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Banks and borrowers
13/06/2006
The Star Articles of Law By BHAG SINGH
IN THE credit-oriented society that we live in, getting indebted whether
through purchase of goods or services on credit or direct advances of money
is becoming an entrenched feature of life.
It is an occasion to rejoice when money comes into a person’s hands even
though it is a loan. However, the pain can start when it has to be paid back
and the ability to do so is restricted or for some reason diminished.
Anticipating that such a state would jeopardise their interest, lenders of
money, especially banks, are inclined to be extra cautious to guard
themselves against the event of default, if and when this should occur.
Thus it is not uncommon for banks to insist on and obtain every conceivable
security that can be thought of. Directors who have no personal assets
whatsoever are asked to give a guarantee just because they are directors. In
some cases it turns out to be a meaningless exercise devoid of any benefit
to anyone.
Banks will usually, apart from obtaining a guarantee from the directors,
also hold security in the form of a charge over landed property. And in the
case of companies, a floating charge over assets that are more mobile in
nature.
It is in this context that a reader asks whether it is fair for the bank to
act against a guarantor when the borrower is around; in addition, the bank
holds land as security. Instead of suing the guarantor and making him a
bankrupt, should the bank not proceed against the borrower himself and sell
off the landed property first?
Indeed it is not an uncommon scenario that when a loan is taken, not only is
the borrower asked to undertake to repay the amount but the directors and
sometimes some others will be made to sign guarantees and provide other
tangible security. Usually the property belongs to the borrower but there
are also occasions when the landed property belongs to a third party.
When there is default in repayment of the loan, it is not unknown for the
bank to commence action to sue the borrower, the guarantor and to proceed
with foreclosure on the land all at the same time. Sometimes while the
foreclosure proceedings are being carried out, a guarantor may in the
meantime be made a bankrupt!
Where landed property is charged, and especially when landed property
belongs to the borrower, it may happen that the proceeds realised may be in
excess of the debt. In the meantime, the guarantor has been made a bankrupt
with no benefit to anyone.
Ideally speaking, a bank should act against the borrower first and following
this, dispose of the property of the debtor which it holds by way of
security and only then proceed against a third party where such a third
party has provided a guarantee or property as security.
However, what is ideal or fair is one thing. What the parties have agreed to
is another. And banks assert their rights based on what has been agreed on.
Parties are then bound to what they have contractually committed themselves
to. So long as the contract is made within the parameters of what is
permitted within the law of contract and other relevant laws, it is valid
and enforceable. Parties are bound by what they agreed to irrespective of
whether it is fair or not. Fairness is not a factor to be considered here.
And the law of contract is based on the idealistic belief and presupposition
that parties are of equal bargaining strength. However, this presumption is
today more fiction then reality.
The bank and the borrower are rarely of equal bargaining strength. A
borrower usually has no alternative but to agree to whatever terms are
stipulated in the loan documents.
In fact, such a situation arose in the case of Bank Bumiputra (M) Bhd vs
Esah binti Abdul Ghani where after foreclosure proceedings had been
proceeded with and had to be temporarily halted, the bank commenced
bankruptcy proceedings against a guarantor.
An application was made for a stay of the bankruptcy proceedings. In the
High Court the judge who allowed the stay castigated the bank for adopting
the method which he considered to amount to extortion. The judge said: “...
To my mind such method albeit may be legal, may amount to an abuse of the
process of the court. Furthermore, as conceded by the counsel for the bank,
the bank had also issued a bankruptcy notice to the principal debtor. By
virtue of this the bank has two avenues to proceed and recover its money. In
the final analysis, this petition against the respondent may turn out to be
a useless piece of litigation.”
However, in the Supreme Court the decision of the High Court was reversed
and the bank was held entitled in the circumstances to proceed. The Supreme
Court judge said: “It must be pointed out that we are not concerned with
moral but legal problem. The bank has obtained a proper judgement against
the surety and is entitled to enforce the judgement.”
Of course, it must be pointed out that in this case the bank had resorted to
bankruptcy because the foreclosure proceedings in relation to the land had
become stalled as one of the co-owners had died and this slowed down the
proceedings.
However, where the option to proceed with the foreclosure actively is
clearly available, it would be far more fair not to proceed against the
guarantor as yet.
Of course, in deciding the cases the courts have to act in accordance with
the law as it exists. While the fairness of a situation may weigh on the
mind of a judge, the decision has to be made in accordance with what has
been contractually agreed to within the framework of the law. |
