Always A Good Time to Chase Bad Debts
Published on 20 April 2020 by Brian Ernest Cumming
With the MCO in place since 18 March 2020, businesses have been halted almost completely. No business, no money - that is the harsh reality. Hence, this is the best time to chase after debts.
This article seeks to provide a guide as to the various options to debt collection.
Letter of Demand, Is it Necessary?
Although issuing a letter of demand is not a legal requirement unless expressly prescribed in a contract or in an invoice, most lawyers would nevertheless recommend a Letter of Demand to be issued to the Debtor demanding the outstanding sum. This enables the debt to be placed on record and gives the Debtor an opportunity to pay before legal proceedings are commenced.
If the Debtor is coy, remains silent or refuses to pay, a Creditor may initiate a civil claim to recover the debt at the Magistrate, Sessions or High Court depending on the quantum of the claim involved.
If the claim is undefended, the Creditor may enter a Judgment in Default of Appearance or in Default of Defence pursuant to Order 13 or Order 19 Rules of Court 2012. Debtors may apply to set aside Default Judgments within 30 days of service failing which the Judgment becomes final.
If the claim is defended, the Creditor may proceed to file an application for Summary Judgment or a Judgment on Admission of Facts pursuant to Order 14 or Order 27 rule 3 Rules of Court 2012. Judgment will be entered without a trial if there are no issues to be tried or no reason for there to be a trial of the claim.
If the Debtor raises an issue to be tried on part or the whole claim successfully, the Creditor would have to prove its claim at trial by calling witnesses and adducing evidence to establish the debt.
Upon securing a Judgment for the payment of money which is not stayed, a successful Creditor may enforce the same pursuant to Order 45 rule 1 to Order 50 Rules of Court 2012 as follows:-
- A Writ of Seizure & Sale which allows the Bailiff to seize and sell movable and immovable property of the Debtor by way of an auction;
- Garnishee Proceedings which orders a garnishee who owes money to the Debtor to pay the debt to the Creditor instead;
- Charging Order which imposes a charge on securities, stock options, shares or debentures of a Debtor to secure payment due to the Creditor.
A Creditor with a Judgment or in instances where the debt is not bona fide disputed, may apply to wind-up a corporate Debtor and seek to prove its debt before a liquidator post winding-up. The liquidator may repay the debt ultimately if there are sufficient funds to distribute. The debt must be RM50,000.00 or more and the steps are as follows:-
- issue a statutory notice pursuant to Section 466(1) Companies Act, 2016 demanding payment within 21 days failing which the corporate Debtor is deemed unable to pay its debts;
- file a Petition to Wind-Up the Corporate Debtor within 6 months from expiry of the statutory notice. The Debtor may be wound-up at the hearing.
In practice, it is not uncommon for Creditors to issue a statutory Section 466 notice demanding payment without a judgment or where the debt is disputed in the hope the Debtor who cannot risk being wound-up, would actually pay up. The Courts however do not encourage this.
Where the Debtor is an Individual and the debt is RM10,000.00 or more, a Creditor may also initiate Bankruptcy Proceedings as follows:-
- A Bankruptcy Notice must be served on the Debtor. The Debtor is deemed unable to pay his debt if he fails to pay or respond within 7 days from service;
- A Creditors Petition is filed and an Adjudication and Receiving Order may be made at the hearing making the Debtor a bankrupt. The Creditor must lodge a Proof of Debt to seek repayment of the debt.
Judgment Debtor Summons
Creditors with debts below the statutory limits prescribed for a Winding-Up or Bankruptcy Proceedings may apply for a Judgment Debtor Summons (JDS) instead. The summons is for an oral examination of a Debtor as to whether any debt is owed and if the Debtor has any property capable of satisfying the Judgment.
The Court may order a lump sum or instalment payment to be made pursuant to Section 4 Debtors Act, 1957 once the Debtor’s financial abilities are declared.
At times, Creditors may not be able to monetize their Judgment if the Debtor Company is insolvent or has been Wound-Up. Directors of such companies would decline to pay electing to hide behind the veil of incorporation claiming they are not personally liable for the debts of the Company. Creditors facing such a predicament may consider a fraudulent trading claim.
Fraudulent trading is a statutory mechanism designed for the protection of creditors by imposing personal liability on officers or individuals controlling the company for the debts of the Company. Section 540 Companies Act, 2016 provides as follows:-
“If in the course of winding up of a company or in any proceedings against a company it appears that any business of the company has been carried on with the intent to defraud the creditors of the company or creditors of any other person or for any fraudulent purpose, the Court on the application of the liquidator or any creditor or contributory of the company, may, if the Court thinks proper to do so, declare that any person who is knowingly a party to the carrying on of the business in that manner shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the Court directs.”
An intent to defraud may be established by the fact directors or persons in control knew there is no reasonable prospect of the debt being paid. Being a civil claim, the burden of proof to establish fraud is on a balance of probabilities, not proof beyond a reasonable doubt.
Directors or shareholders who intentionally shut down their business to preserve capital and avoid paying its creditors may be subjected to a fraudulent trading claim if a creditor is able to establish there is no reasonable prospect of its debt being paid. If successful, the creditor may seek repayment of the Companies debts from its directors, officers or others personally.
Where a tenant owes rent, a landlord may apply for a Writ of Distress directing the Bailiff to distrain moveable property of the tenant and sell them to recover the outstanding rental. Section 5(1) Distress Act, 1951 provides a landlord may only claim outstanding rental of up to 12 completed months. Any rent in excess of 12 months must be claimed as a civil debt.
A creditor in cases involving fraud, conspiracy or fraudulent representation may also consider applying for a Mareva Injunction to freeze assets including bank accounts of the debtor pending disposal of the suit if the circumstances merit such an application.
Any attempt to remove or dispose frozen assets breaches the Court Order and the defaulter may be subjected to committal proceedings punishable with a fine, imprisonment or both. The following must be satisfied:-
- there is a good arguable case;
- there are assets within the jurisdiction;
- there is evidence of a real risk of dissipation or removal of assets before judgment.
With various options available for the recovery of debts, creditors are encouraged to seek proper legal advice on the avenues most suited to their respective case. It should be borne in mind that speed is essential in order to have the best chance of recovery.
The contents of this article are not intended to constitute legal advice on any specific matter and should not be relied upon as a substitute for specific legal advice on matters or transactions.
For further information, please contact the author of this article.