Guarantors and their rights

The law is a complex thing.

I was reading a case on guarantee. It was found by the Court that the two guarantors were liable to repay the debts which they had guaranteed.

When it comes to guarantee the first issue to be resolved is whether the creditor has sent a notice of demand to the guarantor/s and whether they have acknowledged and received it.

There are situations where it is not necessary for notice of demand to be sent to the guarantor/s to invoke liability on them. This is when in the Letter of Guarantee and Indemnity or other loan documents the guarantors accept primary liability and also assume the position of principal debtors to the facilities offerred to the primary debtor which could be a Company.

In this case Danaharta Urus Sdn Bhd v.Chou Kok Hong & Anor the Court found that the guarantors were liable as they had accepted full liability for the loan although they are not the primary debtors.

The reason why guarantors should be made liable only upon the receipt of a notice of demand(which is also known as contigent liability) is because guarantees are known as collateral securities. No matter how serious is the contract between them and the banks they are just guarantors, they are not the main debtors. However if they voluntary agree to assume the position of main debtors then the rules appplicable to guarantors are not applicable to them.

What is meant by notice of demand is not necessary is that if the creditors wish to file a claim on guarantors, they need not have to send a letter to them first demanding the payment, they can straight away file summons against them.