Leave To Initiate Bankruptcy Proceedings Against Guarantors
The Insolvency Act 1967 (Act 360) as amended provides a better protection for guarantors namely social and non-social guarantors. Reason being, a petitioning creditor is not entitled to initiate any bankruptcy action against a social guarantor and as against a non-social guarantor unless leave has been obtained from court.
Previously, under the old Bankruptcy Act 1967, a creditor may still be able to commence a bankruptcy action against a social guarantor provided that he manages to prove that he has exhausted all avenues to recover the debts owed to him by the principal debtor. As an example, a creditor may be allowed to file a bankruptcy notice against a guarantor of a vehicle purchased for personal use once he has satisfied the court that the hirer has been adjudged a bankrupt. However, under the current Act, a creditor is not permitted at all to commence a bankruptcy action against a social guarantor.
With regard to non-social guarantors, a stricter criterion has been imposed by the current Act. Formerly, a creditor was able to initiate a bankruptcy action against a guarantor simultaneously with winding up proceedings against the principal debtor of the loan facility. However, with the new changes in bankruptcy law, a creditor can only commence bankruptcy action against a non-social guarantor upon leave being granted by court.
Pursuant to section 5(4) of the said Act, leave may only be granted once the court is satisfied that the creditor has exhausted all modes of execution and enforcement to recover debts owed to him by the principal debtor. Section 5(6) of the said Act further states that the modes of execution and enforcement include seizure and sale, judgment debtor summon, garnishment and bankruptcy or winding up proceedings against the borrower.
During the early days of the coming into force of the new amendements, most creditors were facing difficulties in initiating bankruptcy proceedings against the non-social guarantors as the courts were reluctant to grant leave due to the vagueness and uncertainty of the wordings in section 5(4) and section 5(6) of the said Act. At that point of time, the Court was of the opinion that the word ‘debtor’ in section 5(4) included the guarantor as well since there was no definition given to the said word in the Act.
As such, the Court took the view that prior to the commencement of bankruptcy action against a non-social guarantor, a creditor must state in his application for leave that he has proceeded with seizure and sale, judgment debtor summon, garnishment and bankruptcy or winding up proceedings against the guarantor and that despite these modes of execution, the creditor was still unable to recover the debt from the guarantor. Failure of the creditors to satisfy such ‘requirement’ would result in the courts dismissing the said application for leave together with the bankruptcy notice filed against the non-social guarantor.
However, the law is now settled with the recent case of Hong Leong Bank Berhad v Ong Moon Huat heard together with Malayan Banking Berhad v Lim Sow Hoon [2018] 1 LNS 1612 whereby the Court of Appeal ruled that the protection in section 5(4) of the Insolvency Act comes in the form of ensuring that enforcement has been exhausted in respect of the principal debtor only prior to proceeding against the non-social guarantor. Thus, the word “debtor” in section 5(4) merely refers to the principal debtor alone.
In conclusion, it suffices that the creditor has stated in its application for leave that they have exhausted all modes of execution against the principal debtor and the court will grant leave to the creditor to commence bankruptcy action against the non-social guarantor. As such, the creditor may proceed to file a bankruptcy notice, serve the same and subsequently proceed to obtain leave from the Court without worrying that the said leave will not be granted.
SHIREEN MUNIRA