Recently, the Dewan Rakyat, the lower but politically dominant house of the Malaysian Parliament, has been reported to have passed the Bankruptcy (Amendment) Bill 2016 (‘Amendment Bill‘) on 29 March 2017 (The reports can be found at Bernama, New Straits Times, the Star and the Malay Mail).  The Amendment Bill can be viewed here. It appears that the Amendment Bill has been passed without any amendments (the Hansard of the 2nd and 3rd reading can be viewed here). This Amendment Bill though is not technically law yet at the time of writing of this article and will only come into effect on the date appointed by the relevant Minister after it receives passage through the upper house, Dewan Negara, and the Royal Assent.

For a quick overview of the changes made by the Amendment Bill, Lee Shih has written a succinct write-up on the changes made by the Amendment Bill (see The New Bankruptcy Bill: The 10 Changes to Bankruptcy Law in Malaysia).

The aim of this article will be slightly different, in that we take a closer look at the new protection mechanism of guarantors.

Under the present law (specifically, subsection 5(3) of the Bankruptcy Act 1967), a creditor could not commence bankruptcy proceedings against a ‘social guarantor’. It is useful to have a look at the exact wording of that subsection 5(3):

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.
[Our emphasis as underlined and bolded].

As can be seen from the extract of subsection 5(3) above, the existing protection of social guarantors turns on two equally important conditions i.e. whether the debtor can be considered a ‘social guarantor’ and whether the creditor has ‘exhausted all avenues’.

The term ‘social guarantor’ is a narrow one and has already been defined by the Bankruptcy Act 1967 itself. The definition is found in section 2 of the Act:

“social guarantor” means a person who provides, not for the purpose of making profit, the following guarantees:
(a) a guarantee for a loan, scholarship or grant for educational or research purposes;
(b) a guarantee for a hire-purchase transaction of a vehicle for personal or non-business use; and
(c) a guarantee for a housing loan transaction solely for personal dwelling;

The existing protection afforded to social guarantors are not absolute but it is meant to ensure that any bankruptcy action taken against social guarantors will only be taken as a last resort. It is in this respect that the Amendment Bill has made what can be considered a far-reaching one and could significantly undermine the appeal of guarantees as a form of collateral. Perhaps, the change could even be wider than what the proponents of the Amendment Bill might have intended.

The change introduced by the Amendment Bill is basically to introduce an absolute protection against bankruptcy for social guarantors, on one hand, and to subject any bankruptcy action against all other guarantors to a highly stringent condition precedent.

In view of the absolute protection afforded to social guarantors and with the Amendment Bill leaving the current definition of social guarantors untouched, we may see more disputes revolving around the definition of ‘social guarantor’ and perhaps even witness a creative interpretation of the same by lawyers in an adversarial environment which characterize the Malaysian litigation landscape. For example, if I were to guarantee a hire-purchase of a car for my brother’s use as an Uber driver, will I fall outside the definition of ‘social guarantor’? The Act is silent as to whether personal or non-business use must be the sole use of the vehicle. Further, does ‘personal dwelling’ covers a housing loan transaction where the house is rented out to tenants but not for the borrower or the guarantor’s use, or what if part of the house is occupied by the borrower, will the guarantor be considered outside the definition of ‘social guarantor’?

The definition may seem at first glance as simple and straightforward but is not completely free of ambiguity once the right circumstances arise. It thus came as no surprise that in 2011, the High Court in Re Abdul Hamid bin Bakri, ex parte Affin Bank Berhad (Bankruptcy No. 29-908-2007 in Muar, Johor) was confronted with the question of whether the phrase “for educational or research purposes” in paragraph (a) above applies to the phrase “loan” in that same sentence. The High Court did rule that plausible reading of the definition must be that the loan here must refer to educational or research purposes, but we can expect more disputes in future in view of the centrality of the definition ‘social guarantee’ now occupies in the soon-to-be-renamed Insolvency Act 1967.

As for the Amendment Bill did provide some certainty as far as procedure is concerned where the current subsection 5(3) lacks, i.e. whether leave of Court is required before commencing bankruptcy action against protected guarantors. What the Amendment Bill has effectively introduced is that the form of protection envisaged for social guarantors are now shifted to all guarantors except social guarantors who are now given an absolute protection from bankruptcy actions.

It can be seen in the extracted subsection 5(3) above, no express procedure was laid out as to whether a creditor ought to obtain leave first before commencing bankruptcy action against protected guarantors. The absence of such procedure proves to be significant after Hong Leong Bank Bhd commenced bankruptcy proceedings against one Khairulnizam bin Jamaludin. This later culminated in a recent decision by the Federal Court on 19 May 2016 in Hong Leong Bank Bhd v Khairulnizam bin Jamaludin [2016] 4 MLJ 302 where the Federal Court held that leave of court is not needed before commencing a bankruptcy action against a protected guarantor.

The Amendment Bill has made it clear that in order to commence bankruptcy action against all other guarantors (except social guarantors), prior leave of court is required (see clause 12(b) of the Amendment Bill).

Further, instead of the vague wording “exhausted all avenues” in the current subsection 5(3), the Amendment Bill has introduced a more precise wording i.e. “exhausted all modes of execution and enforcement”. This is coupled by a further clarification under the new subsection 5(6) whereby it is stated that:

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.

Previously, the Court found no help in judicial precedents whether in Malaysia or abroad, in defining the phrase “exhausted all avenues” (see the judgment of Hamid Sultan Abu Backer J (as he then was) in Re Azman Othman; ex parte Affin Bank Bhd [2012] 2 CLJ 96) but the High Court did find some assistance in an article written by one Rohatul Akmar binti Abdullah, who was the then Head of Legal Division in the Department of Official Assignee titled ‘Recent Development on Insolvency Laws and Business Rehabilitation – National and Cross Border Issues’. It appears that the aim was to ensure that:

... the petitioning creditors are required to take and make use of all the other avenues permitted under the law to recover their debt from the principal borrowers such as writ of seizure and sale or judgment debtor’s summons.
[Our emphasis as bolded and underlined].

Now that this form of protection has moved to protect all guarantors except social guarantors, it is worth noting what has not been clarified by the provision, and for that purpose it is helpful to reproduce the wording used in the new subsection 5(4):

Before granting 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.
[Our emphasis as bolded and underlined].

It is noted that the phrase is not limited to all modes of execution and enforcement against the debtor. As such, the question remains whether this means creditors are expected to exhaust all other modes of execution and enforcement against the guarantor first before resorting to bankruptcy (thus making bankruptcy a truly last resort of all modes of debt recovery). This is arguably wider and far more onerous than what was contemplated in Ms. Rohatul Akmar’s article unless the Court takes the position that obligation to pay by a guarantor is not covered by the phrase “debts owed to him by the debtor”. In that case, the creditor only needs to exhaust all modes of execution and enforcement against the debtor himself.

Note: This article is intended for educational purpose and to encourage discussion on the issues set out above, and not intended to be relied upon as a legal opinion. Readers are advised to consult their solicitors for any advice or opinion.