Case Updates

Case Update: Leave for Bankruptcy against Guarantors under the Insolvency Act 1967 clarified by Court of Appeal

Share:

Print
BANKRUPTCY LAW
Bankruptcy action against guarantors – Meaning of the word “debtor”– Guarantor or principle debtor – Application for leave –Insolvency Act 1967, section 5(3)(b)

Hong Leong Bank Berhad v Ong Moon Huat
[2018] 1 LNS 1612, Court of Appeal
- see the grounds of judgment here

Facts The purpose of the amendments to the Insolvency Act 1967 (“the Act”) is to protect all guarantors where previously only social guarantors were protected. Under the new amendments; firstly, section 5(3)(b) of the Act[1] stated that a creditor is required to obtain leave of court prior to commencing a bankruptcy proceedings against a guarantor. Secondly, under section 5(4) of the Act[2], the court must satisfy itself that the petitioning creditor has exhausted all modes of execution and enforcement to recover debts owed to him by the debtor. The term ‘modes of execution and enforcement’ is defined under section 5(6) of the Act[3] which includes seizure and sale, judgment debtor summon, garnishment and bankruptcy or winding up proceedings. However, the term debtor is not defined in the Act.

Issue The issues are (i) whether the word “debtor’' in “to recover the debts owed to him by the debtor” in section 5(4) of the Act refers to the guarantor or the principal debtor; and (ii) when or at what point should an application for leave under section 5(3)(b) of the Act be made?

Held In allowing the appeal, the Court of Appeal (“the Court”) found that the word debtor refers only to the principal debtor since the whole purpose of the construction of section 5(4) of the Act is to give better protection to the guarantor. The protection comes in the form of ensuring that all modes of enforcement against the principal debtor has been exhausted before enforcing it against the guarantor. On the second question, the Court held that application for leave may be made at any time before presentation of the creditor’s petition since such leave is no longer required for the issuance of the bankruptcy notice.

 
 
[1] Conditions on which creditor may petition
[2] 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.
[3] 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.