Since the outbreak of the Coronavirus pandemic in early 2020, like many Governments around the world, the Malaysian Government imposed strict lockdowns to curb the spread of the virus. According to a Fitch Rating Report, the Malaysian economy contracted 5.6% in 2020 and the Report finds that the Malaysian debt to GDP increased from 65.2% in 2019 to 78.1% in 2020.[1] As a result of the pandemic, businesses and consumers are increasingly taking on more debts to support their financial obligations. With increased debt obligations, there is an increased risk of businesses and consumers unable to service their debts due to the economic circumstances and restrictions within the country.
Debt Recovery Action (DRA)
Debts can arise from a number of situations. The most common source nowadays being tenancy agreements and commercial agreements, especially between suppliers & purchasers where there have been delays in payment according to the time stipulated in the agreement. With the Debt Recovery Mechanism in place, creditors can now recover money owing to them from debtors in the event the latter refuse or are unable to meet such demands.
1. Bankruptcy Search or Company Search
Before commencing an action against a Debtor, it is advisable to do a bankruptcy search with the Malaysian Insolvency Department (MID) if the Debtor is an individual or a company search with the Companies Commission of Malaysia (SSM) if the Debtor is a company. This step is important to identify the bankruptcy status or liquidation status of the Debtor in question.
2. Limitation Period
A DRA can only be commenced by the Creditor, within 6 years from the date the breach occurred,[2] namely, the Debtor’s refusal to pay the agreed sum upon the agreed date. Otherwise, the Court will not recognize such debt in the first place.
3. Negotiation and Letter of Demand
A letter of demand is essentially a document send by the Creditor to the Debtor to demand for payment of money which should be paid within the stipulated time. While a Letter of Demand is not a prerequisite to initiate a civil action, it has always been the norm to issue such a letter to the Debtor first and it is advisable for the Debtor to respond to the said letter. In some cases, the parties would be able to settle the matter amicably at this stage without the need to bring the matter to court.
4. Commencement of DRA
Should the negotiation fails, the next step would be commencing a civil action against the Debtor which is known as the Debt Recovery Action (“DRA”). These kind of cases can typically take as little as two months to several years to obtain a judgment in court.
Once the Creditor (known as “Judgment Creditor”) obtains a judgment from the Court against the Debtor (known as “Judgment Debtor”), the Judgment Debtor must obey the terms ordered against him/her, inter alia, to settle the debt (known as “Judgment Debt”).
5. Enforcement of Judgment
There are several methods which enable the Judgment Creditor to enforce a judgment or order. The method applicable would depend on the nature of the judgment or order given and the property to be attached.
(a) Writ of Seizure & Sale (WSS)
The WSS is a writ that commands the Court Sheriff or Bailiff to seize property(ies) belonging to a Judgment Debtor to satisfy the Judgment Debt.[3] The Judgment Debtor’s goods and chattels which would be attached include movable, immovable and securities. The exceptions to that are tools of trade, government pension and gratuity.[4] The seized goods will be sold by way of an auction and the proceeds will be used to realize the debt.
(b) Judgment Debtor Summon (JDS)
It is a procedure where a judgment creditor may orally examine the judgment debtor or if the judgment debtor is a company, its officer, before the Court.[5] The main purpose of JDS is finding out what debt are owing to the Judgment Creditor and whether the Judgment Creditor has any property or means of satisfying the debt.
(c) Garnishee Proceedings
It is a proceeding where the Judgment Creditor may apply to compel a third party (the garnishee) who is indebted to the Judgment Debtor, to pay the sum directly to the Judgment Creditor.[6]
(d) Charging Order
It provides for the enforcement of a judgment by imposing a charge on the securities to which the Judgment Debtor is beneficially entitled to,[7] such as government & company stocks, shares, debentures and debenture stock. The securities must be in the name of the Judgment Debtor or held in trust for the Judgment Debtor.[8]
(e) Committal Order
Committal proceedings are proceedings which are brought against the party who disobeys the Court’s order or judgment. In situations where the Judgment Debtor refuses to settle the Judgment Debt, the Judgment Creditor may put in an application for an order of committal against the Judgment Debtor. It is a basic, if not a fundamental right of the other party to do so as held in the case of MBF Holdings Bhd & Anor v Hong Hai Kong [1993] 2 MLJ 516 where Anuar J (as he then was) held as follows:-
“It is a paramount in the public interest that every court should have the power and authority or jurisdiction to punish person who scandalise it or disobey orders made by it. If such power is absent, then the public will lose all confidences in the authority of the judicial arm of the state..”
(f) Bankruptcy or Winding Up Proceedings
In the case where the Judgment Debtor is an individual and the total Judgment Debt is at least RM100,000.00, the Judgment Creditor may commence a bankruptcy action against the Judgment Debtor if the Judgment Debtor did not comply with the judgment or order made against him. On the other hand, where the Judgment Debtor is a company and it is indebted in a sum exceeding RM50,000.00,[9] the Judgment Creditor may present a winding up petition against the said Judgment Debtor.
Conclusion
While we recognise the impact of the Covid-19 pandemic on life and businesses in Malaysia, it is always advisable for creditors to take swift action against the debtors to increase the chance of recovering any debt due and owing. Therefore, it is crucial for creditors and debtors alike to seek legal advice or assistance to guide them through the process of the DRA.
[1] https://www.fitchratings.com/research/sovereigns/malaysia-13-08-2021 accessed on 25 August 2021. [2] Section 6(1) of Limitation Act 1953. [3] Order 45 rule 1 of the Rules of Court 2012. [4] Section 3 of Debtors Act 1957. [5] Order 48 rule 1(2) of the Rules of Court 2012. [6] Order 49 rule 1 of the Rules of Court 2012. [7] Order 50 rule 2(1) of the Rules Of Court 2012. [8] Bank Bumiputra (M) Bhd v Cheong Yoke Choy (Malaysian Central Depository Sdn Bhd, Proposed Intervener) [2000] 7 MLJ 323 [9] Prescription of Amount of Indebtedness of Company under Paragraph 466(1)(a) (Gazette Notification No. 4159/2021) dated 22 March 2021.
Authored by Syameel Amirundanish and Tiffany Ding
Kindly note that this legal article does not, and is not intended to, constitute formal legal advice by the Firm, instead all information, content and materials available on this site are for general informational purposes only. If readers require further clarification or legal advice, please email office@kevinwuassociates.com.
