Debt Recovery For Small Businesses In Malaysia (+Payment Reminder Template)

The Limitation Act 1953 gives creditors in Malaysia six years to recover a debt, after which they lose the legal right to pursue it.

As debt is a normal part of doing business, this guide outlines debt collection essentials to help maximise recovery and minimise losses while staying on the right side of the law.

If you already have a plan, skip to our payment reminder template.

If this is your first time with debt recovery, we urge you to read this guide in its entirety.

For the rest of this post, the reader is referred to as the creditor, and the party owing money the debtor.

Let’s begin.

Evaluate debt recovery probability

The desire to pursue a debt is natural, but you must determine your chances of recovery to avoid losing even more in the process.

Here are three questions that help determine if a debt is worth pursuing:

1. Does the debtor still exist?

This sounds obvious, but it’s very easy to check and has a huge impact on recoverability.

Here’s where you can check:

1. Individuals: e-Insolvensi (RM10 per search)
2. Enterprises / Sdn Bhds: MYDATA-SSM (RM15 – RM30 depending on entity)
3. For LLPs: SSM RE-PRINT SERVICES (RM40-RM45)

If the debtor is a bankrupt individual or insolvent business entity, pursuing the debt is almost certainly futile; unless you have separate personal guarantors to pursue.

2. Is the debt defendable?

If the debtor has not paid, consider if they have a valid reason. 

If your debtors claim dissatisfaction with your services and have proof to back it up, debt recovery may involve disputes with the debtor, negotiations as to a mutual settlement sum or may even lead to court proceedings.

Meanwhile, if they simply haven’t paid without any substantive defense, it gets much simpler.

3. Does the debtor have the means to pay?

A debtor’s CTOS / SSM Company Profile should give some indication if a corporate debtor is financially capable of repaying a debt. Look out for the Financial Information in the report as well as the Paid Up Capital of the entity. 

However, CTOS / SSM Company Profile information may not be perfect – namely only using Malaysian sources and being potentially outdated.

For substantial debt amounts, consider engaging a forensic / private investigator for a deep dive into a debtor’s sources of income and assets.

Once you have answers to the three questions above, you have two main options.

Option 1: Pursue debt recovery

If all three conditions are met, there is a good chance of recovering the debt through negotiations or court proceedings, both of which begin with a Letter of Demand.

Alternatively, you can issue a payment reminder.

Letter of Demand (LOD)

There are two types of Letters of Demand (LOD):

• Regular LOD: A standard letter demanding payment within a specific period.
• Statutory LOD: Used to liquidate a debtor’s company if they fail to pay. 

Here, we refer to the former, sent by a lawyer to a debtor outlining the debt owed and demanding payment within a specific period (often 7 to 21 days). 

Its main purpose is to prompt a debtor to settle a debt without involving court litigation.

Payment reminder

We’re adding this here to highlight the difference between an LOD and payment reminder.

Both aim to recover outstanding payment, but an LOD is a formal notice by a lawyer with legal weight, while a payment reminder is an informal notice anyone can send.

If you want to handle your own debt recovery, here’s an editable payment reminder template:

Good luck!

Out-of-court settlement

Negotiations after an LOD can result in:

• Partial recovery of the debt.
• Installment plans.
• Other mutually agreed repayment terms.

If the debtor refuses to negotiate or offers an unreasonable settlement and the debt amount is significant (e.g., above RM150,000), legal proceedings may be worth considering.

Filing a lawsuit for debt recovery

If negotiations fail, a creditor can, through legal counsel, take legal action to obtain a judgment against the debtor. 

Should the debtor still refuse to pay once a judgment is obtained, the creditor can perform enforcement proceedings against the debtor, including the options below: 

Recovery Method	Description
Judgment Debtor Summons	The debtor is summoned to court where they may be ordered to repay in full or installments, and non-compliance can lead to up to 6 weeks in jail.
Garnishee Proceedings	The creditor collects debtor’s funds from third parties such as banks, employers, or clients, under a court order to pay them directly.
Writ of Seizure & Sale	The debtor’s assets are seized, sold at auction, and proceeds are used to pay off the debt.
Winding-Up (For Companies)	For Sdn. Bhd. / Bhd. debtors with debts over RM50,000, where the company’s assets are liquidated to repay creditors.
Bankruptcy (For Individuals)	For individual debtors with debts over RM100,000, where they are declared bankrupt and their assets are liquidated.

Consider costs!

Anecdotally, we’ve heard of debt recovery cases that took four years to resolve, and that while not the norm, it’s not uncommon for cases to drag on for a few years.

On top of that, legal fees can easily stretch into hundreds of thousands of Ringgit depending on case complexity.

We understand sometimes it’s about sending a message, but principles aside, always weigh potential recovery amount against the legal expenses before proceeding.

Option 2: Get a tax write-off

If one or more recovery condition is not met, debt recovery is unlikely and it may be wiser to forgo recovery and opt for a tax write off.

A tax write-off ensures that the creditor does not owe tax on the unpaid debt, as LHDN would otherwise still treat it as taxable income. 

Claiming this is a straightforward two-step process:

1. Issue a Letter of Demand (LOD): This serves as proof of the unpaid debt.
2. Obtain supporting statements: Lawyers or auditors may need to provide verification, particularly for larger sums.

While not the most ideal outcome, a tax write-off helps minimise financial losses.

Should you hire a debt collection lawyer?

As a business service provider, we at MISHU will always say ‘yes’ to outsourcing non-core business tasks to professionals!

That said, there’s no definitive answer–it depends on your circumstances and priorities.

So long as you don’t go to court, you can 100% handle debt recovery yourself.

However, a Letter of Demand from you is really just an extra stern payment reminder with no legal weight and is less likely to be taken seriously.

And if the debtor ignores it, sending another is like admitting you’re all bark and no bite.

Meanwhile, an LOD from a debt collection attorney has two major advantages:

1. It carries actual legal weight
2. It’s more likely to scare the debtor into taking action

If your only concern is cost, some debt collection lawyers have a no recovery, no fee policy.

They charge no upfront fees and instead take a percentage of the recovered amount, giving creditors a zero-risk option to recover their debt.

In fact, we know a pretty darn good one and would be happy to connect you to him 🙂

Let MISHU help with your 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!