- Amalin Shahida
In Malaysia, the liability of guarantors is principally governed by the Insolvency Act 1967 and further shaped by judicial authorities. Broadly, guarantors are categorised into social guarantors and non-social guarantors, with differing levels of protection and exposure.
Types of Guarantors
A social guarantor is defined under Section 2 of the Insolvency Act 19671 as a person who provides a guarantee without profit motive in limited situations, namely:
- Educational or research loans, scholarships, or grants
- Hire-purchase transactions for vehicles used for personal or non-business purposes
- Housing loans for personal residential use
Any guarantor outside these categories is classified as a non-social guarantor.
Social Guarantors: Limited Exposure to Bankruptcy
Although a social guarantor may still be held liable upon default by the principal borrower, the law imposes a significant safeguard:
The creditor must first exhaust all reasonable avenues against the principal borrower before initiating bankruptcy proceedings against the guarantor. Strict compliance is required before proceeding against a social guarantor.2
Practically, to initiate a bankruptcy action against a social guarantor, the creditor must demonstrate to the court in its affidavit that all recovery actions against the principal borrower have been exhausted prior to commencing bankruptcy proceedings against the guarantor.
Non-Social Guarantors: Liability Based on Contractual Terms
For non-social guarantors, liability is primarily governed by the terms of the guarantee agreement.
Where the guarantee is an “on-demand guarantee”, the creditor must first issue a formal demand before initiating legal action.3
When Liability Arises Immediately
A guarantor’s liability may arise immediately upon default, without the need for prior demand, where the guarantor has expressly agreed to be liable as a principal debtor.
In such cases, the guarantor’s obligation is co-extensive with that of the borrower which means no prior demand is necessary if the guarantee imposes primary liability.4
Conclusion
The extent of a guarantor’s liability in Malaysia depends on two key factors:
- The classification of the guarantor (social vs non-social), and
- The wording of the guarantee agreement
While social guarantors benefit from statutory protection requiring creditors to first proceed against the borrower, non-social guarantors—and especially those assuming the role of principal debtor—may face immediate and direct liability.4
1 Section 2 of the Insolvency Act 1967
2 Hong Leong Bank Bhd v Khairulnizam bin Jamaludin [2016] 4 MLJ 302
3 Public Bank Bhd v Nik Chee Kok @ Nik Soo Kok [2003] 2 MLJ 455.
4 Hong Leong Bank Bhd v HGM Machinery Sdn Bhd [2013] 9 MLJ 412
General Disputes Resolution and Appellate Division
General Disputes Resolution and Appellate Division
General Disputes Resolution and Appellate Division
General Disputes Resolution and Appellate Division
This article is prepared and published by
Messrs. Ben Lee & Sharen
Advocates & Solicitors