A Creditor’s Guide To Dealing With Dishonoured Cheques In Malaysia

Rule & Co Editorial Team
3 hours ago
5 min read

Dishonoured, bounced, or bad cheques all refer to a situation where a bank refuses to honour a cheque due to a variety of reasons, most often insufficient funds in the drawer’s account.

And to the business or individual who relied on said cheque for payment, it means a bad day.

A low figure cheque in Malaysia to show that any cheque has the potential to be dishonoured due to insufficient funds — *This young lady looks unhappy enough as it is.*

While honest mistakes happen, our decade in debt recovery has taught us bad cheques are more often than not deliberate - in fact, we once had to personally deal with a bounced cheque from a client to the tune of RM350,000.

The good news is Malaysian law provides a clear path to recovering debts legally, and our guide explains how a creditor can handle a dishonoured cheque, broken down into:

relevant laws on bad cheques (+what they mean for you)
two immediate steps you should take as a creditor, and
our professional take on what to do after that

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

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Otherwise, let’s begin.

Relevant laws on dishonoured cheques

Creditors in Malaysia should be aware of two laws on bounced cheques:

Section 47 of the Bills of Exchange Act 1949, and
Section 420 of the Criminal Penal Code (Act 574)

We advise interpreting them as leverage - having the ability to take these actions is often more effective (and cheaper) at compelling payment than actually taking them.

Section 47 of the Bills of Exchange Act 1949

The Bills of Exchange Act 1949 is the primary Malaysian law on cheques, and Section 47(2) specifically states that a party who has been issued a dishonoured cheque automatically has a cause of action against the drawer.

Why this matters:

A dishonoured cheque by itself is often enough to show proof of debt, which is essential to asserting your legal claim. It can also be a key piece of supporting evidence in a summary judgement application (a fast-tracked court order without going to trial).

Section 420 of the Criminal Penal Code

In short, under Section 420 of Act 574, paying for delivered goods or services with a cheque expected to be dishonoured is a criminal offence that carries mandatory whipping and at least one year imprisonment - potentially up to 10 years depending on severity.

This requires establishing, among other things, that there was a dishonest intention by the buyer who issued the cheque - for example, that they knew their bank account did not have sufficient funds to honour the amount owed.

Why this matters:

Unless a debtor has steel bun implants, the threat of imprisonment and caning is often taken very seriously, and for many, just the prospect of a criminal trial can be enough to motivate payment or negotiations.

Immediate steps as creditor

Whether you pursue litigation or negotiate out of court, take these initial steps promptly to protect your position.

1. Send a notice of dishonour

Notify the person who issued the cheque that it has been dishonoured and that payment remains outstanding within the time required under the Bills of Exchange Act 1949:

it should reach them by the day after the cheque bounces if in the same place
it should be sent by the day after the cheque bounces or by next available post if in different places

There is no fixed format to a notice so long as it contains all relevant details and readers are welcome to use our editable template above.

Failing to give notice within this timeframe can affect your ability to hold the drawer accountable, so readers should not delay.

2. Keep the bank's Image Return Document

sample IRD for dishonoured cheque in malaysia

Keep the bank's Image Return Document (IRD) or other documentation showing that the cheque was rejected or dishonoured. This provides evidence that the cheque was presented but payment was not made.

Reporting dishonoured cheques to the police

Short answer: Yes, but only if your lawyer advises it!

Long answer: A cheque bouncing by itself is not a crime and requires establishing several other factors including dishonest intent to fall under Section 420 of Act 574. Unless you already have strong evidence to support this, it’s likely the police will interpret a bad cheque as a civil matter and ask that you contact a lawyer instead.

So while you absolutely can make a police report, we just think there are more practical steps you can take towards recovering the unpaid amount.

Our professional thoughts on recovery strategy

Say you came to Rule & Co seeking help with a bounced cheque after taking the above steps.

Assuming the debtor has sufficient funds or assets, our strategy first depends on the debt amount, which we’ll broadly separate into three categories:

Below RM50,000: We advise sticking to negotiations as legal costs often make civil proceedings financially impractical even with a full recovery.
RM50,000 and up for corporate debtors: A statutory demand - a precursor to compulsory winding-up - may be available to create significant pressure on the debtor.
RM100,000 and up: Civil proceedings become more viable, as potential recovery is generally more likely to justify the legal costs involved.

While negotiating may sound ‘soft’ do not underestimate it - being labelled a ‘debtor’ is a heavy burden and many will gladly accept the right offer to settle!

For the second and third categories, we also consider the debtor’s attitude - if they are responsive and genuine about negotiating, an amicable settlement is still faster, cheaper and less disruptive than a statutory demand or taking the matter to court.

It is when they make excuses or use ‘negotiations’ to further delay that a lawsuit on the back of a dishonoured cheque may be the best option, as we found out first-hand.

The amount owed was well over our RM100,000 threshold, our debtor was uncooperative, and the facts suggested a high chance of the court ruling in our favour - the debtor’s inaction simply accelerated it and allowed us to garnish their bank account significantly faster.

Notice we didn’t go straight to litigation, and we’re a law firm!

We similarly advise you to first reach out to your debtors, or engage a professional to do it for you (hint, hint).

That's it from us, and we wish you a smooth debt recovery 🙂

Let Rule & Co handle your dishonoured cheque