To Bankrupt a Social Guarantor
If you decided to become a social guarantor for another person in order for them to obtain a loan from a creditor (usually a bank), can the creditor commence bankruptcy proceedings against you if the person fails to settle the loan with the creditor?
Who is a social guarantor
Under section 2 of the Insolvency Act (“the Act”), a social guarantor is defined as a person who becomes a guarantor for another person in order to successfully obtain a loan for:
- Scholarship or grant for educational or research purposes;
- Hire-purchase transaction of a vehicle for personal or non-business use; and
- Purchasing a house for personal dwelling purposes.
Can a creditor file a bankruptcy proceeding against a social guarantor?
To look into this matter, we will have to briefly dive into both the Act and its predecessor, the Bankruptcy Act.
Bankruptcy Act (Pre-amendment)
In the federal court case of Hong Leong Bank Bhd v Khairulnizam bin Jamaluddin, the court held that a creditor can only commence bankruptcy proceedings against a social guarantor if he can show the court that he has exhausted all avenues to recover debts owed to him by the debtor. This was in-line with section 5(3) of the pre-amendment act, which states that:
“A petitioning creditor shall not be entitled to commence any bankruptcy action against a social guarantor unless he proves to the satisfaction of the court that he has exhausted all avenues to recover debts owed to him by the debtor.”
In the case, Hong Leong Bank commenced bankruptcy proceedings against Khairulnizam (as a social guarantor) because the hirer of the car is unable to settle his loan from Hong Leong Bank for the purchase of a car. Hong Leong Bank tried all avenues to get their monies back before commencing a bankruptcy proceeding against Khairulnizam, which includes attempts to repossess the car but to no avail.
The court allowed Hong Leong Bank’s application. The court further held that in order for a creditor to commence bankruptcy proceedings against a social guarantor, a creditor must first file a creditor’s petition and the petition must be accompanied by an affidavit of the creditor or of some person on his behalf having knowledge of the facts. During the creditor’s petition hearing, the creditor has to satisfy the court the creditor has exhausted all avenues to recover debts owed to him by the debtor. It is only after that the court will determine whether to allow the creditor to commence bankruptcy proceedings against the social guarantor.
Insolvency Act (Post-Amendment)
After the amendment, section 5(3) the Act reads as follows:
“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.”
Section 5(4) of the Act further goes to say that:
“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.”
These amendments suggest that a creditor cannot commence any bankruptcy proceedings at all against a social guarantor- they are still entitled to commence bankruptcy proceedings against other forms of guarantors provided that they have obtained permission from the court to do so.
Where to go from here?
We have yet to come across a case that disputes the above proposition in court. Therefore, at the present time (and until and unless the wording of the Act is disputed in court), it could be said that a social guarantor is totally immune from bankruptcy proceedings.
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