLLECTION AGENCY MALAYSIA

11.10.2024

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