Signed As A Guarantor? Here’s What You Need To Know - Malaysia

Your friend Paolo wants to buy a car. He brings you along because he needs a second opinion. When he is about to sign the documents to purchase the car, he then asks you to sign some documents where essentially it says you are the guarantor for Paolo’s purchase. He tells you it’s just for “documentation” purposes so you go along and agree.

8 months later, you receive a Letter of Demand from a law firm informing you that Paolo has defaulted on his car loan and you are now liable for the outstanding sum.

What do you do?

GUARANTEE AGREEMENT

Many a times people think that a guarantor is someone who merely gives reference of a good character of the borrower and/or to enhance their credit standing.

No, you are wrong.

A guarantor is not the same as a referee in a resume.

A guarantee agreement (“GA”) is a legal contract whereby a guarantor undertakes to settle the debt of a borrower in the event the borrower is unable to pay the debts and/or defaults on the repayment of the debt. It is very common that financial institutions require loan applicants to have a guarantor as a safety net for the banks to protect themselves in the event of a default from the principal borrower.

This means, banks or corporations that lent the money in the transaction can initiate legal proceedings against you to recover the loan amount even when you didn’t take a cent from them!

Some GAs may require one of more guarantors. In such circumstances, there is a distinction between a Joint GA and a Joint and Several GA. The former is a type of GA whereby when one guarantor died, the obligations under the GA are passed to the surviving guarantor. The latter is a type of GA when even after the death of one guarantor, the deceases guarantor is still liable under the GA whereby the deceased’s estate will have to satisfy the debt.

A GUARANTOR’S LIABILITY

In the Federal Court in Heng Cheng Swee v. Bangkok Bank Ltd [1976] 1 MLJ 267, His Lordship Lee Hun Hoe CJ (Borneo) (as His Lordship then was) said that:

“A contract of guarantee, like all other contracts, depends primarily upon its expressed terms and the respective rights of the parties must be gathered from the guarantee form used in a particular case. To determine the rights of defendant which are embodied in the guarantee, it is only necessary to look at the guarantee itself.“

As such, your liability as a guarantor depends on the terms of the GA you signed. The extent of the liability of a guarantor will be as specified in the GA. A guarantor is released from his obligations under the GA upon full payment of the debt owing to the financial institution

Most GA are on demand guarantees where a letter of demand may be served by hand, by ordinary post or by registered mail by the financial institution to you. The financial institution has six years from the date of the first demand to bring legal action against the guarantor.

A legal proceeding will then be taken against you upon several demand made unless the whole debt is settled.

CAN A GUARANTOR BE MADE A BANKRUPT?

Yes, but it’s not that as simple.

The new Insolvency Act 1967 essentially bars bankruptcy proceedings against social guarantors i.e. guarantors in a loan, scholarship, personal hire purchase of vehicles etc. For other categories of guarantors, the creditor is required to exhaust all modes of execution such as seizure and sale, judgment debtor summons, garnishment and bankruptcy against the principal debtor/borrower before proceeding with bankruptcy proceedings against the guarantor.

In the case of Hong Leong Bank Berhad v Ong Moon Huat [2018] 1 LNS 1612, the Court of Appeal has clarified the following about the new Insolvency Act 1967 on bankruptcy actions against guarantors.

“A purposive construction of the section as a whole discloses that the section seeks to introduce protection for the guarantor against whom bankruptcy proceedings are to be brought. The protection comes in the form of ensuring that enforcement has been exhausted in respect of the principal debtor prior to proceeding against the guarantor. It is to remedy the mischief of judgment creditors proceeding against the guarantors directly in bankruptcy rather than executing and enforcing against the principal debtor.”

CAN I SAY I DID NOT KNOW I WAS SIGNING AS A GUARANTOR?

It is a general rule of law that a party will be bound by the contract or agreement they sign whether they have read or understood the document. In Wan Salimah Wan Jaffar V. Mahmood Omar; Anim Abdul Aziz (Intervener) [1998] 1 CLJ 480

“It is trite law that when a party signs a contract knowing it to be a contract which governs the relations between them, like the present case, then, to use the words of Denning J (as he then was) in Curtis v. Chemical Cleaning and Dyeing Co Ltd [1951] 1 All ER 631 “his signature is irrefragable evidence of his assent to the whole contract, including the exempting clauses, unless the signature is shown to be obtained by fraud or misrepresentation”. Way back in 1934, Scrutton LJ said in L’Estrange v. F. Graucob Ltd [1934] 2 KB 394 that: When a document containing contractual terms is signed, then, in the absence of fraud, or, I will add, misrepresentation, the party signing it is bound, and it is wholly immaterial whether he has read the document or not. … The plea cannot be available to anyone who was content to sign without taking the trouble to try to find out at least the general effect of the document. Many people do frequently sign documents put before them for signature by their solicitor or other trusted advisers without making any inquiry as to their purpose or effect. But the essence of the plea non est factum is that the person signing believed that the document he signed had one character or one effect whereas in fact its character or effect was quite different.“

In the absence of misrepresentation or fraud, the Court of Law is not too quick to assist individuals who plead ignorance as a defence and the same applies when you claim that you did not read the document thoroughly to know that it was a GA. The onus is on you to make sure due diligence is observed.

CONCLUSION

Guarantee Agreements have serious implications and can cripple one financially, it is of utmost importance that you are constantly aware of the contents of any documents you sign and when in doubt, always seek legal advice.