Article

Note: Malayan Banking Bhd (Creditor) provided overdraft and trust receipt facilities to Fleur Chem Sdn Bhd (First Debtor) and Rubytrend Sdn Bdh (Second Debtor), each secured by letters of guarantee executed by numerous guarantors. An express provision of these banking facilities provided that "[Creditor] is entitled to recall or cancel the banking facilities at any time or if any event of default occurs which will result in the whole amount becoming due and repayable immediately." When Creditor called on Debtors to pay overdue trust receipts and to reduce excess debits in their overdraft facilities, Debtors failed to comply. Creditor then demanded repayment of funds under all banking facilities advanced to Debtors. When Debtors did not repay, Creditor sued First Debtor and its guarantors for RM1,734,562.76 and Second Debtor and its guarantors for RM3,317,603.93. Debtors counterclaimed. The High Court of Kuala Lumpur, Pathmanathan, JC., rendered judgment for Creditor and dismissed Debtors counterclaims, with costs.

Debtors claimed against Creditor that the banking facilities were to be provided for a fixed tenure of three years and further contended that Creditor breached the terms of the banking facilities in rejecting applications for letters of credit for which each Debtor had applied, resulting in substantial losses since Debtors were unable to run their businesses due to lack of credit. Debtors contended that these losses absolved them from liability to Creditor and that they were entitled to damages greater than that claimed by Creditor. Creditor contended that it never received nor rejected the letter of credit applications claimed to have been submitted by Debtors.

The Judge noted that Clause 7 of the banking facilities provided "The bank reserves the right to vary the facilities limit at any time during the validity period of the [guarantee] i.e. validity of the guarantee is only for three years." The Judge noted "In short the tenure of the [guarantee] is stated to be three years, not the tenure of the banking facilities." With no definitive evidence provided by the parties to sway the court in deciding the matter of Debtors' letter of credit application counterclaim, the Judge looked to the actions of Debtors in coming to a determination:

"The net effect of a failure by [Creditor] to accept and process the documentary credit application by [First Debtor] would be to cause considerable loss and damage to the [Debtors] in light of the terms of the facility agreement which envisages that [Creditor] would continue to provide credit within the limits of the agreement. Any such act on the part of [Creditor], particularly where it affected [Debtors'] business to the degree stated, would or should have resulted in [Debtors] taking umbrage and expressing in clear and unequivocal terms their outrage and indignation at [Creditor's] failure to process a valid credit application. However despite [Debtors] contending that the [Creditor's] rejection had caused a near collapse of their cigarette manufacturing business, neither [First Debtor] nor [Second Debtor] took any steps to immediately stipulate, albeit orally or in writing, that [Creditor] had acted wrongfully in rejecting their applications for credit and requiring it to rectify such wrongful rejection with immediate effect."

In any event, the Judge found that even if Creditor had rejected the applications and breached the terms of the banking facilities, it still would not absolve Debtors of all of their responsibilities under them.

[JEB/gdb]

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