1. Does mere omission to sue the principal debtor discharge the surety?
No. The true principle is that mere omission to sue does not discharge the surety, because the surety can himself set the law in operation against the debtor. (Para 2 )
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2011 MarsdenLR 1693
HIGH COURT, KOTA KINABALU
ALLIANCE BANK MALAYSIA BERHAD – Appellant
Versus
SEBLI HJ HASSAN – Respondent
[Kk22-197-1999]
A guarantor's liability is independent of the principal debtor's liability and only crystallizes upon demand, regardless of the principal debtor's limitation status.
Headnote:(A) Limitation Ordinance of Sabah - Effect of time bar on guarantee liability - Contracts Act 1950 - Section 87 - The defendant’s liability as a guarantor remains enforceable as it is independent of the principal debtor's liability, crystallizing upon demand made by the plaintiff - Issuance of demand is critical, irrespective of the principal's limitation status. (Paras 9-14)
(B) Legal principles on surety discharge - The mere omission to sue does not discharge the surety’s obligation. (Paras 10)
Facts of the case:
The plaintiff sought RM830,000 and interest as a guarantor for a banking facility to a principal debtor, which defaulted in 1986. The suit was filed in July 1999 after issuing a letter of demand in December 1998.
Findings of Court:
Judgment is granted for RM3,576,067.47, with interest and costs ordered.
Issues: 1. Is the default judgment against the Principal Debtor statute-barred? 2. Is the guarantee still enforceable?
Ratio Decidendi: The court determined that the defendant remains liable as the guarantee can only be extinguished by a direct contract between the creditor and principal debtor. As such, the defendant's liability is unaffected by the default judgment being time-barred.
Result: Judgment awarded to the plaintiff.
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2. Is the guarantor's liability independent of the principal debtor's liability?
Yes. The guarantor's obligation to pay crystallizes upon demand by the creditor, independent of the principal debtor's liability. (Para 2 )
3. Does section 87 of the Limitation Ordinance discharge the surety where no contract releases the principal debtor?
No. Section 87 requires a contract between creditor and principal debtor releasing the principal debtor, or an act or omission of the creditor resulting in discharge — neither exists here. (Para 2 )
JUDGMENT
Proceeding:
The plaintiffs claim against the defendant is for the sum of RM830,000.00 together with interest totaling a sum of RM3,576,067.47 as at 31.10.2011 as a guarantor to a banking facility granted to SKBS Ratakan Sdn Bhd (the principal debtor). Liability is denied by the defendant on the ground that the claim is time barred by the Limitation Ordinance of Sabah.
Background facts:
The plaintiff had extended a banking facility to the principal debtor and one of its securities is the guarantee provided by the defendant. On the 12th December 1986, the Appellants entered default judgment against the principal debtor. On 15th December 1998 the plaintiff through its solicitors served a letter of demand to the defendant after the earlier letter of demand dated 11th September 1986 was disputed by the defendant as being invalid. This suit was filed on the 27th July 1999.
Issues:
From the submissions, I have no doubt that there are two issues for determination and it is this:
1. Whether the default judgment dated 12 December 1986 against the Principal Debtor is barred by limitation against the Principal debtor.
2. If yes, whether the guarantee is still enforceable against the Defendant as a guarantor.
Issue 2:
I shall deal with issue 2 first. Mr Colin Clark, counsel for the defendant submits that as the default judgment against the principal debtor is over 12 years and hence barred by item 98 of Limitation Ordinance from enforcing the same, the defendant's liability as guarantor is also extinguished relying on sec 87 of the Contracts Act 1950 which states:
"87. Discharge of surety by release or discharge of principal debtor.
The surety is discharged by any contract between the creditor and the principal debtor, by which the principal debtor is released, or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor."
For the purpose of dealing with this issue, I shall assume that the default judgment is statute barred as contended by Mr Clark. However and with respect, that submission is misconceived and my reasons are these. The defendant is being sued as a guarantor for the banking facility granted to the principal debtor and his liability must be premised on the guarantee agreement between him and the plaintiff. From that agreement, the plaintiff's cause of action can only arise when a demand for payment is made. This is what is stated in the guarantee agreement:
"In consideration of your making or continuing advances or otherwise giving credit or affording banking facilities (including inter alia the sums of the guarantees by you and your acceptance of guarantees by the principal as hereinafter defined in favour of third parties) for as long as you think fir to SKBS-Ratakan Sdn Bhd (hereinafter called "the principal"), we, the undersigned herby agree to pay to you on demand all sums of money"... (emphasis added)
It is crystal clear that the defendant's liability can only be crystallized by the issuance of demand by the plaintiff. That demand was made on 16.12.1998, which is just prior to the filing of this suit by the plaintiff. In another word, the defendant's obligation to pay the guaranteed amount is independent of the liability of the principal debtor; hence whether the liability of the principal debtor is barred by the Limitation Ordinance is of no consequence. An authority of antiquity can be found in the case of Carter v. White [1884] 25 Ch. D. 666 where the same issue was discussed and Lindley LJ had this to say:
"It was next said that the defendant had discharged his surety by holding the bills till the Statute of Limitations had run. Is it trite law that a creditor who neglects to sue his debtor till the statute has run will thereby discharge his surety? There is no decision to that effect. On the contrary, the true principle is that mere omission to sue does not discharge the surety, because the surety can himself set the law in operation against the debtor."
Further sec
