Charge

Ainul Jaria - LAW 3111-Lecture 2 1

TOPIC 1

Security Dealings recognised by the National Land Code 1965 (“NLC”)


Introduction

¨ Security Dealings are dealings whereby a registered proprietor conveys his land to either a Bank, finance company or moneylenders to secure the repayment of a loan


¨ The land will be used as collateral or security to assure the Lender that the Borrower will repay the loan within the stipulated time

¨ If the Borrower fails to repay the loan within the stipulated time or breach any terms and conditions stipulated in the loan agreement, the Lender can commence foreclosure proceedings to obtain an order for sale of the land by way of public auction or gain possession of the land


Charge or Torrens Charge

¨ A charge is a type of security dealing or transaction, which is created when a registered proprietor or a lessee uses his land as a collateral or security in return for the loan given to him by the Lender.

¨ The Borrower can borrow money (loan ) from a bank or finance company, which is in business of lending money or even an individual (moneylender)

¨ In return he is required to pledge his land as security to guarantee the repayment of the loan with interest.


LAND AS SECURITY¨ Land can be used and accepted as a

security for a loan, due to it’s special attributes as an immovable property that can give rise to various interests in favour of various persons at the same time

¨ Land is permanent, durable, and its’ value is never lost and most of all can confer interests to various people at the same time, thus is regarded as good security


¨ In the event, the borrower fails to repay the loan or money borrowed together with interest, or borrower fails to comply with any express and implied conditions of the charge the Lender can recover his money by selling the land by way of public auction or by way of private treaty (with consent from the chargor)


Differences between Torrens Charge & Common Law Mortgage¨ Charge is a creation of statute and is

different from the common law deed of mortgage. The Malaysian courts have always appreciated the difference between mortgage and charge

¨ Gan Khor v Soan Bin Pelita (1935) MLJ 158

¨ Paramoo v Zeno (1968) 2 MLJ 230¨ BBMB Bhd v Doric Development Sdn Bhd.

& Ors (1988) 1 MLJ 462¨ Malayan United Finance Bhd. v Tan Lay

Soon [1991] 1 MLJ 504


Differences Between Charge & Mortgage¨ Charge must be registered at the

relevant land office

¨ Charge is created using prescribed statutory form

¨ Mortgage need not be registered, merely preparing a deed of conveyance is sufficient

¨ There is no prescribed form, there is deed of conveyance


Differences Between Charge & Mortgage¨ Chargee takes possession after

chargor defaults in repaying the loan

¨ The chargee can seek to sell the property when chargor defaults in the repayment of the loan at any time

¨ Mortgagee takes possession upon creating the deed.

¨ The mortgagee cannot sell the property and infact he has to hold on to the property


Differences Between Charge & Mortgage

¨ Charge merely confers interest & not title or ownership to the Chargee

¨ The chargor is entitled to a discharge of charge

¨ Mortgage confers absolute ownership to the mortgagee

¨ The Motrgagee has a right in equity to redeem the land at anytime even after the stipulated time


Powers of Charging S.241(1)(a)(b)(c) NLC

¨ The owner of an alienated land has power to create a charge over his land irrespective of whether final or qualified title or as a parcel in strata title.

¨ The landowner’s powers to create a charge is subject to the restrictions imposed in S.241 (3) NLC


What can be charged S. 241(1)(b) NLC ¨ charge can be created over whole of

land but not on part of any alienated land

¨ co-proprietor is empowered to charge his entire undivided half share in an alienated land

¨ The rationale for this provision is to avoid difficulties in identification of the quantification and on default, in the chargee enforcing his remedies


J.Raju v Kwong Yik Bank Bhd.[1994] 2 MLJ 408¨ it was decided that it is possible to

charge part of land but only by way of an equitable charge. This transaction however, is not capable of registration. The statutory remedy under NLC is only available to a registered chargee


Charge - to secure repayment of loan

¨ Charge must be created to secure the repayment of any debt or the repayment of any sum other than a debt or of any annuity or other periodic sum. (S.241(1)NLC)

¨ R&I Securities SB v Golden Castle Finance Corp (M) Ltd. [1979] 1 MLJ 46. The creation of a charge where there is no loan transaction is not possible since it defeats the essence of the charge, which is to secure is repayment of the loan and the obligations to repay


¨ In Yee Sin Cheong v UMBC [1992] 2 CLJ 1298 the court said that unless there is a “loan in existence, no security is therefore required”


Charge Confers Interests

¨ A registered proprietor who charges his land does not transfer his title over the land, but confers merely interest

¨ The ownership of land remains with the landowner

¨ This enables the borrower/chargor power to effect as many subsequent charges as possible


¨ S.241(2)NLC provides that where a person charges his land for the second and third times or any number of times, these charges take priority in accordance with the date of registration


Restriction on Powers of Charging

¨ The powers of charging of property is subject to certain restrictions as specified in S.241(3) NLC

¨ (a) any prohibition or Limitation – for example Malay Reservation restricts the creation of charge of land held under Malay Reservation title in favour of a non-Malay chargee


¨ (b) any restriction on interest, specified in Ss.103-129 NLC where State Authority has endorsed on the issue document of title to the land the restriction to create a charge without written consent of State Authority

¨ (c) if the land is subject to lease then the express and implied conditions of the lease should apply


Void Charges

¨ Charge that fails to comply with certain requirements, e.g. Non compliance with terms of Moneylenders Ordinance 1951, is not enforceable and considered as void charges

¨ In Phuman Singh v Khoo Kwang Chong [1965]2 MLJ 189 & Associated Finance Corporation Ltd. v Poomani[1972]1 MLJ 117 court emphasised that the charge was void for being in contravention of the respective Moneylenders Ordinance in force


¨ Menaka v Lum Kum Chum[1977]1 MLJ 91

¨ Keng Soon Finance Bhd v MK Retnam Holdings SB [1996] 4 CLJ 52

CASES


Charge created in favour of two or more persons

¨ S.241(4)NLC provides that no charge may be granted to two or more persons or bodies unless they are acting in the capacity of trustees or representatives. In this case the charge may be held jointly by them all. In cases of leases the issue document of title or duplicate lease may be held by the first chargee unless there is a contrary agreement to that effect


Requirements to Create Charge

Conditions prescribed in Chapter 1 of Part Sixteen in NLC 1965 that must be complied with prior to creating a Legal / Torrens Charge


Requirements to Create Charge

¨ Must Use the Prescribed Instrument i.e. the Prescribed Statutory Form

¨ The Instrument must be Registered at the relevant land office


Stereotype Prescribed Instrument or Statutory Forms for Charges

¨ Forms 16 A and 16 B¨ S. 242(1)NLC -statutory form for a

charge to secure the repayment of a debt or the payment of any sum other than a debt is Form 16A

¨ Form 16B is the appropriate form for charges providing for the payment of an annuity or other periodic sum. The payment of an annuity is referred to as a rent-charge whereby the payment of an annual sum is charged on the land


Annuity -meaning¨ An annuity is the payment of an annual,

or other periodical sum of money secured over land similar to a mortgage or a Torrens charge.

¨ If the owner of the land bound to pay the annuity defaults the annuitant can enforce the promise to pay by execution against the land. The annuity is similar to the rent-charge of common law.


Amendment to the form¨ Any other conditions that need to

be imposed on the chargee and chargor will be made out in an annexure to the charge

¨ The Forms may be varied as long as the variation is not a matter of substance - S.207 NLC


¨ A matter of substance is one, which represents a material alteration to the requisite information so that the substantive nature of the underlying transaction or the liability of one party is altered thereby. Any conditions agreed between the chargor and chargee can be inserted in the annexure to the charge


Charge created using wrong form¨ The court has held that the Forms are

flexible enough, therefore, the use of the wrong Form will not invalidate the charge created

¨ In V.Letchumanan v Central Malaysian Finance Bhd [1980] 2 MLJ 96 a charge provided that the loan money is to be paid in instalments after execution of the charge rather than payment in full before execution as was stated in the charge. In an annexure, repayment was to be made on demand, though unless and until demand was made, the loan was repayable on instalments


¨ On default, the chargee sought to sell the land, but the chargor objected on the basis that the charge should not have been made in Form 16A because it provided for payment in instalments

¨ The Federal Court held that the use of Form 16A in this case was correct as the statutory form is flexible enough


Tan Yen Yee & Anor v Equity Finance Corpn. Bhd. [1991] 1 MLJ 237¨ A charge created using Form 16A

to secure the payment of rent under chattel-lease of equipment.

¨ Upon default by Chargor, the chargee applied to the Land Administrator for sale of the land. Chargor objected - charge should have been made using Form 16B and so charge is null & void


¨ Court -charge is recognised although wrong form had been used

¨ Court referred to Interpretation Act 1948 & 1967 s.62-the deviation was not of substantial effect nor was it calculated to mislead.

¨ The High Court rejected the contention of the chargor that a charge had to be in one of the two available forms, namely Form 16A (for repayment of principal and Form 16B (for payment of periodic sums)


Registration of Charge

¨ S.243 NLC provides that a Torrens charge must be duly registered in accordance with the requirements of NLC.

¨ Thus, failure to register the charge instrument in the relevant land office will render the instrument unenforceable.

¨ The chargee will never be able to avail himself the statutory remedies provided in the NLC. I.e. Order for Sale by way of Public Auction and Taking Possession .


Position of Unregistered Charges

¨ Situations where the chargee fails to register a charge instrument

¨ i. Parties fail to proceed with registration despite the completion of the instrument of charge, and the title is available;

¨ ii. Though title is available, but parties do not wish to create a charge, borrower hands over title to lender as a security for loan


¨ iii. Title is available but parties wish to enter into a different type of security transaction, which is not prescribed in the NLC 1965. For instance a Jual Janji transaction;

¨ iv. Title is not available so the parties enter into a Loan Agreement Cum Assignment whereby assigning all the interests of the Borrower in the property to the Lender


Position of Unregistered Charge¨ Unregistered chargee can claim

protection as an equitable charge¨ This type of charge may be

recognised pursuant to S.206(3) NLC


¨ Equitable charge is not different from legal charge in procedure.

¨ But it is not registered and this will not be recognised except under equity. A charge being outside the NLC provision will not be able to seek the remedies available to a registered chargee i.e. sale by way of public auction and taking possession


Cases¨ Arab Malaysian Finance Bhd. v

Ting Pik King & Anor [1993] 2 CLJ 523

¨ Ban Hin Lee Bank Bhd. v Lim Kar Bee [1992] 2 CLJ 1192

¨ Chuah Eng Khong v Malayan Banking Berhad [1998] 3 MLJ 97


¨ Development & Commercial Bank Bhd. v Che Wan Development S.B. & Ors [1990] 1 MLJ 12

¨ Hipparion (M) Sdn Bhd v Chung Khiaw Bank [1989] 2 MLJ 49

¨ Hj.Abdul Rahman v Mohamed Hassan [1917] AC 209

¨ Standard Chartered Bank v Yap Sing Yoke & Anor [1989] 2 MLJ 49


Mahadevan v Manilal [1984] 1 MLJ 266¨ In this case, the court held that

a charge document if not registered in the manner prescribed by the NLC, it will only be recognised pursuant to equitable principles and giving rise to a right in contract.


¨ Merchantile Bank v Official Assignee of Property of How Han Teh [1969] 2 MLJ 196

¨ Oriental Bank v Chup Seng Restaurant (Butterworth) Sdn. Bhd.[1990] 3 MLJ 493

¨ Arunasalam Chetty v Teah Ah Poh Trading & Anor [1937] MLJ 17


Subsequent Charges

¨ Ss.241(2); 251; 226; 214; 219;216 NLC

¨ Leisure Complex Sdn. Bhd. v Malaysia Credit Finance Bhd. [1994]1 CLJ 185


Priority of Charges

¨ A charge is given priority in the order of creation refer Ss.245, 246 & 247 NLC.

¨ Lai Soon Cheong v Kien Loong Housing Development & Anor[1993] 2 CLJ 199


Altering Priority of Charges¨ The priority of registered charges

can be changed through agreement by using the following methods:

¨ a.by consolidation (S.245 NLC)¨ b.by tacking (S.246 NLC )¨ c.by postponement (S.247 NLC)


Consolidation of Charges¨ Developed in equity to fetter the right

of the common law mortgagor to redeem on payment of part of his debt owing to a mortgagee who had taken security over several assets of the mortgagor

¨ Relief against forfeiture of one property by preventing the mortgagee from foreclosing another property was dependant on the discharge by the mortgagor of all his liability to the mortgagee over all other properties mortgaged to secure the loan


¨ Therefore, if relief is required the mortgagor must pay for all the mortgages. Consolidation is not encouraged in the Torrens System


Restriction on Consolidation S.245 NLC

¨ Priority of charges can be determined by consolidation as provided under S.245 NLC – which generally refers to the consolidation of two or more charges. This Section restricts consolidation


¨ Consolidation normally takes place where the chargor had charged two pieces of land A&B. Normally relief would only be given if money is paid for both pieces.

¨ Chargor will not be allowed to pay for “A” alone. He must pay for B also. Under NLC it is provided for the right to consolidate only if both the parties consent to it


Consolidation

¨ If a chargee is registered as proprietor of charges over different properties belonging to the same chargor, the chargee can refuse to discharge one charge without the chargor simultaneously (at the same time) discharging or paying off all the other existing charges


Tacking of Charge S.246 NLC¨ Tacking means¨ the chargor’s or the borrowers loan

will increase¨ the chargee will obtain priority

over other chargees


¨ when there is a tacking transaction, the chargee offering tacking facilities will gain priority in respect to the original sum and also in respect of further advances.

¨ tacking which leads to priority over other chargees will take place in accordance to S.246(2) NLC


Conditions ¨ the making of the advance is expressly

authorised by the prior charge or to secure a balance from time to time due to the chargee.

¨ That the loan is made with the consent of the subsequent chargee. In these cases the chargee may tack.

¨ Any subsequent chargee must investigate the instrument and see whether there was any authorisation for tacking in the first charge.


¨ Tacking will give priority to the further advances to the subsequent chargees. If there is a specific authorization for tacking in the first charge - it means that the chargee has a right to make further advances to rank in priority

¨ If prior charge does not expressly authorise further advances then tacking may be possible if the subsequent chargee consents to giving of further advances. This of course will enable the chargee to have priority for the tacked amounts


Postponement of charges S.247 NLC¨ Postponement of the priority of a

charge in relation to competing interests depending on the date of registration

¨ Before a charge can be postponed, it must be registered

¨ Postponement of a charge may change the priority by allowing the subsequent charge to take the place of the prior charge. Thus if the charge postponed is the first charge, postponement will give the subsequent charge priority as the first charge


Procedure ¨ This will be carried out on Form 16C.

The former subsequent chargee will pursue the remedies on default of his charge, which would have been those of the prior chargee

¨ Ling Tee Huah Credit & Leasing S.B. v Lii Tat Credit Mortgage S.B.[1990] 1 MLJ 58

¨ R&I Securities S.B. v Golden Castle Finance Corp (M) S.B.[1979]1 MLJ 46


REMEDIES FOR REGISTERED CHARGEEThis topic examines the statutory remedies available to a registered chargee upon default by chargor to repay the loan as agreed in the charge agreement


STATUTORY REMEDIES

¨ NLC provides two remedies to a chargee in the event the chargor fails to repay the loan.

¨ Order for sale by way of public auction

¨ Taking possession of the charged property


Sale by Way of Public Auction s253 NLC

¨ S.253 NLC enables the chargee to obtain the sale of the land or lease to which his charge relates in the event if there is a breach on the part of the chargor of any of the terms in the agreement or the implied provisions


¨ The power to seek sale of the property can be exercised even if the chargee has taken possession of the land. The most effective remedy is that of sale. But if the proceeds from the said property is not enough then the chargee can always sue on the personal covenant to pay


PROCEDURE¨ S.254 NLC provides that where there is a

breach by the chargor then the chargee may serve Form 16D notice.

¨ a. specifying the breach in question¨ b. requiring it to be remedied within one

month of the date on which the notice is served or such alternative period as may be specified in the charge; and

¨ c. warning the chargor that if the notice is not complied with, he will take proceedings to obtain an order for sale


¨ To serve a notice 16D the breach must have been continuing for a period of at least one month prior to the date of the notice.

¨ This provide the chargor with time to remedy the breach since foreclosure proceedings can only be commenced after failure on the part of the chargor to remedy the breach within the stipulated time.


¨ The other statutory Form is 16E, which is served in the event of non-payment of loan and the order for sale can be applied after one month of service of the notice.

¨ This form requires the repayment of the principal sum on demand. The chargee can upon failure on the part of the chargee to repay within the stipulated duration, apply for an order for sale without issuing any further notice in Form 16D


¨ Central Finance v Loke Kok Lai (1975) 1 MLJ 160

¨ Eliathamby v Shaik Mohamed Said (1970) 2 MLJ 194

¨ Government of Malaysia v Omar Bin Hj. Ahmad [1983] 1 CLJ 242


¨ Mary Michael v UMBC Bhd. [1971]1 MLJ 172

¨ Sykt.Kewangan Melayu Raya Bhd.v Malayan Banking Bhd. [1984] 1 MLJ 115

¨ VAM Hussain v BP Malaysia Sdn. Bhd. [1970] 2 MLJ 69


Procedure for Obtaining Order for Sale

On the expiry of the period in the notice the whole loan sum secured by the charge will be due and the chargee may be able to apply for an order for sale. However, in cases of sale the NLC provide for different procedures depending whether the land is held under registry titles or land office titles.


If registry title the chargee must apply to the High Court for an order of sale according to S.256 NLC

The court when upon receiving the application will decide whether there is default and if satisfied that there is no cause to the contrary it must issue the order for sale of the land


Powers of Land Administrator¨ Inquiry Stage ¨ The general rule is that the Registrar

must not go beyond the Register. If he is satisfied that the charge in dispute is on the register, his duty is limited to deciding as to whether or not there has been a default in the repayment of the loan according to the terms of the charge. The Land Administrator has no power to inquire or investigate any allegation of fraud or misrepresentation since the land office is not a court.


Refer dispute to court¨ The parties can refer the dispute to

court pursuant to S.419 NLC whilst the Land Administrator can stay or adjourn the proceedings pending the court settling the dispute.

¨ The Land Administrator is obliged to make an order for sale if it has been proven that there is breach in the terms and conditions of the charge document


Cases

¨ Gurpal Singh v Kananayer [1976] 2 MLJ 34

¨ Sundram v Chew Choo Khoon [1968] 1 MLJ 90

¨ Suppiah v Ponnampalam [1963] MLJ 202


Power of Land Administrator ¨ The Land Administrator can only

make an order for sale and not any other ancillary order.

¨ Govt. of Malaysia v Omar bin Haji Ahmad [1983]1 CLJ 242

¨ The land administrator made orders to allow the chargor to pay by way of instalment the oustanding loan amount


¨ The Land Administrator and the Court becomes functus officio after an order for sale has been granted, drawn up and perfected. He is not allowed to revoke, alter, or amend the order unless such order is consequential to the order for sale

¨ Exp.Bank Bumiputra [1992] 1 CLJ 200

¨ Lim Yoke Foo v EU Finance Bhd.[1985] 1 MLJ 17

¨ MUI Bank Bhd. v Cheam Kim Yu (Beh Sai Ming Intervener) [1992] 2 MLJ 642


Taking PossessionLimitation on entering possession¨ S.270(1)(a) NLC powers of taking

possession cannot be exercised in relation to any land held under Land Office title or the corresponding form of qualified title.

¨ (aa) shall not be exercisable in the case of a charge of undivided share in alienated land;

¨ (b) in case of town or village land not held under Land Office title can be exercised only when the chargor is not occupying the property


In the case of land office titles the chargee must apply to the Land Administrator of the District, according to S.260 NLC. This is done using Form 16G.

The Land Administrator will make an inquiry and upon being proven of the chargor’s default, he will issue an order for sale of the land


Right of Possession

¨ S.271-273 NLC provides the procedures of entering possession for a chargee.

¨ NLC provides that the chargees right to take possession does not extend to land held under land office titles or qualified title, the power also could not be exercised in case where the subject matter of charge was undivided share in alienated land.


Right of Possession¨ If there are more than one chargee the

right to enter into possession will be exercised only by the first chargee

¨ Taking possession may be actual where the chargee goes into possession by himself or constructive, where the chargee receives the rents payable by a tenant or lessee

¨ Before chargee can take possession of the land under the NLC requires him to give notices under S.272 NLC

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