A Creditor's Guide To Bad Debt Recovery In Malaysia

Rule & Co Editorial Team
7 hours ago
4 min read

Are you having difficulty recovering debts that have been outstanding for years without any payment, and you now wonder whether such bad debts can still be claimed?

news article of a bank in Malaysia suffering from bad debts — *Doesn't sound too bad*...then *you* *realise 6% is RM16 million.*

This article provides a complete guide on your rights as a creditor in Malaysia recovering bad debts from individual or corporate debtors.

Here's how we've broken it down:

defining bad debt
steps to recover debts lawfully
the types of court actions available, and
writing off unrecoverable bad debts

Of course, feel free to skip the guide and get in touch for a free recovery assessment.

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Otherwise, let’s begin.

Relevant laws on bad debt recovery in Malaysia

As a creditor, it is important to understand key legislation:

Limitation Act 1953 – sets a 6-year time limit for debt claims
Contracts Act 1950 – governs the validity of contracts and payment obligations
Bankruptcy Act 1967 – used when debts ≥ RM50,000 and the debtor fails to pay; allows for bankruptcy proceedings to be initiated

What is bad debt and can it be recovered?

A bad debt refers to a debt that has exceeded the time limit provided under the Limitation Act 1953, which is usually six years from the date the debt arose or from the date of the last payment.

If no legal action is taken within this period, the debt is considered 'time-barred' and is generally no longer enforceable in court with two exceptions:

the debtor makes a partial payment within the 6-year period
the debtor acknowledges the debt in writing

Both situations can reset the limitation period, and it's important for creditors to act swiftly to recover what they are owed.

Steps to claim a debt before it is time-barred

1. Gather evidence & supporting documents

To prove the existence of the debt, you should collect:

debt agreement (written or digital)
invoices and payment receipts
proof of delivery of goods/services
communication records such as emails or WhatsApp messages

This is important to convince the court if the case proceeds to a civil claim.

2. Send a formal letter of demand (LOD)

The next step is to send a letter of demand for outstanding payment to the debtor.

sample letter of demand to recover bad debt — *Sample LOD by Rule & Co.*

This is usually issued by a lawyer and typically states:

the amount being claimed
the deadline for payment
a warning of legal action if the debt is not settled

This also serves as evidence that you have given the debtor a chance to resolve the matter amicably.

3. Initiate legal action (if no payment is made)

If the debtor still fails to pay after the notice is issued, you can file a civil claim in court based on the debt amount:

Court	Claim Value
Small Claims Court	Claims by individuals (non-business claimants) up to RM5,000
Magistrates’ Court	Up to RM100,000
Sessions Court	RM100,001 to RM1,000,000
High Court	RM1,000,001 with no upper limit

We can broadly separate civil suits into pre-trial, trial, and judgement / post-trial, and unsurprisingly, the process is long, costly, and risks backfiring, and in our opinion should only be considered if the debt value is sufficiently high.

That said, a court judgement opens doors to more powerful enforcement methods if the debtor continues to dodge payment.

If the debtor doesn't pay after judgement

Winning a court case does not guarantee immediate payment. If the debtor still refuses to comply, you may proceed with debt enforcement actions such as:

Judgment Debtor Summons: Compels the debtor to appear in court and be questioned about their assets and ability to pay.
Writ of Seizure and Sale: Assets such as vehicles, machinery, or business goods may be seized and auctioned to satisfy the debt.
Garnishee Proceedings: The court freezes the debtor’s bank account and orders the bank to transfer funds directly to you.
Compulsory Winding Up: A creditor may apply to wind up a company that is unable to pay its debts, leading to liquidation of its assets under court supervision.
Bankruptcy Proceedings: For individual debtors, bankruptcy action may be initiated to declare them bankrupt and allow distribution of their assets to creditors.
Committal Proceedings: Court action to punish a debtor for contempt of court, typically where they disobey court orders (such as failing to appear or refusing to disclose assets).

That said, getting to this stage is never a good thing, as it likely means the debtor was never able to pay. Over the years, we’ve been approached by many creditors who were advised a civil suit was a surefire path to recover bad debt whose court order was but a paper judgement.

At a certain point, it's worth considering writing off the bad debt to minimise losses.

Writing off bad debt as a last resort

As a creditor, there are times when a debt is simply unrecoverable, and the most pragmatic solution is to write off the bad debt to entitle them to a tax deduction.

By doing this, losses can be minimised and some money put back into business.

You must show that you’ve taken reasonable steps to recover the debt such as:

issuing an LOD through a debt recovery lawyer
evidence the debtor is bankrupt, liquidated, untraceable, or that the debt is time-barred
proof that litigation costs would outweigh recovery benefits

Most auditors in Malaysia will accept a legal Notice of Demand as sufficient proof of recovery attempts, though some may also require a short explanation letter from your lawyer.

Creditors reading this are welcome to get in touch for an assessment of your best steps moving forward, and we wish you all the best with your bad debt recovery 🙂

Let Rule & Co handle your bad debt recovery