Case Study: How a Personal Guarantee Clause Turned a RM300,000 Default into Full Recovery

Key Summary

• Background: A Malaysian tax advisory firm struggled with Sdn Bhd shell companies defaulting on large fee payments. These companies had no assets, making them effectively judgment-proof.

• Solution: Revised engagement terms to include a personal guarantee clause — binding the signatory personally if the company defaulted.

• Result:

  • Tested within 6 months on a RM300k default.

  • Debtor thought winding-up was useless (shell company).

  • Instead, enforcement was threatened directly against the director personally.

  • Full RM300k paid the very next day.

• Lesson: Smart contract drafting = strong leverage. Personal guarantees transform shell companies from untouchable into accountable, protecting businesses from bad debt.

Client

A mid-sized tax advisory firm in Malaysia

Problem

The client was facing a chronic issue: many of their corporate customers - particularly Sdn Bhd shell companies - were defaulting on large fee payments. These companies often had no assets, and once dormant, were effectively judgment-proof. Recovery efforts were futile. The directors walked away, leaving unpaid bills in their wake.

Our Solution

We reviewed and revised the firm’s standard terms of engagement, with a particular focus on enforceability.

Among other changes, we added a personal guarantee clause, subtly but effectively worded to bind the signatory personally in the event of company default. In simplified terms:

"The person signing this agreement agrees to personally guarantee payment if the company fails to fulfill."

The Result

Six months later, the clause was put to the test.

The firm returned with a default case: a customer owed them RM300,000, and the company (an RM2 Sdn Bhd) was clearly a shell. The director confidently told us to go ahead and wind up the company - knowing there were no assets to seize.

But we had other plans.

We replied:

“We’re not planning to wind up the company. We’ll be enforcing the personal guarantee - against you, the signatory.”

The very next day, they emailed back with a cheque for the full settlement amount.

Key Takeaway

Smart contract drafting can be your best protection. Most people don’t read the fine print - until it costs them. By baking accountability into your agreements, you reduce the risk of bad debt and turn legal threats into leverage that actually works. AUTHOR PROFILE

Rudi Cheu is the principal of Rule & Co. Advocates & Solicitors; a Malaysian law firm focusing on practical and cost-effective solutions for debt recovery and commercial disputes. With nearly a decade of debt recovery experience under his belt; Rudi is passionate about helping businesses navigate debt recovery challenges and shares insights at www.rulecolaw.com/blog and recoverdebt.my

He can be reached via Whatsapp: +60102028095 or via email: rudi@rulecolaw.com