Security dealings charge

05/14/14 Ainul Jaria Maidin - LAW 3111-
SECURITY DEALINGS

Meaning
• A dealing created to secure the
repayment of a loan.
• Elements present – loan, security in the
form of either title or interest over real
property

Type of security
• Land can be used and accepted as a security for
a loan, owing to it’s special attributes as an
immovable property as it is permanent, its’ value
is never lost and capable of conferring different
interests to various persons as the same time so
it is regarded as a good security.
• Further, if borrower fails to repay the money
borrowed together with interest, 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).

Security dealings
recognised by National
Land Code 1965

• Charge – Legal Charge or Torrens Charge
• Lien –Statutory Lien

Torrens/Legal Charge
• A charge is a form of security dealing created
by a registered proprietor or a lessee by using
his land as a collateral or security in return for
the loan given to him by the Lender.
• One can either go to a bank or a finance
company, which is in business of lending money
or even to an individual to borrow money and in
return may pledge his land as security to pay
back the money with interest.

• The Torrens charge is a creation of
statute, i.e. the National Land Code 1965
and its characteristics are different from
the common law deed of mortgage.
• The Malaysian courts have always
appreciated the difference between
mortgage and a charge. There are a few
differences between the two dealings

Cases
• 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
• These cases will be discussed in the first tutorial
session –next week. PLEASE READ!

Powers of Charging
• S.241(1)(a)(b)(c) NLC 1965
• The owner of an alienated land has power to
create a charge of 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 1965.

What can be charged
• S.241(1) NLC provides for powers of
charging and type of property that should be
charged.
• Whole, but not part of any alienated land.
Undivided shares in alienated land must be
the whole undivided share and not only a
portion of it.
• the interest of lease in alienated land can
also be charged for loan.

• S.241(1)(b) NLC provides that charge can be
created over the whole but not a part only of any
undivided share in alienated land. This means a
co-proprietor is empowered to charge his
undivided share in an alienated land. However,
only the entire undivided share in the land can be
charged, not merely a part.
• Rationale for this provision is to avoid difficulties
in identification of the quantification and on
default, in the chargee enforcing his remedies.
Problems with charge over part of
land

Case
• J Raju v Kwong Yik Bank Berhad [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 the NLC is only available to
a registered chargee.

Alienated land
• S.241 -Charge can only be created over
alienated land and not any other types of
land such land held under TOL, mining
lease, squatter land etc.
• Lease of alienated land

secure the repayment of
debt
• The charge must be 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).

Case
• R&I Securities Sdn. Bhd. 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 it.
• 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.

Express and Implied
Conditions
• Express conditions to a charge is prescribed
in the charge agreement itself.
• This is often referred as the Annexure to the
Charge and it is annexed to the Statutory
Form 16A or 16B.
• The Implied conditions are provided in
Ss.249-252 NLC.

• These conditions must be observed by the
chargor and the chargee during the
subsistence of the charge. Failure on the
part of the chargee to comply with the
express or implied conditions provided in
the NLC, then he faces the risk of the
chargee instituting foreclosure proceedings.

Restrictions on
Powers of Charging
• The powers of charging of one’s property is
subject to certain restrictions as specified
in s 241(3) NLC 1965:
• (a) any prohibition or Limitation – for
example Malay Reservation Enactment
1933 restricts the creation of charge of
land held under Malay Reservation title in
favour of a non-Malay chargee;

Restrictions ..cont.
• b) any restriction on interest, as specified
in Ss.103-129 NLC 1965 wherein the State
Authority has endorsed on the issue
document of title to the land the
restriction to create a charge without first
obtaining the written consent of the State
Authority;
• (c) if the land is subject to lease then the
express and implied conditions of the lease
should apply.

Charge 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.

Void Charges
• The charges, which fails to comply with
certain requirements, e.g. Non compliance
with the terms of the Moneylenders
Ordinance 1951, is not enforceable and
considered as void charges.

Cases
• Phuman Singh v Khoo Kwang Chong
[1965] 2 MLJ 189 and Associated Finance
Corporation Ltd. v Poomani [1972] 1 MLJ
117, the court emphasised that the
moneylending agreement (the basis upon
which the charge was created) 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
[1996] 4 CLJ 52.

Prerequisite or
Requirements to Create a
Torrens Charge
Conditions to be fulfilled by Chargor &
Chargee in order to create a valid charge.

Requirement to use the
Prescribed Stereotype
Statutory Form / Instrument

• Forms 16A or 16B
• S 242(1) NLC 1965 prescribes the
statutory instrument or form to be used
to create a charge to secure the
repayment of a debt or the payment of
any sum other than a debt shall be in
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.
• Any other conditions that need to be
imposed on the chargee and chargor will
be made out in an annexure to the charge.

Variation to Forms
• The Forms may be varied as long as the
variation is not a matter of substance
• S.207 NLC 1965 - 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.

Use of Form 16A
instead of Form 16B?
• Basically the court has held that the
Forms are flexible enough, therefore,
the use of the wrong Form will not
invalidate the charge created.

Case
• 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 the annexure, it was stated that
repayment was to be made on demand. As such
until demand for payment is 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 created using
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 was created using Form 16A to
secure the payment of rent under chattel-
lease of equipment. On default the chargee
applied to the Land Administrator for sale
of the land. However, the chargor objected
on the basis that the charge should have
been made using Form 16B and so was
invalid.

• The court held that it was a charge within the
provisions of Subsec 2, although wrong form had
been used, the charge remained valid by s. 62 of
Interpretation Act 1948 and 1967.
• The deviation was not of substantial effect nor
was it calculated to mislead. The High Court also
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 1965 provides that for a
charger to be recognised under the
Torrens system must be duly
registered in accordance with the
requirements of the provisions of the
NLC 1965.

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.
• Lender will be recognised as an
equitable chargee;

• ii. Though the title is available, but the parties
do not wish to create a charge, the borrower
hands over the title to the lender as a security
for a loan.
• Lender has a lien, however, in order to make it a
statutory lien, he must proceed to enter a lien-
holder’s caveat and in the event of default he
can enforce his rights by obtaining a judgment
from the court and enforce the same on the
Borrower by obtaining an order for sale by way
of public auction.

• iii. Title is available but the 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.
• If it is a Jual Janji transaction, then the
parties must check the terms of the
agreement as to whether it has become
Jual Putus.

• iv. Title is not available so the parties enters
into a Loan Agreement Cum Assignment whereby
assigning all the rights, interests and benefits
of the Borrower in the property to the Lender.
• The Loan Agreement cum Assignment executed
by the parties can be enforced pursuant to s
206(3) NLC 1965.
• Order 45 of the Rules of High is applicable.

• In the four situations mentioned
above the lender cannot claim the
remedy granted to a registered
chargee by NLC 1965.
• Statutory Remedies are Unavailable.

• The charge, which is not registered
pursuant to the provisions of the NLC
1965, can claim protection as an equitable
charge, but as this type of charge may not
be registered it may be granted
recognition pursuant to the provisions of s
206(3) NLC 1965.

• Equitable is not different from the legal
charge in procedure only that it is not
registered and this will not be recognized
except under equity. However, such a
charge being outside the NLC 1965
provision will not be able to seek the
remedies of sale and taking possession.

Cases
• Mahadevan v Manilal [1984] 1 CLJ
286 or [1984] 1 MLJ 266
• Standard Chartered Bank v Yap Sing
Yoke & Anor [1989] 2 MLJ 49

Security dealings charge

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