WHEN CAN A CREDITOR COMMENCE BANKRUPTCY ACTION AGAINST A NON-SOCIAL GUARANTOR?
Are you a creditor with a non-social guarantor on a debt that has gone into default? Before you take any bankruptcy action, it's important to understand the legal requirements and limitations that govern such proceedings.
In this article, we will explore what distinguishes social from non-social guarantors, how this affects bankruptcy proceedings, and the steps creditors must take before initiating any move.
1. According to Section 5(3)(b) of the Insolvency Act 1967, a petitioning creditor cannot commence any bankruptcy action against a non social guarantor, without obtaining prior permission or leave from the court.
2. In order to understand who is a non-social guarantor, we must first understand who the law defines as a social guarantor.
3. A social guarantor is a person who provides a guarantee for a debt that is incurred for social or domestic purposes, such as education, personal transportation, or housing. The guarantee is not provided for the purpose of making a profit.
4. On the other hand, a non-social guarantor provides a guarantee for a debt that is incurred for business or commercial purposes, such as a business loan or a loan for the purchase of commercial property.
5. The guarantee may also be provided for personal purposes, but with the intention of making a profit, such as when a person provides a guarantee for a friend's loan and expects to receive a commission or other financial benefit in return.
6. It's important to note that the distinction between social and non-social guarantors only applies in the context of bankruptcy proceedings.
7. In other legal contexts, there may not be such a distinction, and the obligations and liabilities of guarantors may be determined based on other factors, such as the terms of the guarantee agreement.
8. So, what does this mean for creditors? Essentially, if a debtor has a guarantor who is a non-social guarantor and the debtor defaults on the debt, the creditor must first seek permission or leave from the court before commencing any bankruptcy action against the guarantor.
9. The court will only grant permission or leave if the creditor can prove that they have already exhausted all other methods of debt recovery.
10. This ensures that the guarantor is not unfairly targeted for bankruptcy without the creditor making reasonable efforts to recover the debt from the debtor first.
11. For example, let's say a business owner, Nor, defaults on a loan he took from NHL Bank. Nor's friend, Hafeez, acted as a guarantor for the loan. NHL Bank cannot commence bankruptcy action against Hafeez without first obtaining permission from the court.
12. To obtain permission, NHL Bank must prove to the court that they have already exhausted all other methods of debt recovery from Nor, such as seizure and sale, judgment debtor summon, garnishment and bankruptcy or winding up proceedings against the borrower.
13. If NHL Bank fails to satisfy this condition, leave, most likely, will not be granted.
SUMMARY
A non-social guarantor is a guarantor whom provides a guarantee for commercial purposes with the intention of making a profit. The Insolvency Act 1967 stipulates that a creditor cannot initiate bankruptcy proceedings against a non-social guarantor, without obtaining leave from the court. If a debtor defaults on the debt, the creditor must first seek court permission before initiating bankruptcy proceedings against a non-social guarantor. The creditor must also prove that they have exhausted all other debt recovery methods against the debtor. This provision ensures that the guarantor is not unfairly targeted for bankruptcy without the creditor making reasonable efforts to recover the debt from the debtor first.
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Disclaimer: This article is published for the purpose of awareness and general knowledge. Any part contained in this article should not be considered as a guide to initiate legal action independently without first consulting an experienced lawyer.
For any further information regarding this article or to schedule a legal consultation session, you may contact your preferred lawyer, or you may reach us via WhatsApp by clicking the yellow image above. Note that the information in this article is accurate at the time of publication and may be subject to change without notice. We will not be liable for any action or failure to act taken based on the information contained in this article.
Nor Hafeez adalah seorang peguamcara sivil yang beramal sebagai seorang peguam dan pemilik penuh sebuah firma guaman yang mempunyai pejabat kecil di pinggir Kuala Lumpur. Beliau mengendalikan pelbagai kes-kes sivil dan pelbagai masalah berkait dengan undang-undang sivil Malaysia seperti kes saman malu, langgar kontrak, hutang peribadi dan korporat, pencerobohan tanah, penceraian bukan islam, harta pusaka, pemecatan kerja, konsultan tuntutan CIPAA dan sebagainya. Di masa lapang, beliau berkongsi ilmu melalui penulisan blog dan sekali sekala menggunakan telefon untuk mengambil dan mengedit gambar secara amatur. Beliau juga adalah seorang glory hunter yang meminati Manchester City dan juga segelas Nescafe Ais diwaktu pagi.
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