Debt Recovery Process in Malaysia

debt recovery

Debt Recovery Process in Malaysia

It is very normal to owe someone even your close friends, relatives, or sibling’s money. We would often hear promises before one would ask you to borrow them money (eh can borrow money arh? I pay you tomorrow confirm!!) Deep in your heart you know he would not pay by tomorrow, but you would still lend him the money. As times goes by, after months and years he has no response to your messages and ignore your calls. Definitely, you would want to recover your money (worst still huge five figures amount). You would think what are the ways to recover your money? How long will the process take? What if he has no money to pay me back but he has a new car? Don’t worry, I would cover all your concerns shortly.

debt recovery

What do I mean by Debt Recovery?

Of course, I am talking about the legit ways to recover or collect monies owed by a person / company (Not the Ah Long ways…get it!!) Debt recovery in simple terms means initiating legal action to recover debts / monies from individual / company if they refuse or delay payment of debt. Let’s look at some examples first.

1)       Your company provides cleaning services for offices and houses. Bob engages your services to clean his houses every day. However, Bob did not pay for the services after you had issued a numerous of invoices (total sum RM20,000.00) and reminders to him.

2)       Your company provides cleaning services for offices and houses. Company A engages your services to clean his offices every day. However, Company A did not pay for the services after you had issued a numerous of invoices (total sum RM20,000.00) and reminders to Company A.

Identify limitation period

Taking the above scenarios above, first concern would be the limitation period. Many will wonder what do you mean by that? According to s.6 (1)(a) of the Limitation Act 1953, the limitation period for a debt recovery is 6 years from the date the monies owed becomes due. For example, the invoices sent to Company A or Bob due on 3rd May 2015 then the time would start to run from 3rd May 2015 till 3rd May 2021 (limitation period). Hence identify when the time starts to run is very important.

Conduct bankruptcy search

Next, the lawyer will conduct a bankruptcy search (individual), Company Search (company). The reason behind this is to see whether it is worth pursuing a legal action against them. For example, if Bob is a bankrupt then it would make no sense to sue him to recover the debt. After conducting the searches, a Letter of Demand (LOD) would then be issued to the debtor. Question arises, is it mandatory to issue a LOD? The answer would be no. The reason issuing the LOD is actually to acquire more information (is this the debtor’s address, debtor may call for a settlement maybe to be paid in a few installments) or people would usually say to scare them so that they will actually pay the debt. However, most of the time the LOD would be ignored by the debtor.

Debt Recovery Scenario

In the scenario where the debtor chooses to ignore or still fails to pay within the stipulated time provided in the LOD, the lawyer would then file a legal action into the court and serve the cause papers to the debtor (personal service). The debtor (who is the defendant now) would be required to enter appearance and filed his defense to the suit against him within 28 days (time of appearance + defense). Many of you will think, how if the Defendant just continue to ignore?

a) In the event the Defendant chooses to ignore the cause papers, the Plaintiff (who is the person initiated the suit) may obtained a Judgment in Default (JID) against the debtor i.e winning the case without even fighting. 

b) In the event the Defendant enter appearance and filed for defence, the Plaintiff may make an application under Order 14 Rules of Court 2012 for a Summary Judgment against the Defendant. If at all the Summary Judgment fails or is dismissed by the court, then the suit would proceed to trial (where witnesses would be called here).

*Take note that if your claim is below RM10,000.00 then you should file in the Magistrate Court, if your claim is above RM100,000.00 then you should file in the Session Court and if your claim is above RM1,000,000.00 then you should file in the High Court.

Hence you can actually see that if you obtain a Judgment in Default which means the Defendant chooses to ignore it then it would be a jackpot to you as the process is much shorter and less complicated as you do not need to pass through the Trial stage (which may take months for it to complete).

Here you are in the scenario you obtained your judgment to recover your debts back. Sadly, what you obtained is just the paper judgment. This means that you would now need to execute the paper judgment against the judgment debtor (previously we called defendant). In a simple term, you have a car key but in order to get the car moving, you would have to insert the car key into the car and start the car. Only after doing that, the car would only move (it makes sense right?).

How to execute paper judgement?

To execute the paper judgment, there are a few methods to execute it. I will discuss each separately to avoid any complications or confusions.

According to the new amendment on the Insolvency Act 1967, the new minimum debt threshold is RM50,000.00 (previously RM30,000.00).

In a simple term, going back to the scenario above, the total sum owed is not more than RM50,000.00 hence you are not able to initiate a bankruptcy proceeding against Bob.

However, if the sum is more than RM50,000.00 then a Bankruptcy Notice would be required to serve to the Judgment Debtor (asking him to pay the debt owed). I will not be going into the process but briefly state what are the key issues to take extra caution in order to prevent the bankruptcy proceeding to collapse such as the right amount the debtor owes, meet the time frame of the service of the Bankruptcy notice and creditors petition and most importantly when the Act of bankruptcy has been committed. You may feel that all these are just minor issues but trust me in order succeed on the debtor side, all these key issues played a very crucial and important determining whether a Bankruptcy Order would collapse.

Aside for the key issues, the downside of a Bankruptcy proceeding is that judgment creditors are unsecured creditors i.e you would be lining up behind banks who are the secured creditors. This means the bank will have priority on the distribution of assets. You would only be able to get the remaining if they are any.

Technically, once someone is declared as a Bankrupt, he would not be able to own any properties under his name, bank accounts and leave the country (no overseas holiday) until he settles his debt.

If you are aware that I had stated above that the bankruptcy proceeding initiated against Bob and not the company. This is because for company, it would be winding up petition i.e. “bungkus the company” (layman terms). The latest winding up proceeding threshold against the debtor company for “inability to pay debts” is now RM50,000.00.

Hence referring to the scenario above, you (creditor) would send out a notice of demand (s.218 of the act) to the Company A to ask him to pay the amount owed (assuming is above RM50,000.00), and if Company A fails to pay then you a file the winding petition to Court.

Usually if it is an active and reputable company, the filing of the winding up petition itself will cause them to incur damage on their business, reputation and confidence of their shareholders which will create an impact on the share prices as well (if it’s listed in Bursa Market).

In the scenario if winding up occurs, the liquidator would take over Company A and managed the company temporary (for e.g. sell of the assets). However, you (judgment creditor) would be an unsecured creditor which mean that there is a chance that you might not be able to the full debt payment (secured creditors such as banks would be the priority).

This is a process where the judgment creditor would apply to court to attach the debt owed to the judgment debtor bank account. The judgment creditor firstly may apply an order from court to freeze judgment debtor bank account. This is to avoid the judgment creditor from removing all his monies from his bank account.

In summary, the idea of this order is to “whack his bank account”. Unlike bankruptcy proceedings and winding up, you would not have to line up where the secured creditors will have priority over the assets first.

This would be one of the best modes to go for if the judgment debtor has got monies in his bank account. However, a key point to remember is that the sum / debt owed by the judgment debtor must be calculated preciously i.e the right debt owed. This is to prevent the judgment debtor from setting aside the order.

Here, the Judgment Creditor may apply to the court for an issue of summons to be served to the Judgment Debtor compelling them to appear in court to provide with their ability to pay the judgment debt and information of the whereabouts of his properties.

The court may issue a warrant of arrest if the judgment debtor fails to appear after the summons has been served. In addition, if the judgment debtor appears, he may propose to the court to pay the debt in installments if he is not able to pay the lump sum payment.

This would be another option to go for usually if bankruptcy proceeding / winding up is not an option for e.g. the judgment sum is not more RM50,000.00. Looking at our scenario, this would be one of the option to consider since the debt owed by Company A and Bob is less than RM50,000.00

Writ of Seizure and Sale (also known as WSS) is applicable to both movable (for e.g. furniture) and immovable properties (for e.g. land and houses).

What would happen in this process is that the court will commands the sheriff / bailiff to seize and sell the property of the judgment debtor. The assigned sheriff / bailiff, your lawyer and a guard will go to the debtor’s house where the movable properties are and make a list of items that would be seized. Then the debtor would usually be given a time frame (usually 2 weeks) to settle the debt and if they failed to do so, the item will be auctioned and the proceeds of sale will be used to pay the judgment debt (any extra would be returned to the debtor).

To noted that as for movable properties, according to s.3(1) Debtors Act 1957, there are certain items that is prohibited from seizing and selling it such as wearing apparel, cooking utensils, beds and his tools of trade. As for immovable properties, for example Bob’s house, you may apply for an order to prohibit or restrict Bob from transferring, charging, or leasing the house.

In my opinion, this is very effective mode of execution if you have knowledge that the debtor house has some valuable items such as antiques clocks or valuable paintings. This may push them to settle the debt before the auction takes place. I personally did have a chance to participate in one WSS where I was present in the debtor’s rented house (being the tenant) assisting the bailiff in doing the list. I would say there are not much valuable items in the house (already removed I guess). Moreover, the cost of initiating a WSS maybe a costly at times.

Conclusion

In conclusion, I would say which modes of execution would depend on the debtor. Definitely, you would not want to go for the option where you would only incur cost but getting nothing in return (unless you don’t need the money but to just teach him a lesson and make him a bankrupt). Do take note that you would only have 12 years to execute your paper judgment (after 6 years leave is required from court) pursuant to s.6(3) Limitation Act 1953. Hence, once you obtained your judgment, start planning what modes of execution and try not delay it (while the debtor still has the money, better go for it). If you required any further information or advice, please don’t be reluctant to contact us. (There is saying that goes, when the food is served hot, it would definitely taste better 🙂

BY BENJAMIN LEONG

Disclaimer: This article is for reference only and does not constitute legal advice. Therefore, if readers have any legal questions or needs, they should seek professional legal advice. If the reader suffers any loss by relying on this article, the author will not be held responsible.

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