TUTORIAL 1 QUESTION 3

Agnes is a sole proprietor of a small bakery. For purposes of furthering her studies in a business
management course she takes a loan of RM150,000 from Hotplay Bank Bhd. Agnes requested Mr.
Daniel to stand as her guarantor.

Agnes also enters into a hire-purchase agreement for RM120,000 with Hotplay Bank Bhd. for the
purchase of a van for her business use. For this transaction, Agnes requested Mdm Joyce to be her
guarantor.

Agnes defaults on her credit repayments under both the loans to Hotplay Bank Bhd. and judgment
is obtained against Agnes. As Agnes fails to pay the judgment sum Hotplay Bank Bhd proceed to
issue bankruptcy proceedings against Agnes as well as her guarantors Mr Daniel and Mdm Joyce.

Advise Mr Daniel and Mdm Joyce on whether Hotplay Bank Bhd. can pursue bankruptcy
proceedings against them as guarantors.

Issue: Whether Hotplay Bank Bhd can pursue bankruptcy proceedings against Mr. Daniel and
Mdm Joyce as guarantors?

Law: Before determining whether Hotplay Bank Bhd can pursue the bankruptcy proceedings
against both of them, it is necessary to first determine whether or not they fall within the definition
of social guarantors, because under the Insolvency Act 1967, social guarantors now enjoy complete
protection.

The definition of social guarantor is provided for in S.2 (a) of Insolvency Act 1967 (IA
1967), where it is stated that a social guarantor is one who provides a guarantee not for the purpose
of making a profit such as guarantee for a loan. Further, as mentioned in S.5 (3) (a) of IA 1967, a
creditor cannot commence any bankruptcy proceedings against a social guarantor. In other words,
an absolute protection is given to a social guarantor. On the other hand, as for non-social guarantors,
the definition of a non-social guarantor, as mentioned in Re Azmer Idris Exparte Malaysia Debt
Ventures Bhd. [2017] 1 LNS 448, is one who guarantees a loan for profit is not a social guarantor.

S.5 (3) (b) of IA 1967 only provides limited protection towards a non-social guarantor
whereas S.5 (4) of IA 1967 provides that the creditor must satisfy the court that he has exhausted
all modes of execution and enforcement to recover the judgment debt from the debtor, only the
bankruptcy proceedings can be brought against a non-social guarantor. Additionally, in S. 5(6) of
IA 1967 for the purposes of subsection (4), modes of execution and enforcement include seizure
and sale, judgment debtor summon, garnishment and bankruptcy or winding up proceedings
against the borrower.

Although we have previous cases like Azham Othman; Ex Parte Affin Bank Bhd [2012]
and Hong Leong Bank Bhd v Khairulnizam Bin Jamaluddin [2016] 4 MLJ 302 where the courts
held that a creditor could proceed in bankruptcy proceeding against a social guarantor after having
obtained leave from the court, it is to be noted now under our current IA 1967, there is an absolute
prohibition against commencing any bankruptcy proceedings against a social guarantor. However,
Hotplay Bank Bhd has the right to sue Mr. Daniel and obtain a final judgment for the debt from
the court or Hotplay Bank Bhd can also pursue other types of execution proceedings against Mr.
Daniel such as garnishee proceedings or writ of seizure and sale.

As for non-social guarantor, reference can be made to the case of Hong Leong Bank Bhd
v Khairulnizam bin Jamaludin [2016], where the Federal Court held that on a proper reading of
ss 5 and 6 of the Insolvency Act 1967, a creditor has to satisfy the court at the hearing of the
creditor’s petition that the creditor had exhausted all avenues to recover debts owed to him by the
debtor. This could be done by way of an affidavit pursuant to S. 6(1) of the IA.

Application: Mr. Daniel stands as a guarantor for Agnes’s loan of RM 150,000 in order to enable
her to pursue her studies in business management. Therefore, applying the definition of social
guarantor under S.2(a) of the IA 1967, Therefore, Mr. Daniel is a social guarantor.
 On the other hand, Mdm Joyce is the guarantor for a hire-purchase loan that Agnes has
taken to finance a van for her business use. S.2 (b) of IA 1967, a social guarantor can give guarantee
for hire purchase transaction for a vehicle only for personal and non-business use or purpose. Thus,
since the van is for a business purpose, it would not fall within the ambit of S.2, hence, Mdm.
Joyce is not a social guarantor (non-social guarantor).

Although we have previous cases like Azham Othman; Ex Parte Affin Bank Bhd [2012]
and Hong Leong Bank Bhd v Khairulnizam Bin Jamaluddin [2016] where the courts held that a
creditor could proceed in bankruptcy proceeding against a social guarantor after having obtained
leave from the court, it is to be noted now under our current S.5 (3) (a) of IA 1967, there is an
absolute prohibition against commencing any bankruptcy proceedings against a social guarantor
like Mr. Daniel. Therefore, Hotplay Bank Bhd cannot pursue bankruptcy proceedings against Mr.
Daniel as a social guarantor.

Whereas for Mdm. Joyce who is a non-social guarantor, S. 5(3) (b) of IA 1967 only
provides a limited protection to her. If Hotplay Bank Bhd wants to commence a bankruptcy
proceeding against her: first, the bank must have first obtained leave from the
court; and second, before the court can grant the leave, the bank shall satisfy the court that he has
exhausted all modes of execution and enforcement to recover debts owed to him by Agnes (debtor)
as required under S. 5(4) of IA 1967 and Hong Leong Bank Bhd v Khairulnizam bin Jamaludin
[2016].

We can presume from the facts that most probably Hotplay Bank Bhd could not satisfy the
court that the bank had exhausted all revenues of recovering the debt from Agnes by the modes
included in S. 5(6) of IA 1967 before the leave could be granted. Therefore, similarly no
bankruptcy proceeding can be brought against Mdm. Joyce.

Conclusion: Hotplay Bank Bhd cannot pursue bankruptcy proceedings against both Mr. Daniel
and Mdm. Joyce.