Singapore – Preserving The Commercial Value Of A Guarantee.

2 May, 2017

In United Overseas Bank Ltd v Pereira Dennis John Sunny and another [2017] SGHC 66 (“UOB v Pereira”), the High Court considered a Registrar’s Appeal on the issue of whether a guarantor to a loan facility has the right to prevent a creditor from exercising its right to payment when there is a reasonable prospect that the principal debtor is able to pay its debts in full. Following the legal principle established by the Court of Appeal in Chan Siew Lee Jannie v Australia and New Zealand Bank Group Ltd [2016] 3 SLR 239 (see our previous commentary in May 2016 here), the High Court dismissed the appeal and held that the guarantor had no such right.

 

Brief Facts

 

In UOB v Pereira, Mr Pereira mortgaged two properties to UOB as security for monies due and owing to UOB for two housing loans granted by UOB to Mr Pereira and his wife, and guarantees furnished by Mr Pereira to UOB in respect of two loan facilities extended by UOB to Mr Pereira’s company (the “Company”). One of the properties was Mr Pereira’s family home at Toh Crescent, Singapore (the “Toh Crescent Property”). The other property was at Upper Changi Road East (the “Changi Property”).

Owing to defaults in repayment of the housing loans and the loan facilities, UOB commenced a mortgage action against Mr Pereira, as the guarantor of the aforesaid loans, and obtained orders for vacant possession of the two properties (the “Orders”). However, the Court granted a stay of execution of 3 months (until 30 November 2016) on the Toh Crescent Property so that Mr Pereira’s daughter, who was living there, could prepare for her examinations.

On 13 December 2016, UOB’s solicitors filed a writ of possession in respect of the Toh Crescent Property (the “Writ”). Their attempt to execute the Writ on 23 December 2016 was unsuccessful as it was discovered that Mr Pereira was still in occupation of the Toh Crescent Property. Subsequently, Mr Pereira filed an application for stay of execution of the Writ pursuant to Order 45 rule 11 of the Rules of Court (the “Stay Application”).

Order 45 rule 11 of the Rules of Court provides that the Court may grant a stay of execution of an order on the ground of matters which have occurred since the date of the order and on such terms as it thinks fit. Such matters are “matters which would or might have prevented the order being made or would or might have led to a stay of execution if they had already occurred at the time the order was made”.1

The Stay Application was dismissed by the Assistant Registrar and Mr Pereira appealed.

 

The grounds of the Stay Application In the appeal to the High Court, Mr Pereira’s main argument was that the Company had a reasonable prospect of being able to satisfy its debt in full. The Company had received new offers for its acquisition and there was also a prospective sale of its diving system since the Orders had been granted. Furthermore, the Company was under judicial management, which meant that there was a reasonable probability of rehabilitating the Company. As UOB had supported and continued to support the judicial management of the Company, this meant that this belief was shared by UOB.2

In making these arguments, Mr Pereira’s counsel relied on the principle in Hong Leong Finance Ltd v Tan Gian Huay and another [1999] 1 SLR (R) 755 (“Hong Leong Finance”) that if there was a reasonable prospect of the Company being able to satisfy its debt, the Court “retained the jurisdiction and discretion to grant a further stay of execution of the order for possession”.3

Separately, it was also argued that the sale of the Toh Crescent Property would be insufficient to satisfy the Company’s
debts,4 and that negligible prejudice would be suffered by UOB if a further stay of execution was granted compared to that suffered by Mr Pereira and his daughter in losing their family home. 

 

UOB’s position 

 

UOB’s counsel relied on the Court of Appeal decision of Chan Siew Lee Jannie v Australia and New Zealand Bank Group Ltd [2016] 3 SLR 239, which held that a creditor was fully entitled to elect whether to enforce its claim against the debtor or the guarantor. Thus, UOB was not obliged to proceed against the Company before it may proceed against Mr Pereira. Further, UOB’s counsel argued that Hong Leong Finance was distinguishable as it dealt with the direct enforcement of the security between a mortgagor-borrower and mortgagee-lender and was not applicable to
guarantees.

 

Secondly, UOB’s counsel argued that the “new circumstances” raised by Mr Pereira were merely speculative, resting as they did on draft term sheets which were produced merely for the purpose of discussion.

Finally, UOB noted that more than sufficient time had been granted to the Company and Mr Pereira to settle their debts, and that Mr Pereira had unconscionably taken advantage of the stay of execution to resume occupation of the Toh Crescent Property.

The High Court’s decision
 

The High Court dismissed Mr Pereira’s appeal. The High Court agreed with UOB that a creditor is fully entitled to proceed against a guarantor regardless of the principal debtor’s ability to pay its debts. To hold otherwise (i.e. to require the creditor to look to the principal debtor to discharge its obligations where there is a reasonable prospect of such repayment before proceeding against the guarantor) would be to defeat the commercial value of a guarantee.

 

In reaching this conclusion, the High Court agreed with UOB’s counsel that Hong Leong Finance was not authority “for the contention that the guarantor may requirethe creditor to wait for repayment by the principal debtor before enforcing its rights and remedies against the guarantor because of a reasonable prospect of such repayment”.5

The High Court also opined that, in any event, Mr Pereira had failed to satisfy the Court that there was a reasonable prospect of the Company being able to satisfy its debt as the offer to acquire the Company was only a possibility. In addition, the fact that UOB supported the judicial management of the Company did not advance Mr Pereira’s case that the Company had a reasonable prospect of paying its debt, given that an order for judicial management is premised on the statutory requirement that the Company “is or will be unable to pay its debt”.6

The case is currently on appeal to the Court of Appeal.

 

Conclusion
 

The High Court’s decision reaffirms the principle that the creditor is not obliged to wait for the principal debtor to discharge its obligations, even where there is a reasonable prospect of the principal debtor repaying its debt, before enforcing the personal guarantee and realizing any security granted therefor. This is because of the need to preserve the commercial value of a guarantee, in order to give due regard to the parties’ contract and to uphold the legal policy of assuring creditors that guarantees continue to function as a security mechanism.
 

1 UOB v Pereira at [16].
2 UOB v Pereira at [14], [19] and [20].
3 UOB v Pereira at [27].
4 UOB v Pereira at [21].
5 UOB v Pereira at [29].
6 UOB v Pereira at [33].