Right of bank to proceed against chargor/guarantor stayed

It has been taken for granted by Banks that when a debtor defaults his/her loan, the Bank may proceed in foreclosure proceedings against any land charged to the Bank, and simultaneously proceed against the chargor/guarantor for the full sum. The Bank therefore would be entitled to take all actions simultaneously until recovery of full sum owed. Arguments raised to the effect that Banks must proceed in foreclosure first, usually are not regarded well by the Courts.

Hence, the Supreme Court in Low Lee Lian v Ban Hin Lee Bank Bhd had established the principle that the Bank, barring any special circumstances, may proceed against the chargor/guarantor personally despite having obtained an order for sale of the land.

This same issue was ventilated recently in the High Court in the case of AmMerchant Bank Bhd v Totalhill Sdn Bhd [2008] 3 CLJ 845. In this case, it was argued by the chargor/guarantor that the fact that foreclosure proceedings have commenced (and likely to cover the full indebtedness) constitutes special circumstances for the claim against the chargor/guarantor to be stayed.

Incredibly, the High Court agreed. By doing so, the High Court is setting a precedent which may well turn out to be prejudicial to the financial interests of Banks generally. It potentially opens the floodgates for other debtors/guarantors to argue that recourse must be had against the principal debtor/security first before recourse is had against them for the balance. That of course goes against the tenets of the contract signed which places the chargor/guarantor as principal debtors and therefore liable for the principal sum.

This case also goes to show that as much as Banks seek to contract out every risk, Courts of law would remain vested with the discretion to administer justice as they deem fit. Banks would do well to focus more on credit risk rather than legal risks in its business operations.

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