Article

Topics: Classification; Guarantees

Note: Hong Leong Bank Bhd (Creditor) granted three banking facilities to Sri Tanjung Travel Sdn Bhd (Borrower), guaranteed by a director and two shareholders of the Borrower (Guarantors). The facilities included a bank guarantee for RM 100,000, a term loan of RM 565,000, and an overdraft facility of RM 3,000,000. The director-Guarantor provided a personal guarantee of RM 500,000, one shareholder- Guarantor executed two charges in favor of Creditor, and all three Guarantors issued two guarantees totaling RM 5,665,000.

The guarantees stated in relevant part:

". . . jointly and severally guarantee payment on demand upon us of all monies and liabilities . . . together with interest on all such debts and liabilities to the date of payment . . . Provided that the total sum recoverable from us hereunder is limited to the sum of [RM 3,665,000 + RM 2,000,000 = RM 5,665,000] owing or incurred to [Creditor] as aforesaid at the date of demand for the same is made by [Creditor] or discontinuance by any means of this guarantee by any of us . . ." The opinion stated "It is common ground that the guarantee in the present case is an on demand guarantee."

Borrower defaulted on the facilities, and Creditor issued separate notices of demand to Borrower and Guarantors. When Borrower and Guarantors failed to make any settlement, Creditor sued both Borrower and Guarantors, claiming RM 8,834,348.11 for the Overdraft Facility, RM 207,752.01 for the Term Loan Facility, plus interest at 3.0% per annum above Borrower's base rate for both. When Borrower was wound up, the suit proceeded against Guarantors.

At trial in the High Court, Guarantors argued that (1) their liability was limited to RM 5,665,000; (2) the demand was therefore invalid because the incorrect amount was stipulated in the letter of demand; (3) separate letters of demand must be issued for each guarantee. The trial court found that the guarantee must be read as a whole, and concluded that Guarantors' reading of the limiting clause would render meaningless the first clause guaranteeing payment of "all monies and liabilities...together with interest. The court further found that there was no requirement for the precise stipulation of the sums due, and therefore, demanding an erroneous amount would not invalidate the letter of demand. Additionally, the court ruled that there was no requirement that separate letters of demand be issued for each guarantee. Thus, the Judge determined that the certificate of indebtedness proved the amount due, per the "conclusive evidence clause" of the two guarantees.

The Court of Appeals, in reversing the trial court, concluded that the letter of demand must state the correct amount, and that the conclusive evidence clause only applied to Borrower and not to Guarantors. It found that while it "may not be necessary to state the actual amount in the demand addressed to the Borrower, the same does not apply to a demand against a guarantor wherein the creditor is required to specify the exact amount." As such, the certificate of indebtedness was not binding on Guarantors, and only on Borrower. It further held that the Guarantors' liability was limited to the amount stipulated as an upper limit, RM 5,665,000.

The Federal Court, Zakaria, CJ, reversed the Court of Appeals, reinstating the judgment of the trial court. The Federal Court stated that "[t]he purpose of the demand is only to give notice to the debtor that the creditor is demanding payment of the sum borrowed", and therefore, it is not necessary that the notice of demand indicate the exact amount due and payable. The Federal Court also concluded that the amount owed could still be adjudicated, notwithstanding the clause limiting liability to RM 5,665,000. The guarantee specifically stipulated that it was a "continuing guarantee" upon each of the Guarantors. As such, the Guarantors' liability "is not confined to the principal sum alone but should include interest arising from the loan plus other chargers." The court agreed with the trial court in holding that if the guarantee is read as a whole, it "clearly indicates that the extent of [Guarantors'] liabilities are not limited to the sum of RM 5,665,000", as the clause "together with such further sum for interest" would be rendered meaningless.

TEXT:

The Opinion contained the following excerpts from the Guarantee:

In consideration of you, EON BANK BERHAD . . . making or continuing advances or otherwise giving credit or affording banking facilities and accommodation . . . to SRI TANJUNG TRAVEL SDN BHD . . ." the defendants ". . . jointly and severally gurantee payment on demand upon us of all monies and liabilities . . . owing or incurred to the Bank from or by the customer . . . ."

"Provided that the total sum recoverable from us hereunder is limited to the sum of [RM3,665,000.00 + RM 2,000,000.00 = RM5,665,000. 00] owing or incurred to the Bank as aforesaid at the date of demand for the same is made by the Bank or discontinuance by any means of this guarantee by any of us or by the executors administrators or legal representatives of any of us howsoever such sum is arrived at together with such further sum for interest thereon and other commission banking charges and legal and other costs charges and expenses whether incurred in enforcing or seeking to enforce any security for or obtaining or seeking to obtain payment of all or any part of the money hereby guaranteed or otherwise howsoever as shall accrue due to the Bank within twelve months before or any time after the date of demand or discontinuance as aforesaid."

"clause 4 stipulates that the guarantee is a continuing guarantee upon each of the guarantors. As a continuing guarantee generally, the liabilities of the guarantors is not confined to the principal sum alone but should include interest arising from the loan plus other charges. This is further fortified by the provision in clause I to the effect that "the guarantors shall for the purpose of the debt be deemed to be principal debtors".

Clause 19 of the guarantees provides that the certificate of indebtedness is conclusive evidence as against the defendants. In the circumstances we hold that the certificate of indebtedness is binding and is sufficient as proof of the amount due by the defendants.

[JSC/mjb]

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.