Malaysia collection profile

The financial information on Malaysian companies is overall satisfactory since registered companies are required to file their annual audited financials with the Public Authorities (Companies Commission of Malaysia, SSM) six months from the financial year end, otherwise a penalty will be incurred for late submission. However, enforcement of that requirement has a margin for improvement.

Allianz Trade works closely with local information providers and allocates each company a grade reflecting its financial health and how it conducts business. Grades represent a core of Allianz Trade’ knowledge and analyses, and help clients identify and avoid risk. Data is continuously monitored to offer the most up-to-date information to support management decisions.

Liability for business debts is determined by legal structures, which are described as follows:

• Sole Proprietorship is available for small businesses managed by an individual and for which no commercial structure is necessary. In this case, the owner is held liable for all business debts. Two or more individuals may also decide to share ownership and responsibilities through Partnerships (under the Partnership Act of 1961), in which case the partners may be jointly and individually liable for the actions of the other partners. Limited Liability Partnerships (governed by the Limited Liability Partnerships Act of 2012) may alternatively offer limited liability to the partners.
• Private Limited Liability Companies (Sendirian Berhad) are the most favoured legal entities because they require no minimum capital funds while the shareholders' liability is limited to their contribution. Joint-Stock Corporations (Berhad) are used for larger structures willing to divide their capital into tradable shares. In these entities, the shareholders' liability is limited to the value of their shares.
• Foreign companies may alternatively settle in Malaysia through Representative Offices, provided that the entity does not generate any income. Branch Offices may otherwise be set up to generate revenues but with the condition that they must have been awarded a government contract. As a general rule, the Ministry of International Trade and Industry strongly encourages foreigners to incorporate local subsidiaries. Joint Ventures would also be incorporated as Limited Liability Companies.
  

The judicial system in Malaysia is built upon numerous courts, the main of which may be described as follows. At the lower level, justice is rendered by Magistrate's Courts and Sessions Courts (among other tribunals). At the higher level, two High Courts have jurisdiction to deal with large commercial and insolvency disputes in addition to serving as Appellate Courts for the various claims brought before the subordinate courts mentioned previously. The Court of Appeal considers claims brought against decisions rendered by the High Courts. The Federal Court finally acts as the supreme jurisdiction.

The Malaysian legal framework has long been modelled upon British legal rules, but it has been significantly modernized in the past years. On one hand, reforms conducted since 2009 have made the judicial system more efficient insofar as specialized courts (including Commercial Courts) have been set up. On the other hand, civil procedure rules have been harmonized so as to be used more efficiently by lower and higher courts alike. Despite such efforts, the courts' independence and transparency still have margin for improvement, while lawsuits – which can be slow – ought to be avoided whenever possible.

Similarly, collection costs must be agreed upon in writing when negotiating the contract, though they would essentially be paid upon court request. Therefore, as for late payment interest, they would essentially be used as negotiation tools during pre-legal collection.

Contractual agreements aimed at preserving the creditor's ownership over goods until the related invoice has been paid in full do not exist in Malaysia.

The most common payment methods are as follows:

Bank transfers are among the most popular payment means for international transactions as they are fast, secured and supported by an increasingly developed banking network internationally and domestically. Export transactions are usually guaranteed through Export Credit Insurance, which helps minimize the risk of sudden or unexpected customer insolvency. Allianz Trade’ worldwide network of risk offices monitors the financial well-being of customers and grants them a specific credit limit up to which clients may trade and claim should something go wrong. Alternatively, Standby Letters of Credit (a bank guarantees the debtor's credit quality and repayment abilities) are often used in relation to export shipment transactions because they constitute reliable guarantees which can be triggered as a 'payment of last resort' if the client fails to fulfil a contractual commitment. Also, irrevocable and confirmed Documentary Letters of Credit (the debtor guarantees that a certain amount of money is made available to a beneficiary through a bank once certain terms specifically agreed by the parties have been met) are increasingly relied upon.

Down payments may be negotiated with local partners, while up to 25% of business transactions also tend to be paid in advance. These advance payment terms can range from 20% to 30%.

Amicable settlement opportunities should always be considered as an alternative to lengthy legal proceedings.

Prior to commencing formal legal action, obtaining a payment instalment agreement or, at least, a formal debt recognition title is always worthwhile. In addition, it is vital to verify whether the company is still active and whether the debtor is solvent: if insolvency proceedings have been initiated, it indeed becomes impossible to enforce a debt (see below).

The law provides for relatively fast-track proceedings if the case is straightforward. Failing that, full lawsuits would be necessary.

Ordinary legal action would usually commence when amicable collection has failed. The creditor would file a claim with the High Court – or Lower Courts, if the claim is below MYR 5000 (approx. EUR 1,000) – and Summons would be served to the debtor who would be required to file a formal appearance in court within a specified timeframe. Failing to do so would allow the claimant to obtain a judgment in default. The courts would normally award remedies in the form of damages, specific performance or injunctions. Punitive damages may be awarded in Malaysia.

Agreement entered into between both parties, statement of account reflecting the outstanding amount, invoices and all other relevant documents in support of the claim.

Business claims must generally be brought to court within six years. Beyond this time limitation, legal action would normally be barred.

Provisional measures may help preserve the creditor's interests pending a final judgment. Upon request, the courts would typically order interim measures aiming at avoiding irreparable damage (attachment, injunction to do something or to prevent from doing something, protection of rights, etc.), or at preserving evidence.

Since the Subordinate Courts (Amendment) Act of 2010 entered into force, both the lower and higher courts are now entitled to order interim measures. It is however necessary to demonstrate that the measure would prevent imminent damage or maintain the status quo and the court would often order the claimant to provide security on costs in order to protect the respondent from irresponsible action.

Decisions rendered by High Courts in the first instance may be appealed before the Court of Appeal within one month from the date of the decision. Decisions rendered by Lower Courts may be appealed before the High Court within 14 days from the date of decision.

Decisions rendered in second instance may be appealed before the Federal Court (within 30 days), but a leave for appeal must be obtained. Leave will only be granted if there are special circumstances: (i) if it is a matter of public interest, and/or (ii) if there is new evidence which was not available at the previous stage.

A judgment is enforceable as soon as it becomes final (i.e. when pronounced, barring a stay of enforcement). In most cases, the debtor would fail to satisfy the judgment, thus forcing the creditor to request a mandatory enforcement order from the court in the form of an attachment order, a liquidation petition or a garnishee order (allowing payment of the debt to be obtained from a third party owing to the debtor). Overall, enforcement would be efficient as long as the debtor's assets can be identified.

As previously mentioned, various reforms have been introduced and strict compliance requirements have been imposed. These have had a significant impact on delays, with nine out of ten claims brought to the High Courts dealt with within nine months. When a claim is disputed, however, proceedings may last for three years on average (inclusive of hearings at first instance and appeal).

Alternative Dispute Resolution methods such as conciliation, mediation or arbitration are becoming increasingly popular in Malaysia because they may provide an alternative to complex trials.

In addition, the law does allow the granting of jurisdiction to the laws of a Commonwealth Country and to the courts of certain other countries in a contract, but possibilities of relying on a foreign court to avoid time consuming proceedings before domestic courts would otherwise be limited.

Enforcing a decision issued by a foreign court against a debtor owning assets in Malaysia is possible but time consuming. In fact, it is often said that obtaining a decision before domestic courts would be faster and more efficient than seeking a decision abroad.

Under the Rules of Court 2012, any decision rendered by a foreign country must be recognized as a domestic judgment in order to become enforceable (through an exequatur procedure). First, Malaysian courts would only recognize decisions issued in countries with which a reciprocal Recognition and Enforcement Agreement has been signed. These countries (Brunei, Hong Kong, India, New Zealand, Singapore, Sri Lanka and United Kingdom) would be listed under the Reciprocal Enforcement of Judgment Act of 1958. Second, in addition to verifying the reciprocity requirement, Malaysian courts would also consider whether the decision is indeed final and enforceable in the issuing country. Third, Malaysian courts would tend to retain exclusive jurisdiction over various legal areas (tax matters, insolvency, etc.) which, if considered in the foreign decision, would make the latter non-receivable. They would therefore also verify that the foreign court indeed had sufficient jurisdiction to deal with the dispute at stake. Finally, the courts would verify that the enforcement claim was brought within specified time limitations (normally six years from delivery).

Malaysia is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958, therefore, domestic courts also ought to recognize and enforce decisions rendered through international arbitration proceedings. This rule may also be found under the Arbitration Act of 2005, which makes it clear that international arbitral awards are final and binding, and must thus be enforced as domestic judgments.

On 1 September 2021, the Insolvency (Amendment) Act 2020 came into force. It amended the Insolvency Act 1967 which provides, conditions on which a creditor may present a bankruptcy petition against a debtor. The key difference of the amending Act is an increase of the minimum debt threshold for the presentation of a bankruptcy petition from MYR 50,000 (approx. EUR 10,000) to MYR 100,000 (approx. EUR 20,000).

The restructuring and insolvency procedures in Malaysia are:
• schemes of arrangement;
• receivership;
• corporate voluntary arrangement;
• Judicial management; and
• winding up.

The CVA rules are very similar to those in operation in the UK.  Upon filing documents with the court, a moratorium will come into force for 28 days. The debtor will have to conduct a meeting of creditors and at the meeting the majority (75%) must come to a consensus to approve the CVA. It is worth noting that in Malaysia a debtor cannot enter a CVA if they have charged some or all of their assets.

Judicial Management will allow the director of the company or a creditor to apply for a court order to place the management of a company in the hands of a qualified insolvency practitioner which will be known as the Judicial Manager. A moratorium is put in place to allow the Judicial Manager to assist in the rehabilitation of the distressed company without any interference from the creditors of the company.

The Judicial Manager will then manage the company for 6 months which can be extended for another 6 months upon application. During this period, the Judicial manager will have to prepare a restructuring plan for the creditors’ approval. Once approved, the Judicial Manager will submit the plan to the Court to sanction and the plan will be implemented and binding on all creditors.

Liquidation aims at obtaining cash from the debtor's assets and may occur upon request of the debtor (voluntary liquidation) or of the creditors (involuntary liquidation). A liquidator is normally appointed by the High Court to sell the company's assets and distribute the proceeds to the various creditors.

Complex priority rules normally apply while distributing the proceeds to the creditors. Liquidation costs, secured debts and preferential debts would be repaid first, followed by debts to employees and the federal tax office. Debts secured by a floating charge would finally be given priority over unsecured debts. As a result, there is little chance of recovery left for unsecured creditors in practice. Furthermore, in practice the debtor would tend to pay the debt (whenever this is possible) as soon as they become aware of the insolvency proceedings.

Insolvency proceedings last six months to one year on average, but this timescale may extend when the cases are rather complex. Liquidation proceedings may exceed 10 years in the most complex cases.

Judgment against the debtor, statement of account, invoices and all relevant documents in support of the claim.