The partial protection for guarantors under the Insolvency Act applies to trade debts, requiring court leave for bankruptcy actions against non-social guarantors.

Ravinthran N Paramaguru JCA:

Introduction

[1] The short point that arises in this appeal is this. It is whether the partial protection granted to guarantors in a bankruptcy action can only be availed in a loan case or whether it also applies generally to all guarantors including those who guaranteed a trade debt. In the case at hand, the guarantee in question was given for a trade debt as opposed to a loan. The learned Senior Assistant Registrar held that leave of court must be obtained before bankruptcy action can be instituted against the guarantor. She set aside the bankruptcy notice and creditor petition. The High court thought otherwise and reversed the Senior Assistant Registrar's decision. Hence this appeal, which is by the guarantor, who is also the judgment debtor. For ease of reference, we shall refer to the parties as the judgment creditor and the judgment debtor. Unless otherwise indicated in this judgment, all statutory references are to the Insolvency Act 1967 (Revised 1988).

Background Facts

[2] The following undisputed background facts are gratefully extracted from the judgment of the High court.

[3] Leblanc Communication (Malaysia) Sdn Bhd was granted a credit facility on 11 July 2014 to purchase goods from the judgment creditor. On 1 April 2015, Leblanc Muno Ventures Sdn Bhd executed a corporate guarantee for the credit facility. Subsequently, on 11 September 2015, four individuals, namely Muhammad Kuna, Daru Aswadi Bin Affendi, Yaqzan Yeap Kar Kat, and the judgment debtor executed a personal guarantee for the same credit facility in favour of the judgment creditor. It is not disputed that at the material time, the judgment debtor was a Director of Leblanc Communication (Malaysia) Sdn Bhd.

[4] The principal debtor, i.e., Leblanc Communication (Malaysia) Sdn Bhd, defaulted in paying the judgment creditor for the goods sold and delivered. Leblanc Communication (Malaysia) Sdn Bhd was wound up by a third party on 5 April 2019. The judgment creditor sued the corporate guarantor and the four individuals, including the judgment debtor in the Shah Alam High court in Civil Suit BA-22NCC-59-05-2010. The corporate guarantor was subsequently wound up by a third-party on 16 May 2019. On 6 January 2020, summary judgment was granted in favour of the judgment creditor in the sum of RM6,242,385.98 against all the individual guarantors including the judgment debtor. The said judgment has not been set aside to date.

[5] The judgment creditor issued the bankruptcy notice in question on 25 May 2021 and it was followed with a creditor petition on 6 April 2022. On 26 May 2022, the judgment debtor filed a summons-in-chambers to set aside the bankruptcy notice and creditor petition on the principal ground that no leave was obtained under s 5(3)(b) of the Insolvency Act 1967 . The provision says that, in respect of guarantors other than social guarantors, leave must be obtained from the court before bankruptcy action can be commenced. It is not disputed that leave was not obtained in this case. The learned Senior Assistant Registrar allowed the application to set aside the bankruptcy notice and creditor petition.

Decision Of High court

[6] Upon appeal by the judgment creditor, the High court reversed the decision of the learned Senior Assistant Registrar and reinstated the bankruptcy notice and creditor petition.

[7] The learned High court Judge held that s 5, which imposes the pre-condition of obtaining leave before commencing bankruptcy action, only applies to loan cases where there is a "borrower". As what was guaranteed in this case was a trade debt and not a loan, the learned High court Judge said that s 5(3)(b) does not apply. The reason is that there is no "borrower" in a trade debt. Subsections (5) and (6) of s 5 mention "borrower" and, thus, the partial protection envisaged by Parliament in s 5 must necessarily apply to a guarantor of a loan only. This reasoning is found in the following passages of the judgment of the High