MAYBANK ISLAMIC BERHAD v 1. ) NG CHEE KAE 2. ) CHYE YIAN SOANG

Case Significance

Confirms that under an on-demand guarantee the guarantor's liability arises immediately upon demand and is independent of the creditor first exhausting remedies against the principal debtor or realising charged property.

This High Court decision at Johor Bahru concerns an application by Maybank Islamic Berhad for summary judgment under Order 14 of the Rules of Court 2012 against two guarantors of an Islamic financing facility. The bank had granted a Commodity Murabahah Term Financing-i facility of RM1,500,000 to a customer, and repayment was secured by a letter of guarantee signed by the defendants. On the customer's default the bank sued the guarantors for RM3,513,771.69 as at 31 July 2023, together with late-payment charges and profit. The guarantors' short defence was that the bank had no valid cause of action because it had not exhausted all avenues of recovery against the principal debtor, in particular by first selling the charged property, so that the claim was premature. The central legal question was the nature of the guarantee and whether the guarantors' liability was contingent on the creditor first pursuing the principal debtor. The court construed clauses 6(i), 7 and 7A of the letter of guarantee and held that it was an on-demand guarantee under which the guarantors' liability arose immediately upon a demand being made and was independent of the liability of the principal debtor. It reasoned that a failure to sell or dispose of the charged property did not render the claim premature, and drew a clear distinction between the requirement of exhaustion of remedies under section 5(4) of the Insolvency Act 1967 in bankruptcy proceedings and a civil claim brought under a letter of guarantee. Since the guarantors had never denied signing the guarantee or that it bound them, their defence raised no bona fide issue requiring a full trial. The court allowed the bank's application and entered summary judgment against the guarantors for the sums claimed. The judgment is a useful statement that an on-demand guarantor's liability is immediate and independent of recovery against the principal debtor.