FIRM 4:

1. Nur Nabila 2017807006

2. Mohd Nor Hakimi 2017678196

3. Anas Aqilah 2017683668

4. Yus Ezzette 2017683522

5. Sarah Aimi 2017806994

6. Fazira yusof 2017806884

QUESTION 4

Zaza obtained a personal loan of RM130,000.00 from Happy Bank for business purposes. Zaza
further obtained a personal loan of RM100,000 from Kaya Bank for her education in Best
University. Jesicca agreed to be her guarantor for both loans. However, Zaza had failed to pay
the installments. Both Happy Bank and Kaya Bank obtained Judgment against both of them.

Whether Happy Bank and Kaya Bank can proceed with bankruptcy proceeding against Jesicca?

Discuss.

The issue is whether Happy Bank and Kaya Bank can proceed with a bankruptcy
proceeding against Zaza’s guarantor, Jessica under the Insolvency Act 1967?

Section 2 of the Insolvency Act 1967 ​(hereafter known as IA 1967) states that a social
guarantor is a person who provides, not for the purpose of making profit, the following
guarantees, firstly, a guarantee for a loan, scholarship or grant for educational or research
purposes; secondly, a guarantee for a hire-purchase transaction of a vehicle for personal or
non-business use; and thirdly, a guarantee for a housing loan transaction solely for personal
dwelling.

Adding to that, ​Section 5 (3) (a) and (b) of the IA also states that a creditor cannot
commence bankruptcy proceedings against a social guarantor or a guarantor other than a social
guarantor unless he has obtained leave from the court. Nevertheless, the creditor must satisfy the
court that he has exhausted all modes of execution and enforcement to recover the judgement
debt from the debtor including seizure and sale, judgment debtor summon, garnishment and
bankruptcy or winding up proceedings against the borrower. This can be seen clearly under
Section 5 (4) and 5 (6) of the IA respectively. In addition, by virtue of ​Section 5 (7)​, the court
shall dismiss the petition if the petitioning creditor fails to comply with the requirements of
Section 5.

In the case of ​Azham Othman; Ex parte Affin Bank Bhd [2012] 2 CLJ 96​, the case
discusses that a creditor may proceed in a bankruptcy suit against a social guarantor provided
that he has obtained leave from court and that the court is satisfied that he has exhausted all other
avenues. This case was decided under the previous Bankruptcy Act 1967. Similarly in the case of
Hong Leong Bank v Khairulnizam bin Jamaludin [2016] 7 CLJ 335 (CA)​, the case upheld
the decision in Azham’s case. These two cases are following the provisions in the Bankruptcy
Act. Now, the Insolvency Act has an absolute prohibition of bankruptcy proceeding against a
social guarantor.

In the case of Hong Leong Bank v Ong Moon Huat[2018] 1 LNS 1612​, there are two
issues discussed by the Court of Appeal pertaining to when the leave of court may be granted to
a creditor to recover a debt from ‘other guarantors’. In this case, the court allowing the appeal,
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 have
been exhausted before enforcing it against the guarantor.

In regards to the fact at hand, to see whether Happy Bank and Kaya Bank can proceed
with the bankruptcy proceeding against Zaza’s guarantor, Jessica, it must be satisfied that the
said guarantor is not a social guarantor as defined under ​section 2 of the IA 1967​.

Considering the fact that the nature of the transaction between Happy Bank and Zaza is
based on the purpose of making profit as the loan was used to finance Zaza’s business, Jessica as
the guarantor in this transaction is not deemed as a social guarantor. In this regard, Happy Bank
can proceed with bankruptcy proceeding against Jessica, provided that Happy Bank has obtained
leave from the court as highlighted under ​section 5(3) of IA 1967​. Applying the case of ​Hong
Leong Bank Bhd v Ong Moon Huat, before granting such an order, Happy Bank needs to
satisfy the court that he had exhausted all avenues to recover debts owed him by the debtor as
required under ​section 5(4) and 5(6) of IA 1967​.

However, with regards to the second loan transaction between Kaya Bank and Zaza, the
loan was obtained for the education purposes, where Jessica as the guarantor for this loan is
deemed as a social guarantor as provided under ​section 2 of the IA since it was not for the
purpose of making profit. As ​per section 5(2) of IA​, Jessica as a social guarantor has absolute
protection from any bankruptcy proceeding which means that Kaya Bank cannot commence any
bankruptcy action against Jessica. The reason of why Kaya Bank may not be allowed to proceed
the proceedings against Jessica is due to, when we apply the construction of ​section 5(4) of the
Act​, it is to give Jessica who is a social guarantor a better protection for her as she provides a
guarantee for the education purpose not for profit purpose. In addition to that, Jessica as a social
guarantor is immune from bankruptcy proceedings so long as Kaya Bank has not exhausted all
avenues to recover debts word to him by Jessica. Hence, since none of the facts mentioned that
Kaya Bank have exhausted all modes to recover debt from Jessica, therefore Jessica is immuned
from the proceedings by Kaya Bank.

In conclusion, Happy Bank can proceed with the bankruptcy proceeding against Jessica,
provided that he satisfies the court that he has exhausted all modes of execution to recover the
debts from Zaza. Meanwhile, Kaya Bank cannot proceed with the bankruptcy proceeding against
Jessica since Jessica is a social guarantor thus she has absolute protection from any bankruptcy
proceedings.