THE LIABILITY OF GUARANTORS

Q1. Please explain the type of guarantor in Malaysia.

 A: There are two types of guarantors. A social guarantor and a non-social guarantor.

Q2. If I became a guarantor for my relative when he wants to purchase a car for his personal use, what kind of guarantor am I?

A: You would be a social guarantor.

Q3. What is a social guarantor?

A:  A ‘social guarantor’ is a person who, not for the purpose of making profit, provides guarantees on the following[1]:

(i)    a guarantee for loan, scholarship or grant for educational or research purposes;

(ii)   a guarantee for hire purpose transaction of a vehicle for personal or non – business use;

(iii)  a guarantee for a housing loan transaction solely for personal dwelling.’

If you are a guarantor for other than the aforesaid purpose, you are non-social guarantor.

Q4. If I am a social guarantor, can bankruptcy action be taken against me if the principal borrower defaulted in his/her payment?

A: Yes. However, the law provides that the Creditor must exhaust all action against the Principal Borrower prior initiating bankruptcy against the guarantor.[2]

 Q5. How can bankruptcy action be initiated against a social guarantor?

A:The Creditor must file an affidavit to prove to the Court that all action has been exhausted against the Principal Borrower. Thereafter, the Creditor may file a Bankruptcy action against the guarantor.

Q6. How about if I am a non-social guarantor, how can action be taken against me?

A: That would be depending on the terms of Guarantee. If the term is “on-demand guarantee”, there must be a demand before an action can be taken against you[3] .

 Q7. What kind of guarantee that will make a guarantor liable as soon as the principal borrower defaulted payment?

A:If the guarantor agreed to become the Principal Debtor, there will be no demand needed before the Creditor can immediately take action against the guarantor[4].

FOOTNOTES 

[1] Section 2 of Insolvency Act 1967.

[2] In the Federal Court, Hong Leong Bank Bhd v Khairulnizam bin Jamaludin [2016] 4 MLJ 302.

[3] In the High Court, Public Bank Bhd V Nik Chee Kok @ Nik Soo Kok [2003] 2 MLJ 455.

[4] In the High Court, Hong Leong Bank Bhd v HGM Machinery Sdn Bhd (formerly known as Handee Engineering & Consultancy Services Sdn Bhd) & Ors [2013] 9 MLJ 412.

THIS FAQ IS PREPARED AND PUBLISHED BY GENERAL LITIGATION, CORPORATE INSOLVENCY AND APPELLATE DEPARTMENT OF THE DISPUTES RESOLUTION OF MESSRS GAN & ZUL, ADVOCATES & SOLICITORS.