Debt Recovery Process in Malaysia (Proses Tuntut Hutang)

Introduction

Although Malaysia has emerged from the COVID-19 pandemic, its impact on our country and the global economy can still be felt today.

Many individuals and businesses were severely affected, leaving numerous individuals, sole proprietors, partners, and companies unable to repay their debts.

At the same time, many creditors have had to initiate debt recovery processes because borrowers failed to make payments due to these economic effects.

As a creditor, how can you recover debts from a borrower, and what is the most effective and efficient way to do so?

The debt recovery process is a procedure used to claim payment from individuals, businesses, or companies that refuse and/or fail to settle their debts.

In this article, ASCOlaw will provide an overview of the debt recovery process in Malaysia.

1. What Can Be Considered a Debt?

Debt doesn’t just come from bank loans. It can arise in many everyday situations, such as:

• Taking a car or housing loan from a financial institution.

• Lending money to a friend or family member.

• A tenant owing unpaid rent to a landlord.

• A patient owing hospital bills for treatment.

• A business that fails to pay after goods have been delivered or services completed.

• Freelancers (such as photographers or videographers) not being paid for their work.

If any of these situations sound familiar, it means a debt relationship exists between the creditor and the debtor.

However, before you start a claim, it’s important to understand that there is a time limit (limitation period) under Malaysian law to file your case.

2. Understanding the Limitation Period

A limitation period is the maximum amount of time allowed by law for you to take legal action against someone.

Under the Limitation Act 1953, creditors have six (6) years from the date the debt became due to file a lawsuit.

If you already have a court judgment but the debtor still refuses to pay, you have up to twelve (12) years from the date of that judgment to enforce it.

Failing to act within these periods may cause your claim to expire — meaning the court will no longer recognise your right to sue.

3. Before Filing a Lawsuit: Background Check on the Debtor

Before rushing into court, ASCO Law advises creditors to check the debtor’s background to ensure that legal action is worthwhile.

If the debtor is a company, you can:

• Conduct a company search with the Companies Commission of Malaysia (SSM).

• Check for any winding-up proceedings at the Department of Insolvency.

This will show:

• The company’s registered and business addresses.

• Whether it’s still active or has been wound up.

• The list of directors or partners.

If the debtor is an individual, you can perform:

• IC search and bankruptcy search at the Insolvency Department.

These searches help confirm the debtor’s current address and whether the person is bankrupt, which affects your ability to recover payment.

4. Notice of Demand (NOD)

The first step in any debt recovery process is usually to send a Notice of Demand (NOD), also known as a Letter of Demand.

This letter formally asks the debtor to pay the outstanding amount within a specified period — often 7, 14, 21, or 30 days.

While not mandatory under the law, a Notice of Demand serves several important purposes:

• It gives the debtor a final opportunity to pay before legal action.

• It acts as proof that the creditor has made a reasonable effort to settle the issue.

• If issued by a law firm like ASCO Law, it shows the debtor that legal action is serious and imminent — often prompting faster settlement.

In some cases, when a debtor responds or makes a partial payment after receiving a NOD, it can be used as admission of debt in court.

5. Taking Legal Action (Debt Recovery Claim)

If no payment or settlement happens after the Notice of Demand, the next step is to file a claim in court.

The type of court depends on the amount owed:

• Magistrates’ Court – for debts below RM100,000

• Sessions Court – for debts between RM100,000 and RM1,000,000

• High Court – for debts exceeding RM1,000,000

Once the claim is filed, your lawyer will serve a Writ of Summons and Statement of Claim on the debtor.

If the defendant (debtor) fails to respond or appear in court, you can request a Judgment in Default (JID) — meaning the court automatically decides in your favour.

However, if the defendant contests the claim but has no valid defence, your lawyer may apply for a Summary Judgment under Order 14 of the Rules of Court 2012, which avoids a lengthy trial.

6. After Winning the Case: Judgment Creditor vs Judgment Debtor

Once the court issues a judgment, the creditor becomes the Judgment Creditor, and the debtor becomes the Judgment Debtor.

The Judgment Creditor is entitled to recover the amount stated in the judgment, also known as the Judgment Debt.

If the Judgment Debtor still refuses to pay, there are several enforcement options available under Malaysian law.

7. Methods to Enforce a Court Judgment

(a) Judgment Debtor Summons (JDS)

A JDS compels the debtor to appear in court and disclose their financial situation.

If the debtor is a company, one of its directors or officers must attend on its behalf. The court will then decide if the debtor can pay the debt in full or by instalments.

If the debtor ignores the summons, the court may issue an order of arrest or proceed ex parte (without the debtor present). Persistent non-compliance can even lead to committal proceedings for contempt.

(b) Garnishee Proceedings

This method allows you to claim the money from a third party that owes money to the debtor — such as their bank account or another client.

Under Order 49 of the Rules of Court 2012, the court can order the third party (known as the garnishee) to pay the owed amount directly to you.

This is often one of the most effective ways to recover debt, especially if you know where the debtor keeps their funds.

(c) Writ of Seizure and Sale (WSS)

Under Order 45 Rule 12 of the Rules of Court 2012, you may apply for a Writ of Seizure and Sale to confiscate and auction the debtor’s movable or immovable property.

A court bailiff will seize items such as vehicles, office equipment, or land, and sell them through a public auction. The sale proceeds will then be used to pay your judgment debt.

(d) Winding-Up Proceedings (for Companies)

If the debtor is a company that owes at least RM10,000, you can initiate winding-up proceedings under the Companies Act 2016.

Before doing so, you must first issue a Notice of Demand under Section 466 of the Companies Act. If the company fails to respond within 21 days, it is presumed to be insolvent, allowing you to proceed with a winding-up petition.

Once the court issues a winding-up order, a liquidator (often the Director General of Insolvency) will take over the company’s assets, sell them, and distribute the proceeds among creditors.

(e) Bankruptcy Proceedings (for Individuals)

If the debtor is an individual and owes RM50,000 or more, you can begin bankruptcy proceedings under the Insolvency Act 1967.

A Bankruptcy Notice must first be served, demanding payment within 7 days. Failure to respond constitutes an Act of Bankruptcy, allowing you to file for a bankruptcy order.

Once declared bankrupt, the debtor’s assets are assigned to the Director General of Insolvency (DGI), who will distribute them among all creditors.

(f) Committal Order

A Committal Order is used when a debtor wilfully disobeys a court order.

While it cannot usually be applied just for failing to pay a debt, it can be used for breaching specific terms in a judgment — such as issuing post-dated cheques or violating payment conditions.

This order allows the court to fine or imprison the debtor for contempt of court under Order 52 of the Rules of Court 2012.

8. Key Takeaways and Practical Tips

• Always start with a formal Notice of Demand — it’s the first and most strategic step.

• Perform a background check before suing — this ensures you’re not wasting time and costs.

• Keep all contracts, invoices, and receipts well-documented. They will be crucial in proving your claim.

• Be aware of the limitation period — six years to sue, twelve years to enforce.

• Seek legal advice early to choose the most effective method for recovery.

  
  

Conclusion

Recovering unpaid debts can be stressful and time-consuming — but with the right legal guidance, it’s absolutely manageable.

As a creditor, acting promptly and strategically can make all the difference. Whether you are dealing with an individual, a business, or a company, understanding your rights and the available legal remedies is the key to effective debt recovery.

If you’re facing issues with unpaid debts — whether you’re trying to recover payment or defend a claim — ASCO Law can assist you at every stage of the process, from issuing a Notice of Demand to court enforcement and negotiated settlements.

👉 Contact ASCO Law today to discuss your situation and get professional guidance on the most efficient debt recovery strategy in Malaysia for 2025.