Why Personal Guarantees Matter to Directors
When a company borrows money or obtains credit facilities, lenders frequently require directors or shareholders to sign personal guarantees. This document transforms what would otherwise be a purely corporate obligation into a personal one. If the company fails to pay, the guarantor becomes directly liable.
Many directors sign these guarantees without fully appreciating the consequences. A personal guarantee can expose your personal assets—your home, savings, and other property—to claims by creditors, even though the debt was incurred by the company.
The Legal Framework in Malaysia
Personal guarantees in Malaysia are governed primarily by the Contracts Act 1950. Sections 79 to 88 of the Act set out the law relating to indemnity and guarantee, including the rights and obligations of sureties (guarantors).
A guarantee is a promise to answer for the debt, default, or miscarriage of another person. For a guarantee to be enforceable, it must be in writing and signed by the guarantor or someone authorised by the guarantor. Oral guarantees are generally not enforceable.
Joint and Several Liability
Most bank guarantees contain a clause making the guarantor's liability "joint and several" with the principal debtor (the company). This means the creditor can pursue the guarantor for the full amount without first taking action against the company. The creditor does not need to exhaust remedies against the company before coming after you personally.
How Personal Guarantees Are Enforced
When a company defaults on its obligations, the creditor will typically issue a letter of demand to both the company and the guarantor. The demand will state the amount outstanding and require payment within a specified period, often 14 or 21 days.
If payment is not made, the creditor may commence legal proceedings against the guarantor in court. In many cases, particularly where the guarantee terms are clear and the debt is undisputed, the creditor will apply for summary judgment under Order 14 of the Rules of Court 2012. Summary judgment allows the court to enter judgment without a full trial where there is no genuine defence to the claim.
Enforcement of Judgment
Once judgment is obtained, the creditor can enforce it through various means, including:
- Writ of seizure and sale against movable property
- Charging orders against land and property
- Garnishee proceedings against bank accounts
- Bankruptcy proceedings if the debt exceeds the statutory threshold
Common Defences to Guarantee Claims
While personal guarantees are generally enforceable, several defences may be available depending on the circumstances.
Non Est Factum
This defence applies where a person signed a document fundamentally different from what they believed it to be. It is rarely successful in commercial contexts, particularly where the signatory is a director who should understand business documents. Courts expect directors to read what they sign.
Misrepresentation
If the creditor made false statements that induced you to sign the guarantee, you may have a defence. However, you must prove the misrepresentation was made by the creditor (not by the company or a third party) and that you relied on it when signing.
Undue Influence or Duress
A guarantee may be set aside if it was obtained through undue influence or duress. This defence is more commonly raised by family members who guaranteed company debts, rather than by directors actively involved in the business.
Material Variation of the Principal Contract
Under Section 85 of the Contracts Act 1950, a surety is discharged if any variance is made without the surety's consent in the terms of the contract between the principal debtor and creditor. However, most modern guarantee documents contain clauses waiving this protection, allowing the creditor and company to vary the underlying facilities without releasing the guarantor.
Release of Security
Section 86 of the Contracts Act 1950 provides that if a creditor releases any security held for the debt without the guarantor's consent, the guarantor is discharged to the extent of the value of that security. Again, many guarantees contain waivers of this right.
Limitation
The Limitation Act 1953 provides that actions founded on contract must be brought within six years from the date the cause of action accrued. If the creditor has waited too long to commence proceedings, the claim may be time-barred. However, limitation issues in guarantee cases can be complex, particularly where there have been acknowledgments of debt or part payments.
What to Check When You Receive a Demand
If you receive a letter of demand under a personal guarantee, you should take several immediate steps.
Verify the Guarantee
Obtain a copy of the guarantee document you signed. Confirm that your signature is genuine and that the document is complete. Check the date and ensure you actually signed this particular version.
Check the Amount Claimed
Review the amount claimed against the company's records. Creditors occasionally make errors in calculating outstanding amounts, interest, or other amounts. Ensure the debt is actually owed by the company in the amount claimed.
Review the Guarantee Terms
Examine whether the guarantee contains any monetary limit or cap on your liability. Some guarantees are limited to a specific amount, while others are unlimited. Check whether the guarantee covers only specific facilities or all liabilities of the company to the creditor.
Look for Time Limits
Some guarantees contain expiry dates or require renewal. Check whether the guarantee was still in force when the company's default occurred.
Consider Whether the Company Has Assets
While creditors can pursue guarantors directly, it may be worth exploring whether the company has assets that could satisfy the debt. This does not provide a legal defence, but it may affect commercial negotiations.
Rights of the Guarantor After Payment
If you pay a debt under a guarantee, you are not without recourse. Section 82 of the Contracts Act 1950 provides that a surety who has paid the guaranteed debt may claim that amount back from the principal debtor. You step into the shoes of the creditor and can pursue the company for the amount you paid.
Additionally, under Section 83, you are entitled to the benefit of any security the creditor held for the debt. This right of subrogation allows you to enforce securities against the company or other parties.
Practical Considerations
Directors should think carefully before signing personal guarantees. Consider whether the guarantee is truly necessary and whether its terms can be negotiated. Limiting the guarantee to a specific amount or specific facilities can reduce your exposure.
If you are asked to guarantee obligations of a company in which you have no active involvement or control, exercise particular caution. Your ability to monitor the company's financial position and prevent defaults may be limited.
When you receive a demand under a personal guarantee, time is important. Ignoring the demand will not make the problem disappear and may result in judgment being entered against you. Seek legal advice promptly to understand your position and explore your options.