Understanding the Protection for Guarantors in Bankruptcy Proceedings

As everyone may be aware, following the introduction of the Insolvency Act 1967, a social guarantor can no longer be subjected to bankruptcy proceedings as Section 5(3) of the Insolvency Act provides absolute protection to social guarantors.

Now what about non-social guarantors?

Unlike social guarantors, non-social guarantors do not enjoy complete immunity from bankruptcy proceedings. However, they are afforded partial protection under Section 5(3)(b) of the Insolvency Act, which requires a creditor to obtain leave of the court before initiating bankruptcy action against them.

This issue was recently clarified in the Court of Appeal decision of Yuri Zaharin Wahab v. Ann Joo Metal Sdn Bhd [2024] 6 MLRA 440, which addressed the key question:

Does this protection apply only to loan guarantors, or does it extend to all non-social guarantors, including those guaranteeing trade debts?

Initially, the High Court ruled that the protection under Section 5(3)(b) of the Insolvency Act 1967 only applies to loan guarantors, as the provision refers to a “borrower.” Since trade debts do not involve a borrower in the conventional sense, the High Court held that creditors could proceed with bankruptcy proceedings against trade debt guarantors without obtaining leave from the court.

However, the Court of Appeal overturned this decision, ruling that the law does not distinguish between loan guarantors and trade debt guarantors. Instead, it protects all non-social guarantors, meaning that leave of the court must be obtained before initiating bankruptcy proceedings against them, regardless of whether they guaranteed a loan or a trade debt. This decision ensures that all guarantors receive equal legal protection and prevents creditors from exploiting technical loopholes to bypass statutory safeguards.

The Court of Appeal reinforced the principle that bankruptcy should be a measure of last resort and cannot be initiated prematurely against a guarantor. Before commencing bankruptcy proceedings, creditors must first exhaust all other available enforcement mechanisms against the principal debtor. These include seizure and sale of assets, judgment debtor summons, garnishment orders, or initiating bankruptcy or winding-up proceedings against the principal debtor.

If a creditor fails to demonstrate that these avenues have been fully explored and exhausted, the court will not grant leave for bankruptcy proceedings against the guarantor. This requirement ensures that guarantors are not unfairly burdened with insolvency proceedings when other legal remedies remain available.

In short, all non-social guarantors—whether for loans or trade debts—are entitled to statutory protection under Section 5(3)(b) of the Insolvency Act 1967, which requires creditors to first exhaust all available remedies before initiating bankruptcy proceedings. Only after obtaining leave of the court can creditors proceed with enforcing bankruptcy action against the guarantor.

This article is written by

Gwen Yeap Siew Fen
Partner, Low & Partners

Jareen Lee Hoay Yin
Principal Associate, Low & Partners