As cash flow management is a constant struggle for SMEs, delayed payment terms inevitably lead to dealing with businesses that default on their invoices.
All is not lost – here are four steps to maximise chances of B2B debt recovery.
Alternatively, if you believe the debt is unrecoverable, time to minimise your losses.
Let’s begin.
⏳ Debt recovery limitation periods
- Under Malaysia’s Limitation Act 1953, creditors have six years to recover a debt.
- The six year limitation period starts from the date of when payment is due.
- If a debtor acknowledges a debt / makes partial payment, the six-years resets.
- Enforcement of a Court Judgement against a debtor is six years by default.
- The courts may extend a judgement by another six years with justification.
- If a creditor allows the limitation period to run out, legal recovery is no longer possible.
- In short, creditors should not procrastinate if they want their money back!
So, with at least six years to recover a defaulted invoice, what should your next steps be?
Step 1: Evaluate debt recovery feasibility
Assess if the defaulting business has the means to pay, and if they have a substantive defense for not paying.
Here’s how you can assess the financial standing of a business entity:
- Enterprises / Sdn Bhds: MYDATA-SSM
- For LLPs: SSM RE-PRINT SERVICES
Meanwhile a substantive defense just means the debtor has a valid reason to refuse payment.
In such a case, recovery is still possible, just more likely to be disputed with a chance you won’t recover the full amount.
Step 2: Send a payment reminder
Issue a polite but firm final payment reminder.
Though this message has no legal weight, it can still prompt the debtor to settle their outstanding balance, especially for smaller amounts.
Feel free to use this template:
Final Payment Reminder Template
Dear [Recipient’s Name/Accounts Department],
I hope this message finds you well. We refer to our invoice [Invoice Number], dated [Invoice Date], for the amount of RM [Outstanding Amount], which remains unpaid despite our previous reminders. As of today, the payment is overdue by [Number of Days Overdue] days.
Please note that as per our agreed terms, late payments are subject to an interest charge of [X]% per month ([Y]% per annum), which has been applied to the overdue amount. The current outstanding balance, including accrued interest, is RM [Updated Outstanding Amount].
We kindly request that payment be made in full by [Specify Deadline, e.g., 7 days from the date of this email] to avoid further action. Payment can be made to the following account:
- Bank Name: [Your Bank Name]
- Account Name: [Your Business Name]
- Account Number: [Your Account Number]
Should we not receive the full payment by [Deadline], we will have no choice but to escalate this matter, including initiating legal proceedings to recover the amount owed, along with any additional costs incurred.
If you have already made the payment, please disregard this message. Otherwise, we urge you to treat this matter with urgency. Should you wish to discuss this further, please do not hesitate to contact us at [Your Contact Details].
Thank you for your prompt attention to this matter.
Yours sincerely,
[Your Name]
[Your Position]
[Your Business Name]
[Your Contact Information]
After all, consider that the average SME can have very messy internal communications and the person in charge may have forgotten or overlooked your invoice.
If the debtor ignores your letter without making payment, time to lawyer up!
Step 3: Issue a Letter of Demand (LOD)
A Letter of Demand is a legal letter sent by a debt collection attorney that outlines the amount owed and demands payment within a set period, usually 7–21 days.
An LOD from a lawyer is serious stuff and leads to one of two outcomes:
- The debtor asks to negotiate debt settlement without involving the courts
- The debtor refuses to pay / ignores the LOD and the lawyer files a suit
Option 1: Negotiate out-of-court settlement
Your lawyer negotiates with the debtor to reach mutually agreed payment terms, which can include partial debt recovery, installment plans, and interest on the principal.
In truly one-sided cases, your business could recover the full amount as a one-off payment.
Option 2: Obtain a Court Judgement
If out-of-court settlement is not possible and the debt is large enough to justify the risks of court litigation (time, costs, etc.); then you may consider initiating court litigation to obtain a Judgment against the debtor.
They can be obtained through several methods:
- In Default of appearance
- Summary judgment, or
- Full trial
In simple English, a Summary Judgement is when the judge thinks it’s so obvious the debtor has no defence for not paying that it’s not even worth going to trial over.
A Judgement in Default of Appearance (JID) is where the defendant doesn’t respond in time or appear in court within the given timeframe.
With a Judgement, you can apply legal enforcement methods to recover the debt.
Step 4: Consider recovery enforcement options
Like scenes in movies where the torturer opens up their bag of tools, you now have an array of debt recovery enforcement options at your disposal, including:
- Judgment debtor summons: Debtor ordered to pay or face penalties.
- Garnishee proceedings: Recover funds from debtor’s bank or clients.
- Writ of seizure and sale: Sell debtor’s assets to recover funds.
- Compulsory winding up (for company debts above RM50,000): Forced asset liquidation.
Your lawyer will be able to advise you on the best course of action.
Get a tax write-off if recovery is unlikely
If recovery is not feasible, the best option is to get a tax write-off so you don’t owe tax on the unpaid debt, which LHDN would otherwise classify as taxable income.
Though it’s at the auditor’s discretion, smaller amounts can usually be written off without issue.
For larger amounts, auditors often require proof that:
- your customer defaulted on payment and
- your business took reasonable steps to recover the debt
The easiest way is to appoint a debt collection attorney and have them handle the process, and for all you know, the debt may be more recoverable than you think!
Let MISHU help with your B2B debt recovery
MISHU is partnered with numerous professional business service providers to help us deliver a comprehensive suite of solutions tailored to SME owners. Let us connect you with the right experts to meet your needs!