Can a Guarantor Be Made a Bankrupt in Malaysia?

Introduction

Can a Guarantor Be Made Bankrupt?

According to Section 5(3) of the Insolvency Act 1967, a creditor is not permitted to begin bankruptcy proceedings against a guarantor who is classified as a social guarantor. The law specifies:

“A petitioning creditor shall not be entitled to commence any bankruptcy action:

• against a social guarantor; and

• against a guarantor other than a social guarantor unless the petitioning creditor has obtained leave from the court.”

  
  

This means that creditors are entirely barred from making social guarantors bankrupt. However, they may still initiate bankruptcy proceedings against other types of guarantors, but only after obtaining the court's permission (leave). Without this permission, the bankruptcy petition will be dismissed as per Section 5(7) of the Act.

Additionally, Section 5(4) mandates that before granting this permission, the court must be satisfied that the creditor has tried all available methods to recover the debt. Specifically, it states:

“Before granting the leave referred to in paragraph (3)(b), the court shall satisfy itself that the petitioning creditor has exhausted all modes of execution and enforcement to recover debts owed to him by the debtor.”

This implies that the creditor must first exhaust all other avenues to recover the debt from the main borrower, such as seizing and selling assets, issuing a court summons, or pursuing bankruptcy or winding-up proceedings against the main borrower. The case of Malaya Sibuku; Ex P: Kaya Karisma Sdn Bhd reinforces the necessity of these steps to prevent guarantors from being unfairly targeted.

What Is the Difference Between a Social and Non-Social Guarantor?

It’s essential to understand whether you fall under the category of a "social guarantor." According to Section 2 of the Insolvency Act 1967, a social guarantor is someone who guarantees a loan not for profit, such as for education, purchasing a personal vehicle, or acquiring a home for personal use. On the other hand, non-social guarantors usually guarantee loans for business or commercial purposes.

For example, in Azmer bin Idris v Malaysia Debt Ventures Bhd [2017] MLJU 454, a person claimed to be a social guarantor for a research loan. However, the court found that the loan was actually used to buy equipment for a business, and since the guarantor was also a director of that business, they were not considered a social guarantor. Similarly, in Re Ferdilin bt Abdul Rahman; Ex Parte Affin Bank Bhd [2018] 8 MLJ 35, the court determined that the loan was for personal use (buying a Toyota Hilux), making the person a social guarantor.

When Should the Creditor Apply for Court Permission?

A creditor can seek court permission to pursue a guarantor at different stages of the bankruptcy process. They can apply early on or just before filing the creditor’s petition in court. The case of Hong Leong Bank Bhd v Ong Moon Huat and another appeal [2018] MLJU 1576  affirmed that creditors have the flexibility to seek permission at various points. This follows the case of Khairulnizam which held that:

“it is open to a judgment creditor to file an application for leave to proceed against a guarantor either upon the issuance of the bankruptcy notice, or even prior to that, up to and immediately prior to the filing of a creditor’s petition”

The key requirement for the creditor is to demonstrate that they’ve exhausted all other methods of debt recovery from the main borrower, as stipulated by Section 5(4) of the Insolvency Act 1967.

Conclusion

The Insolvency Act 1967 provides clear guidelines that protect both guarantors and creditors. These rules ensure that the process remains fair, preventing either party from exploiting the other during financial difficulties. Specifically, social guarantors are fully protected from bankruptcy actions, while non-social guarantors can only be pursued if the creditor has first obtained the court’s permission and has exhausted all other avenues of debt recovery.