COVID-19 & Post MCO: Debt Recovery In Malaysia
May 22, 2020
The global pandemic has been challenging to all in many ways. In attempting to weather the storm, individuals and companies are working to ensure their cash-flow remains sheltered to keep out of harm’s way. Gradually, businesses in Malaysia have resorted to salary cut, retrenchment and calling on their employees to take unpaid leave.
In the absence of proper financial planning and restructuring, the financial dilemma amidst this pandemic is likely to lead to unwarranted legal implications such as an action for debt recovery. Against that backdrop, this alert seeks to canvass an overview of debt recovery process in Malaysia.
The Law
Debt recovery is a process of reclaiming a sum due. The party owing monies would be referred to as the debtor whilst the party recovering the monies is referred to as the creditor. Both the creditor and the debtor can be either an individual or a corporation.
The laws governing debt recovery process are similar to that of a breach of contract. It is key that an action is commenced within its limitation period to avert futility. Otherwise, it may be raised as a point of defence to strike out the claim (Ronex Properties Ltd v. John Laing Construction Ltd & Ors [1982] 3 All ER 961).
As a general rule, the limitation period for a debt recovery action is 6 years from the date the monies owed become due. Time starts to run from the date when certain repayment becomes due (Nasri v. Mesah [1970] 1 LNS 85).
As it stands, there is no minimum limit for a debt to be incurred before an action for debt recovery can be taken. The debt threshold is, however, relevant to determine the appropriate forum to initiate such action (Subordinate Courts Act 1948; Courts of Judicature Act 1964).
The Process
To initiate an action for debt recovery, creditors will first file a claim through a Writ of Summons (WOS) together with a Statement of Claim (SOC) in Court. When the WOS is issued and endorsed together with the SOC, it must then be served to the debtor. The purpose of servicing these documents is to notify and alert the party who is answerable to the claim.
Two possible scenarios may ensue – (i) the debtor comes forward and enters into appearance or (ii) the debtor does not enter into appearance.
First Scenario
If the debtor chooses to defend the action, parties will go into a full trial. This process involves written and oral submissions of legal principles and calling in witnesses by both parties. At the end of the trial, the Court will make a determination to either allow or dismiss the creditor’s claim.
Alternatively, if the creditor has an unanswerable case (i.e. a clear-cut case), the creditor may file an application for a summary judgment. Summary Judgment is a procedural process available for a prompt and expeditious disposal of an action by a plaintiff or a counterclaim by a defendant, without a trial when there is no dispute as to the fact and law (UNP Plywood Sdn Bhd v. HSBC Bank Malaysia Bhd [2010] 5 MLJ 323). This method is time efficient as opposed to going through a full trial.
Second Scenario
If the debtor does not enter into appearance in Court, the creditor may apply for a Judgment in Default of Appearance against the debtor. The disadvantage to this is that oft-times, creditors are left with mere paper judgment. This leads to one question – how is a judgment enforced?
Enforcement Mechanisms
Once a judgment is obtained against the Judgement Debtor (JD), there are various ways of enforcement, namely by way of (i) Judgment Debtor Summons; (ii) Writ of Seizure and Sale; (iii) Garnishee Proceedings. The Judgment Creditor (JC) has to be mindful that the limitation period for an enforcement of judgment is 12 years from the date of the judgment (Sec. 6(3) of the Limitation Act 1953).
Judgment Debtor Summons (JDS)
Ordinarily, a JC would not know what assets the JD owns. Sec. 4 of the Debtors Act 1957 allows the JD to be summoned to Court and be examined under oath to state what his assets are. If the JD is a corporation, an officer of the corporation will be summoned. Subsequently, the Court may order the JD to pay the debt either in lump sum or by instalments within such time as the Court may fix. If the JD defaults in payment, the Court may call upon the JD to show cause as to why he should not be committed to prison for such default (Sec. 4(7) of the Debtors Act 1957).
After discovering the assets owned by the JD, the JC may also wish to secure such assets from being removed or disposed of. The legal recourse available to a JC would be the Mareva injunction.
Having gained its name from the case of Mareva Compania Naviera SA v. International Bulkcarriers SA [1980] 1 All ER 213, the purpose of the Mareva injunction is to restrain the JD from removing its assets from the jurisdiction and stultifying any judgment given by the Court. This will safeguard the interest of the JC.
This legal weapon however, cannot be used at the whims and fancies of the JC as there are grounds to be satisfied. Normally gleaned from the facts and circumstances of each case, the JC in essence will have to show that he has (i) a good and arguable case; (ii) the JD has assets within the jurisdiction; and (iii) there are risks that the assets will be dissipated or disposed of (Menk Sdn Bhd v. Joerg Hugo Schmidt [2009] 3 MLJ 205).
Writ Of Seizure And Sale
The JC may apply to Court to seize and sell the property of the JD to satisfy the sum owed to the JC. Such application however demands strict compliance with the procedures set out under Order 46 of the Rules of Court 2012. Note that not all properties may be seized. Exceptions are made to personal items belonging to the JD such as wearing apparel, cooking vessels and beds or bedding (Sec. 3 of the Debtors Act 1957).
Garnishee Proceedings
The JC may also recover the amount owed by the JD through Garnishee proceedings. Garnishee proceedings is a process where the JC recovers money or debt due and accruing by the JD from the hands of a third party (Order 49 of the Rules of Court 2012). For instance, if the JD is an employee, the JC may apply to Court for a Garnishee Order to recover the money directly from the JD’s salary subject to certain conditions (Sec. 3(1)(f) of the Debtors Act 1957).
The employer will then set aside a portion of the salary to be given to the JC in accordance to the judgment. Garnishee Order includes a current or deposit account with a bank or other financial institution, whether or not the deposit has matured and notwithstanding any restriction as to the mode of withdrawal (Order 49 rule 3 of the Rules of Court 2012).
Bankruptcy Or Winding Up Proceeding
When a debtor is served with a notice of demand, and subsequently fails to pay the debt, this raises the presumption that the debtor is unable to pay the debt. Therefore, apart from the enforcement mechanisms above, the creditor may also resort to a Bankruptcy or Winding Up Proceeding against the debtor.
Depending on whether the debtor is an individual or a corporation, a bankruptcy or winding up proceeding is considered most threatening in a debt recovery judgment.
A bankruptcy proceeding which is commenced against an individual debtor must meet the debt threshold of RM50,000.00 (Sec. 5 of the Insolvency Act 1967).
This will cause the debtors to face many drawbacks as a consequence of being declared a bankrupt. For instance, a bankrupt may not travel overseas unless with the written permission from the Director General of Insolvency (DGI) or after obtaining a Court order allowing him to do so. In order to get a written permission from the DGI, a bankrupt must make an application by stating his intention, reasons and duration of travelling.
On the other hand, a winding up proceeding against a company debtor may be made via a petition to Court (Sec. 464 of the Companies Act 2016). A winding up proceeding may be commenced if the debt threshold of RM10,000.00 is met. Once served with a notice, the debtor has a window of 21 days to respond and repay the debt (Sec. 466 of the Companies Act 2016). Failure to repay within 21 days may result in the filing of a winding up petition against the debtor.
In light of the pandemic and the Movement Control Order (MCO) imposed by the government commencing on 18.3.2020, there was a nationwide stoppage in certain trade and businesses for two months. In order to cushion the impact on businesses, the Companies Commission of Malaysia had taken initiatives to reform the law on winding up beginning 10 April 2020. The minimum threshold for winding up is now increased from RM10,000.00 to RM50,000.00. The period to respond to the notice and for repayment has also been extended from 21 days to 6 months.
It is anticipated that debtors may invoke force majeure or rely on the doctrine of frustration as a shield to evade debt repayment. On this point, a detailed discussion may be found in our previous alert titled “COVID-19 & MCO: Its Effects On Contractual Performance” published on 3 April 2020.
The Practical Approach The practical approach of recovering debt may, however, differ from the procedures set out above.
First, creditors should consider conducting a background/ company search to assess the financial status of the debtor. The underlying reason is that an action to sue a bankrupt person or a wound-up company would be a futile act.
Second, creditors should issue a letter of demand stating the details of the breach – i.e. the date the amount owed becomes due and the exact sum owed. A letter of demand is not a legal requirement to an action to recover debt. However, it may be a key instrument for the creditor to establish a strong claim. Not only a letter of demand would manifest that the creditor had attempted to reclaim the sum due before resorting to commencing a legal action, it would also form a chain of evidence for the creditor.
It is also prudent for creditors to consider the clauses in the contract or loan agreement as a whole. This is because a contract may contain a penalty clause for late payment. This may involve an accrual of interest on the sum due.
As a practical approach, it is advisable that parties endeavour to reach a settlement before taking a legal action. This is especially the case when there is an existing relationship of trust and confidence between the debtor and the creditor. Besides, an out of Court settlement is a cost and time saving method. A legal action is commonly commenced as a last resort when all other methods to seek repayment has been exhausted.