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When a Singapore company borrows from a bank or finance company, the lender usually asks more than one person to sign a personal guarantee. Typically the directors sign, sometimes the main shareholders as well, and occasionally a parent company or a spouse. Everyone signs the same document on the same day, and nobody thinks much about how the burden would be shared if the company could not pay.
Then the company defaults. Most bank guarantees are joint and several, so the bank can demand the whole sum from whichever guarantor is easiest to collect from. That guarantor pays, and is left asking a simple question: can I get any of this back from the other guarantors, or from the company itself?
This article explains the two main routes Singapore law gives a guarantor who has paid: contribution from co-guarantors, and indemnity from the company as principal debtor.
Short answer
A guarantor who pays more than a fair share of a guaranteed company debt can usually claim contribution from the other co-guarantors in equity, generally in equal shares, and an indemnity from the company. The rights can be changed by agreement, and the guarantee wording, any side arrangements and the company’s solvency will decide how much is actually recovered.
Why the bank can chase one guarantor for everything
A guarantee is a promise to answer for the debt of another person. Under section 6(b) of the Civil Law Act 1909, no action can be brought on such a promise unless it, or a note or memorandum of it, is in writing and signed by the person to be charged.
Most bank guarantees make each guarantor jointly and severally liable for the full amount. They also commonly say that the bank need not first sue the company, enforce its security, or claim against any other guarantor. The High Court confirmed in Atlantic Navigation Holdings (Singapore) Ltd v Chang Yee Meng Malcolm and another [2021] SGHC 159 that a surety cannot compel the creditor to pursue the principal debtor or its security first. The sharing happens afterwards, between the guarantors themselves.
Right 1: contribution from co-guarantors
Where the right comes from
The right of a co-guarantor to contribution is not a term of the guarantee. It is an equitable right that arises because the co-guarantors share a common burden. In Tng Kay Lim v Wong Fook Yew and another [2009] SGHC 195, the High Court explained that a guarantor who pays more than his share may call on his co-guarantors to contribute, and that the right arises in equity rather than in contract. In Atlantic Navigation, the court repeated that the right to contribution arises as a right in equity, so no contract between the co-guarantors is needed.
How the burden is shared
The starting point is equal shares. In Tng Kay Lim, seven people had guaranteed a company’s debt to a building contractor. Two later became bankrupt. The court held that the five remaining guarantors, including the one who had paid, should each bear one fifth of the judgment sums, and ordered the two defendants to pay the claimant the difference between their one fifth share and what they had already paid, with interest and costs.
Equal sharing is only the starting point, though. In Periasamy Ramachandran and another v Sathish s/o Rames and another [2020] SGHCR 8, the court said that the courts look at the substance of the relationship between co-guarantors. A co-guarantor who was not in an equal position, for example because the guarantors had agreed between themselves who would really bear the loan, or because one only signed as a formality at the lender’s insistence, may have an arguable defence to an equal share. The defendants there were given unconditional leave to defend, so the point went to trial.
When the right arises
Generally, the right to contribution arises once a guarantor has paid more than a proportionate share. In Atlantic Navigation, the co-guarantors argued that the paying guarantor had paid too early, before any formal demand from the bank. The court rejected this. A demand is not a condition that must be met before the guarantor becomes liable; it simply marks the point from which the liability can be enforced. Because the borrower had already defaulted, the payments were not premature, and they had benefited the other guarantors by reducing their own exposure. The two defendants were ordered to contribute their rateable shares, with interest.
What can reduce or defeat a contribution claim
| Issue | Why it matters |
|---|---|
| Agreement between the guarantors | The right to contribution can be changed or excluded by agreement. A shareholders’ agreement, a side letter or even an oral understanding about who bears the loan may change the shares. |
| Unequal positions | Following Periasamy, the court looks at substance, including who benefited from the loan and why each person signed. |
| Insolvent co-guarantor | Where one co-guarantor is bankrupt, the burden is generally shared among the remaining solvent guarantors, as in Tng Kay Lim. |
| Clauses in the bank guarantee | Many bank guarantees stop a guarantor from claiming against co-guarantors until the bank is paid in full. In Atlantic Navigation, the relevant clause protected only the bank, and the bank had waived it. |
| Delay | Under section 6(1)(a) of the Limitation Act 1959, actions founded on contract generally cannot be brought more than 6 years after the cause of action accrued. A guarantor who has paid should not sit on the claim. |
Right 2: indemnity from the company
The company is the principal debtor. A guarantor who pays the company’s debt is ordinarily entitled to be reimbursed by the company. In Periasamy, the court explained that this right to indemnity is usually implied from the fact that the company asked the guarantor to stand as surety, so it is contractual in origin and can be excluded or limited by agreement. Where the parties had agreed that the loan would really be repaid from the guarantor’s own resources, for example because the money was used for the guarantor’s own investment, there may be no implied indemnity at all.
In practice, the indemnity is often worth less than contribution, because the company is usually insolvent. If it is in liquidation, the guarantor’s route is normally to file a proof of debt with the liquidator for the amount paid, and to rank with the other unsecured creditors. This can be complicated where the bank has already proved for the whole debt.
Stepping into the bank’s shoes
Section 5 of the Mercantile Law Amendment Act 1856, which applies in Singapore under the First Schedule to the Application of English Law Act 1993, gives a surety who pays the debt the right to have assigned to him any judgment or security held by the creditor, and to stand in the creditor’s place. This is often called subrogation. If the bank held a charge over company property, the paying guarantor may be able to take the benefit of it.
A typical scenario
Three directors each guarantee a S$900,000 bank facility to their trading company. The company stops trading. The bank demands payment from all three, but only one director has a property, so the bank presses him and he pays S$900,000 to protect his home. On an equal basis, his fair share is S$300,000. He may claim S$300,000 from each of the other two as contribution, and the full S$900,000 from the company as indemnity, although he cannot recover more than he paid overall. If one of the other directors is bankrupt, the burden is shared by the two solvent directors, so each bears S$450,000, subject to anything they agreed between themselves.
What the company should do
Guarantor disputes are fought on documents, and many of them sit with the company.
- Board minutes and resolutions: the board resolution approving the bank facility should record which directors or shareholders were asked to guarantee it and on what basis. If the guarantors agreed to share the burden in a particular way, record it in writing at the time.
- Shareholders’ agreement: if guarantees are to be borne in proportion to shareholding, or released on exit, say so expressly. Our article on releasing a guarantor when a director resigns explains why resignation alone does not end a guarantee.
- Accounts: when a guarantor pays the company’s debt, the company’s books should record the payment as an amount owing to that guarantor, not as a capital contribution or gift, unless that is genuinely what was agreed.
- ACRA filings: if directors resign or shares change hands as part of a settlement among guarantors, the changes must be lodged with ACRA on time and the registers of directors and members updated.
- Liquidation: if the company is wound up, the guarantor should lodge a proof of debt, supported by evidence of payment. See our guide to proof of debt in a Singapore liquidation.
Practical steps for a guarantor who has paid
- Collect the facility letter, every guarantee, the bank’s demand, proof of payment and any agreement among the guarantors.
- Work out the shares: identify all co-guarantors, check whether any are bankrupt, and calculate each person’s share on the basis the documents support.
- Ask the bank about its security: if the debt is fully paid, ask whether the bank will assign any judgment or security it holds.
- Write to the co-guarantors and the company: set out the payment, the share claimed from each, and a deadline.
- Diarise the time limits: do not let years pass while negotiating. See our article on limitation periods for debts in Singapore.
If you have not yet paid and have received a demand, the first question is different. Our guide to statutory demands against personal guarantors covers that stage, and our general guide to personal guarantees in Singapore explains what directors sign up to.
Frequently asked questions
Do co-guarantors have to share the debt equally?
Equal shares are the usual starting point, as in Tng Kay Lim. However, the right can be changed by agreement, and the court may look at the substance of the relationship, including who benefited from the loan. A guarantor who signed only as a formality may argue for a smaller share.
Can I claim contribution if the bank never formally demanded payment from me?
Yes, generally. In Atlantic Navigation, the High Court held that a formal demand is not a precondition to the guarantor’s liability. Because the borrower had already defaulted, the voluntary payments still supported a contribution claim.
What happens if one co-guarantor is bankrupt?
The burden is generally shared among the remaining solvent co-guarantors. The paying guarantor may still be able to lodge a claim in the bankrupt guarantor’s estate, but recovery there is often limited.
Can I claim against the company as well as the co-guarantors?
Usually yes, because a right of indemnity from the principal debtor is normally implied. You cannot recover more than you paid in total, and an insolvent company may only pay a dividend in its liquidation.
Does a guarantee clause stop me from suing my co-guarantors?
Some bank guarantees postpone a guarantor’s rights against co-guarantors and the company until the bank is paid in full. Whether such a clause applies, and whether it protects only the bank, depends on its wording. In Atlantic Navigation, the clause protected the bank only and did not defeat the claim.
Need a lawyer?
This article is general information about Singapore law for companies, directors and shareholders. It is not legal advice, and it does not take account of your circumstances. Raffles Corporate Services Pte Ltd is a corporate service provider, not a law practice, and does not give legal advice.
If you have paid a company’s debt under a guarantee and want to recover a share from your co-guarantors or the company, we can introduce you to an experienced Singapore law firm that handles guarantee, contribution and debt recovery claims. Tell us briefly what has happened and we will connect you.
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We can also take care of the corporate side for you: board and shareholder resolutions, register updates and ACRA filings.
Conclusion
A guarantor who pays the whole of a company’s guaranteed debt is not left without a remedy: contribution from co-guarantors, an indemnity from the company and the bank’s securities may all be available. These rights are only as strong as the documents behind them, and side agreements, guarantee wording, insolvent co-guarantors and delay can all reduce what is recovered. The same discipline applies to who may sign for the company in the first place, a point covered in our article on when a company is bound by a contract signed without authority. You can read the statutory provisions mentioned above on Singapore Statutes Online, including the Civil Law Act 1909 and the Limitation Act 1959. For help with resolutions, registers and filings around a financing or a guarantor settlement, speak to Raffles Corporate Services.
The Editorial Team, Raffles Corporate Services