Substitution Of Guarantor And Purported Part Payments

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Recently, the High Court allowed a summary judgment application by an established bank in Malaysia. The High Court’s decision was forthright in that the bank has satisfied all the requirements in Order 14 of the Rules of Court 2012 and that the three defendants have failed to show any triable issue.

The bank was successfully represented by the firm’s dispute resolution partner, Syafinaz Vani together with Elani Mazlan and Rakkshanaa Samasundaram.

This alert highlights the key points of this summary judgment matter.

Background

In 2015, the bank granted a Banking Facility to the 1st defendant company which was guaranteed by the other two defendants, who were the company’s directors and shareholders. Due to the Covid-19 pandemic, the company went into financial difficulties and defaulted in the repayment of the Banking Facility. The default in repayment constituted an event of default and the bank recalled, cancelled and terminated the Banking Facility.

The bank proceeded to apply for a summary judgment as it was able to fulfil the following requirements:

(i) The defendant has entered an appearance.

(ii) The statement of claim was served on the defendant.

(iii) The affidavit in support has the facts of the claim and states that the bank believes there is no defence to the claim.

Once these preliminary requirements are satisfied, the burden then shifts to the company to satisfy the court by showing triable issues to justify why judgment should not be given against the company.

The Defendants’ Purported Triable Issues

The company and its two directors raised the following as triable issues:

(a) Before obtaining the Banking Facility from the bank, the company had expressed its intention to change the guarantors under the Banking Facility. The bank promised that the directors will be removed as the guarantors.

(b) One of the directors has made part payments to the bank. Thus, the sum due and owing under the Banking Facility is incorrect.

(c) The bank has admitted and accepted the payments made towards the sum due and owing under the Banking Facility from the company and the directors. As such, the bank has no cause of action against them.

The Plaintiff’s Rebuttal

The bank’s response was as follows:

(a) The existence of the Banking Facility granted to the company as well as the fact that the directors were the guarantors for the Banking Facility were not disputed. The company’s intention to remove the directors as guarantors upon being granted the Banking Facility was communicated to the bank before the company signed the letter of offer. However, when the company signed the letter of offer, it was a clear term that the directors shall be the guarantors.

Thereafter, the facility was disbursed the company enjoyed the Banking Facility and did not raise any issues on the substitution of guarantors. It was only after the bank sent the letter of demand did the directors suddenly raise this substitution issue.

(b) The company purportedly made part payments to the bank but these were never received by the bank. The company and the directors failed to prove that there was a successful transfer of money to the bank. Hence, their allegation on the discrepancy in the sum claimed was a mere red herring. In fact, the company’s claim that it had made some part payments to the bank was an admission of the company’s indebtedness to the bank.

(c) The company and the directors were estopped from denying the debt owed to the bank after enjoying the facility and having made part payments towards the sum due and owing to the bank. Further, the company had also repeatedly requested for time to make payments to the bank.

(d) On the point of mitigation, the company and the directors failed to raise the same in their affidavits and as such, it was a submission from the bar. Additionally, it was a baseless argument to say that the bank was not entitled to claim the remaining sum due and owing under the Banking Facility just because the company had made some part payments.

Conclusion

The High Court accepted the submission advanced by the bank’s counsel and held that there was no triable issue raised by the company and its directors.

This case demonstrates that the discretion to allow a summary judgment will only be exercised in plain and obvious cases. The courts ordinarily do not entertain attempts to raise triable issues in cases where the facts and contemporaneous documents clearly show otherwise.

The purpose of a summary judgment is to expeditiously dispose of a case while saving time and costs. Thus, in debt recovery cases, it is common to turn to a summary judgment application for a speedy determination of a matter. Of course, it must be borne in mind that a summary judgment application will only be a practical course of action where there is no dispute in facts and in law.

Authored by Rakkshanaa Samasundaram, a pupil-in-chambers from the Dispute Resolution practice.

25 January 2023