What Should You Do If Your Customer Has No Financial Means To Pay Your Invoices?

In order to reduce the soaring number of Covid-19 cases, the Malaysia government has implemented the second phase of movement control order (“MCO”) on 13 January 2021. The government has relaxed the restriction as compared to the first phase of MCO by allowing more sectors to open and promote business activities throughout the country. Recently, followed by the decline in Covid-19 cases, nearly all economic sectors are now allowed to resume operations, subject to the standard operating procedures (SOPs) set by the Ministry of Health.

The two phases of lockdown has affected all sectors in economy especially the small and medium enterprise (SME) businesses. Many businesses have permanently shut down during the pandemic while some businesses are still struggling to weather the crisis. In order to keep their businesses alive, business owners tend to drown in debt and cases of debt recovery may therefore increase.

What should you do if your customer has no financial means to pay your invoices?

Limitation period

The Limitation Act 1953 establishes general limitation period of six years which the creditor must commence civil proceedings to recover a debt. This means that if the creditor sleeps over his rights after the time limit, his rights are extinguished and he no longer has any legal remedy. However, the six-year time limit can be extended in a number of circumstances and the two most common scenarios are acknowledgement of debt which the debtor recognizes they have an outstanding debt or the debtor made a partial payment towards the outstanding debt.

Letter of demand

Before commencing civil proceedings in the court, you may consider to issue a letter of demand to your creditor. A letter of demand shall outline the date of the debt was incurred, details of debt and a clear and definitive expectations of the payment, including a date the payment should be made by the debtor. However, generally serving a letter of demand to your debtor is not a pre-requisite requirement before commencing legal proceedings in court unless it is specifically stated in the contract. Doing so may potentially save huge costs by avoiding litigation if the debtor complies. On the other hand, if the debtor fails to respond to your letter of demand, you may consider to commence legal proceedings.

Filing of Writ of Summons in court and subsequent proceedings

Except small claim case whereby the amount claimed does not exceed RM5,000, you will need to engage a lawyer to commence a legal proceedings. Most debt recovery actions are commenced by way of a writ of summons and must be endorsed with a statement of claim. A writ must be served personally on each debtor (hereinafter debtor shall be referred to as “defendant”) by serving a copy of the writ of summons and statement of claim with the defendant at his or her last known address if the defendant is an individual and at the registered address or principal business address of the defendant if it is a company. With the recent amendment to the Rules of Court 2012, subject to the practice direction, the writ of summons can be served on the defendant by way of electronic communication.

Once the defendant has been served with the writ of summons, the defendant has to file a memorandum of appearance in the Court within 14 days from the date of receipt of the writ of summons. When the defendant has entered appearance, he is required to file and serve his defence within 14 days after the time limited for entering an appearance, or after service of the statement of claim, whichever is later.

Judgment in Default

If the defendant fails (after proper service of writ of summons) to enter his appearance in Court, the plaintiff can apply to Court for a judgment in default of appearance against the defendant.

While judgment in default is a powerful tool for claimant, consideration must be given to the circumstances in which a default judgment could be set-aside.

Enforcement of Judgment

After obtaining a judgment against the defendant, if the defendant fails to settle the judgment sum, the plaintiff is required to enforce the judgment for recovery of the judgment sum. There are many modes of execution of a judgment such as bankruptcy proceedings, winding up proceedings, garnishee proceedings, writ of seizure and sale proceedings and etc. The plaintiff may choose the mode of execution that is most suitable and effective for recovery of the judgment sum.

This article is written by 
Wai Chong Khuan
Partners, Low & Partners
Derek Chin Tze Qi
Associate, Low & Partners
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