Security Transaction

Charges & Liens

CHAPTER 1
CREATION OF CHARGES, AND GENERAL PROVISIONS RELATING THERETO

241. Powers of charging.

242. Form of charges.
243. Effect of charges.
244. Custody of issue document of title or duplicate lease.
245. Restriction on consolidation.
246. Tacking of further advances.
247. Postponement of charges.
248. Application of this Part to existing charges.
 PART SIXTEEN CHARGES AND LIENS CHAPTER 1
CREATION OF CHARGES, AND GENERAL PROVISIONS RELATING THERETO

241. Powers of charging.

(1) Subject to sub-section (3)-

(a) the whole, but not a part only, of any alienated land;
(b) the whole, but not a part only, of any undivided share in alienated land; and
(c) any lease of alienated land, may be charged under this Act
with-
(aa) the repayment of any debt, or the payment of any sum other than a debt; or
(bb) the payment of any annuity or other periodic sum.

(2) The powers conferred by sub-section (1) shall include power to create second and subsequent charges.
(3) The said powers shall be exercisable in any particular case subject to-
(a) any prohibition or limitation imposed by this Act or any other written law for the time being in force;
(b) any restriction in interest to which the land in question is for the time being subject;
and
(c) in relation to leases, the provision thereof, express or implied.
(4) Without prejudice to paragraph (a) of sub-section (3), no charge may be granted to two or more persons or bodies
otherwise than as trustees or representatives.
 Section 242. Form of charges.

1) Every charge to secure the repayment of a debt, or the payment of any sum other than a debt, (in either
case, whether the amount in question is to be paid as a lump sum or by instalments) shall be effected by
an instrument in Form 16A.

2) Every charge to secure the payment of an annuity or other periodic sum-

a) shall be effected by an instrument in Form 16B; and

b) may if the parties think fit include provision whereby, in the event of the chargee exercising his
power of sale, the proceeds of sale (so far as available for the purpose) are to be utilised in or
towards the satisfaction of payments subsequently falling due.
Security Transaction

Charges

➢ Whether a charge constitutes interest in land?

➢ This issue has been raised when considering the effect of the Malay Reservation Enactment (e.g. s. 7(1) of the K’tan
MRE No. 18 of 1930).

➢ Ho Giok Chay v. Nik Aishah [1961] 1 MLJ 49

• A charge constitute an interest in land?
• Held: it was an interest in land especially in view of the fact that the land liable as security under the K’tan Land
Enactment 1938 (now repealed by the NLC 1960) and that the chargee could, in the event of default by the chargor,
obtain an order for sale in respect of the encumbered land.
 T Bariam Singh v. Pegawai Pentadbir Pesaka M’sia [1983] 1 MLJ 232

❑ Mohd. Zahir J. Held: a charge did not create an interest in land for the purposes of the k’tan MRE on the ground that a
chargee is not given any interest in the land as to the enjoyment and use of it.

❑ His lordship examined the objects and reasons for the malay reservations enactment – i.E. “The object of the
enactment being not so much to preserve to individual malays the lands that they own but to ensure that reservation
lands shall continue to be owned by malays in general”.

❑ Therefore charges to non malays are permitted, with a condition that if the land charged is sold in satisfaction of the
charge no person other than a malay may bid at the auction.

❑ Teo agrees with zahir j. Because by such an arrangement the “ownership of such land is still restricted to a Malay –
see teo, 2nd. Ed., 1995, p. 656
 Difference between a charge and a mortgage

Bank Bumiputra M’sia Bhd. V. Doric Dev. Sdn Bhd [1988] 1 MLJ 462

• “…the premise that a charge under National Land Code is the same as an English mortgage at common law
is patently erroneous. A charge is governed by detailed statutory provisions of the National Land Code while
an English mortgage at common law was a horse of a different colour altogether.

• In an English mortgage at common law, the mortgaged property was transferred to the name of the
mortgagee on the creation of the mortgage with a proviso for redemption. Under the said proviso, the
mortgagee agreed to re-transfer the mortgaged property by a certain date beyond which it was stated to be
irredeemable.

• Equity stepped in and provided the equity of redemption, by which the right to redeem was extended
beyond the said date and would be lost only on foreclosure or sale. The rules of mortgage at common law
would therefore not apply at all to a charge under the National Land Code.” (at p.463)
 To speak of equity of redemption under the NLC is wrong.
Malayan United Finance v. Tay Lay Soon [1991] 1MLJ 504

✓Under the NLC the interests in the land subject to a charge does not vest in the chargee
but, upon registration of a charge, it renders the land subject to the charge liable as a
security only in accordance with the provisions of the charge, express or implied (s. 243)

✓(Under) s. 266(1) any chargor may at any time before the conclusion of a judicial sale of a
charged land tender the amount sufficient to the registrar of the court or the collector
and the amount sufficient to cover all expenses in connection with the judicial sale.

✓Since the right or interests in the charged land remains with the registered owner he has
nothing to redeem. To speak of the equity of redemption or the like of it in our situation
under the NLC is clearly technically and legally incorrect. (At p. 508)
Effect of registration

1. S. 243 NLC – every charge created under the NLC shall take effect upon registration so as to render the
land liable as security.
2. S. 304 describes the manner of registration.
3. Upon registration of the legal charge, title or ownership of the property does not vest in the chargee. The
chargee merely acquires an interest in the land or over the lease.
4. If the charge is the first regsitered charge, the cahrgee will have priority over all later registered charges –
subject to a voluntary postponement of priority (e.g. Tacking, consolidation, postponement ss. 245-247).
5. It is possible to create any number of legal charges as long as there is nothing in the first or subsequent
cahrges which prohibit the borrower from effecting further charges in respect of his land (because a
charge does not involve the transfer of title in the property and see also s. 241(2)).
6. In cases where there are two or more charges, they will take priority in accordance with the date of their
registration – unless there has been a change in priority due to ss. 245-247.
7. Once registered, the chargee acquires an indefeasible interest in the land (exception in cases founded on
s. 340(2))
 Failure to register
According to the NLC, the legal charge comes into existence only upon registration.

• Where the lender/bank holds an instrument of charge in statutory form and the IDT has been deposited by the borrower with
him/bank – but he has failed or neglected to register the charge the law regards him as an equitable chargee.

• If the equitable charge is not supported by an instrument in statutory form the remedies of the lender do not rest in equity but in
contract Here he will have to rely on the provision of s. 206(3) NLC. In such an event, where the borrower defaults, the lender’s course
of action is to obtain –
• A judgment against the debtor and

• A writ of seizure and sale

Both are under order 45 rules 12 of the Rules of Court 2012.

[This is to recover money on the basis of his interest in the contract (see judith sihombing, 2nd. Edn., P. 506)]

[Pls note that there is not much different between the creditor’s right is based on equity or contract. In any case in order to have a cause
of action the important fact is whether there is a valid contract between the parties. Equitable rights is important if the creditor has the
intention to secure his right in the property by using “Lien” under section 281 of the NLC.]
 Effect of an unregistered charge.

Mahadevan v. Manilal [1984] 1 MLJ 266. The FC held that there is no provision in the NLC which prohibits the creation of an equitable charge.

• “[The] examination of court’s decisions clearly shows that the courts have resorted to equitable principles and consistently held that an

agreement or an agreement to secure a debt in favour of the creditor in respect of the debtor’s land creates an equitable charge giving rise to

an equitable right in favour of the creditor, although no charge or lien within the provisions of the national land code or the previous code is

executed or created.

• (See Ngan Khong v Bamah bte Pakeh Jamin & anor [1935] FMSLR 81; Arunasalam Chetty v Teah Ah Poh Trading [1937] MLJ 17 ; Vallipuram

Sivaguru V Palaniappa Chetty [1937] 6 MLJ 59 and Mercantile Bank V Official Assignee [1969] 2 MLJ 196)

Oriental BANk v. Chup Seng Restaurant (Butterworth) Sdn. Bhd. [1990]3 MLJ 493. The court held that an equitable chargee does not have

the same legal rights as those of a registered chargee. He cannot apply for an order for the sale in the event of default by the chargor.

The Federal court in Mahadevan & Anor v Manilal & Sons (M) Sdn Bhd [1984] 1 MLJ 266 - Held that the national land code 1965 does not

prohibit the creation of equitable charge, the code being a complete and comprehensive code of law governing land, on the other hand, clearly

requires the charge to be registered in its prescribed form before a chargee can enforce his right of foreclosure under the code.
 Can an unregistered chargee remove a caveat?

Tan See Hock v. D&C Bank [1993] 3 MLJ 250. The court held

1. Section 340(1) of the NLC expressly confers indefeasible title or interest on any person or body for the time being registered as
proprietor of any land, or in whose name any lease, charge or easement is for the time being registered. It never mentions such a
privilege to be conferred on a chargee not registered neither does it recognize an equitable charge to benefit it from being
indefeasible. As the first defendant was not a registered chargee, they could not avail themselves of the indefeasibility of their
interest in the said land.

2. As the first defendant was not a registered chargee, it had no legal right to proceed by way of s 326 of the NLC. By doing so, it
would render the acts of the registrar, including the issuance of form 19C, ultra vires. The word ‘interest’ in the section referred to
a registered interest.

3. Therefore, s 326(1) of the NLC can only be utilized by a registered owner or a person with a registered interest, which would
include a registered chargee. Any other category of persons aggrieved should seek relief by way of s 327 of the NLC.
 Order for sale
BREACH OF AGREEMENT
• Where a breach has occurred of any agreement by the chargor and is continued for one month, the chargee must give a statutory notice to the chargor
for the breach to be remedied within one month (or alternative period).
• On default, the moneys secured become due and payable. Then the charge may apply to the court for an order for sale (i.e, OS) under s. 256 NLC.
• Breach of agreement refers to:
1) Those contained in s. 249 NLC (Agreements by Chargor implied in all charges)
2) Those referred to in s 250 NLC (Agreements by Chargor implied in absence of contrary intention)
3) Any express agreements inserted into the charge by the parties themselves – 253(1) NLC

NOTICE BEFORE SALE (Notice of Demand)

• The relevant instrument in the above circumstances will be in form 16D.
• It is served in respect of any breach of the terms of the charge (including failure to pay sum due)
• The chargor is given one month or the time stated in the charge to correct the breach (depending on the terms of the agreement)
• Default on the part of the chargor – the chargee can commence proceedings for sale.
• Form 16E is used in respect only of breach of the agreement to repay the principal sum and that sum is payable on demand.
• Form 16E requires repayment within one month from the service. If not the chargee may apply for an order for sale (OS).
• The timing in form 16E cannot be reduced by the chargee
 FORM 16D OR 16E? Confusion on the application of the two forms – due to the following
statement:

1. “…Form 16D can be used whether or not the principal sum is payable on demand, form 16E can be used only if the
principal sum is payable in demand.” Per Azmi LP in Mary Michael v. UMBC [1971] 1 MLJ 172 (explanation: see point no. 8)

2. The explanation made by Sufian LP in Jacob v. OCBC [1974] 2 MLJ 161 is plausible.

“The language of sub s. 1 of s. 255 would seem to indicate that if the chargee had made its demand by using form 16E it need not
have followed it up by also serving notice by form 16D, but that if it did not first use form 16E it would be all right if it used only form
16D. The object of the legislation is to see that sufficient notice is given to the chargor before the chargee applies for an order of sale,
and in my judgment here the chargee has given the chargor sufficient notice before coming to court.”

On this point his lordship referred to s. 48 of the Interpretation Ordinance (s 62 Interpretation Act):

“Any written law prescribing a form shall be deemed to provide that an instrument or other document purporting to be in that
form shall not be invalidated by reason of any deviation from the form if the deviation has no substantial effect an is not intended to
mislead…”
 Demand for principal + interest v. Demand for principal only.

Jacob’s case also explained this point:

“…Counsel for the chargee said that form 16D was used because this was a demand for principal and interest, and that form 16E was
appropriate where there was a demand for principal only, probably because it is headed ‘demand for payment of a principal sum’. With respect I do
not think it correct to say that if you demand principal sum and interest you use form 16D, but if you you demand principal only, you must use form
16E. In my view, as neither section 254 nor section 255 uses the word ‘interest’, interest may be claimed by either form.”

Payable on demand

Moscow Narodny Bank Ltd. V. New Kok Ann Realty Sdn Bhd [1989] 3 MLJ 310

• Clause 1 called for repayment to be made within 1 year of the loan.

• Clause 2 further added that the chargor “will on demand pay…all sums which are now or shall….”

• Notice in form 16E was served requiring the chargor to pay.

• The chargor objected on the ground that notice in form 16D was more appropriate.

Held: that once the initial period had passed the chargee could rely on clause 2, and the obligation to repay was now payable on demand.
Conclusion:

• Where there has been a breach of any obligation form 16D may be used, regardless of the nature of

the obligation, thus including that of payment of the principal sum on demand; and

• Where the principal sum is payable on demand then either notice in form 16D or form 16E may be

served.
 Defective procedure
Syarikat Kewangan Melayu Raya [1986] 2 MLJ 253 PC

• In the form 16D cited two charges and in respect of which the sums due under both charges are lump together. Held: not defective. Because the chargor
has not been prejudiced or misled by any defect therein.

Co-operative Central bank Ltd. V. Meng Kuang Properties [1991] 2 MLJ 283

• Held: That a notice on demand of payment which does not specify the precise sum owing is not invalid if the chargor is given a reasonable opportunity to
comply with the notice by the chargee. There is no general rule that the notice must state the precise sum due, nor is there any general rule that, that the
notice would be invalidated if the precise sum is mistaken.

Public Bank Bhd v. Chan Siok Lie [1989] 2 MLJ 305

• “There is no general rule that in all cases, regardless of the terms of the document, a proper precise demand is a sine qua non to the commencing of an
action

Datin Hjh Salma bt Md Jamin, Intervener [1989] 1 MLJ 381

• The chargor objected to the statutory notice, i.e, form 16D, on the basis that it referred to a breach continuing for 7 days whereas the breach had continued
only for 6 days at the date of the notice. Held: this irregularity did not invalidate the notice because the loan was payable on demand and so adequate
notice of demand was made
 APPLICATION FOR ORDER FOR SALE OF CHARGED PROPERTY

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.

There are two different procedures as follows:

• Charged property held under Registry Title (s, 256 – High court)

• Charged property held under land office title (s. 260 – LAND OFFICE)

APPLICATION MUST BE TO THE RIGHT PARTY

In Tan Teng Pan v Wong Fook Shang, [1973] 1 MLJ 31. 167 land held under an EMR (entry in the mukim
register) was charged by way of registered charge. On default, the chargee applied to the court for an order of
sale. This was refused on the basis that the court had no jurisdiction in view of the requirements prescribed in
sections 261 and 262 of the NLC1965.
 Procedure for Applying to Court for Order for Sale

chargor's rights under an order for sale by the court pursuant to and section 257 NLC

In Development & Commercial Bank Bhd, Johore Bahru v Kim Ming CHOON

• it was held that the chargor's rights under an order for sale by the court pursuant to and section 257 of the National Land
Code 1965 are not completely lost when the order for sale is made.

The chargor merely abrogates his rights and powers to dispose of the sale land to the charge on condition that the sale of his
land is carried out in accordance with the order granted by the court under the order for sale and other consequential orders
arising thereform.

In the event that the order for sale and the consequential orders are breached and, the sale under such orders is aborted, the
chargor's rights are restored pending fresh orders.
 The Court must make an order for sale unless 'cause to the contrary exist’

In MUI Bank Bhd v Cheam Kim YU

it was held that once an order for sale has been granted and the public auction pursuant to the order has been completed and the
certificate of sale has been issued to the successful purchaser, the court is functus officio.

This rule is subject to certain exception, one of which is that an order which is a nullity owing to failure to comply with the essential
provision such as service of process, can be set aside by the court which made the order in the exercise of its inherent jurisdiction.

Matters to be Dealt in an Order for Sale Made by Court

An order for sale made by the Court pursuant to section 256 of the National Land Code 1965 is required to contain the following (s 257
NLC)

a) provide for the sale to be by public auction;

b) require the sale to be held on a date not less than one month after the date on which the order is made;

c) specify the total amount due to the chargee at the date on which the order is made;

d) and require the Registrar of the Court to fix a reserve price for the purpose of the sale, being a price equal to the estimated market
value of the land or lease in question.

This requirement is mandatory and non-compliance with any of the provisions would result in the invalidation of an order for sale.
 Oriental Bank Bhd v Sykt Zahidi Sdn Bhd

the order for sale will continue to have binding force until set aside, or to make the order effective, if an
application is made to amend, alter or vary the said order.

The manner of distribution of the proceeds of the sale

purchase price paid by the purchaser that is the successful bidder at the public auction is to be used in the
manner as prescribed in section 268 of the NLC 1965, where it provides for the distribution of the proceeds of
the sale in respect of the various amounts in the order of priority therein detailed.

The amount payable to the chargee include the principal sum and any interest remaining due: any expenses
incurred in the application and sums added to the principal due where the chargee carried out any of the
obligations of the chargor pursuant to section 250 of the National Land Code 1965.
It is mandatory requirement for the order for sale to specify the total amount due at the date on which the
order is made.

in Bank Pertanian Malaysia v Zainal Abidin bin Kassim & Anor,

it was held that -

a) the chargee's failure to comply with Order 83 rule 3(3) and
(6) Rules of the High Court 1980, in particular, the failure to state the amount of the repayments and
instalments in arrears, in the affidavit in support of the application for an order for sale under section 256 of the National
Land Code 1965, were serious omissions which warranted a dismissal of the action for the absence of such pertinent
information was highly prejudicial to the chargors.

b) Fairness requires the chargee to state and state accurately the amount of repayments made and the amount of instalments
in arrears
 The chargor has the right to have the land sold at the market value prevailing on the date of sale (s. 257
(1)(d) NLC 1965)

The meaning of this phrase was been considered in Public Bank Bhd v Chan Tak Kow.

The court, in considering the chargor’s objection that the reserve price was not the market price as provided for
by this paragraph, held that:

1) Order 31 rule 2(4)(c) Rules of the High Court 1980 gives the court a wide discretion to decide when "fixing a
reserve or minimum price”

2) It may be noted that section 257(1 )(d) requires the registrar of the court to fix a reserve price" being a price
equal to the estimated market value" of the land.

THE issue is whether gives the registrar a discretion in that he needs only fix an "estimated" market value hence
that it will also include “force value”
In the circumstances of the case, the judge found no reason to upset the order of the registrar.

It would seem that he accepted that the amount set could reflect the 'forced sale value’, that is
market value under forced conditions which was claimed to be: 'a condition influenced by the current
economic situation resulting in a tendency in the value of property going on the downward trend’

This was the interpretation relied on by chargee in this case and it seemed to be the one adopted by
the court as well as reflecting the 'market value' required by this paragraph. In addition, the court
referred to the 'estimated market value' indicating that the price set was not necessarily the actual
price which could be received.
SAMBUNG LELONG
This can happen because the order for sale has no due date
Form 16H [Section 263] - Order Of Sale At Instance Of Chargee

*(a) RM ................................Name of chargee ................................. (b) RM .................................Name of chargee ................................. (c) RM

................................. Name of chargee .................................

3. The sale shall be subject to the following conditions:

(a) the bidder possesses, the sum equivalent to ten per centum of the reserve price specified under paragraph 1(b) above:

RM ................................. (in words ................................. Ringgit) ;

(b) the full amount of the purchase price may be paid immediately after the fall of the hammer by the successful bidder to the chargee;

(c) where the full amount of the purchase price is not paid after the fall of the hammer by the successful bidder-

(i) then the sum specified in paragraph (a) shall be paid to the chargee and it shall be retained as a deposit until the full purchase price has been paid; and

(ii) pending the settlement of the balance of the purchase price, the sum

(d) the balance of the purchase price shall be settled within a date not later than one hundred and twenty days from the date of the sale, that is, not later than the
................................. day ................................. of................................. (year) ................................. and there shall be no extension of the period so specified; and

(e) where the full purchase price is not settled on or by the date specified in paragraph (d) , the sum paid as deposit under paragraph (c) to the chargee
shall be forfeited and disposed of in the manner specified under section 267.
•

•
Example

Janjuary 2012, Ahmad had defaulted & the bank served the notice of demand (From 16d or 16e). Ahmad did not do anything

March 2012 the bank applied for the order for sale & obtained it from the high court.

Ahmad negotiated with the bank – the bank agreed not to proceed with auctioning of the property with condition that ahmad
agreed with refinancing.

Because of the refinancing – Ahmad is paying a higher instalment to the bank.

In January 2018, Ahmad defaulted again. After that Ahmad continued to pay. Ahmad came to know that his property has been
sold in an auction without his knowledge. The successful bidder/buyer was ah Chong.

Question: can Ahmad challenge the auction & transfer of his property to ah Chong?

[pls check also what was the reserve price for the 2nd auction]
 Remedy of Taking Possession

1. Another remedy available to the chargor if the chargee defaulted is by way of taking possession of the land or lease. See
Section270(1)

2. The power to take possession can only be exercise by the first chargee. See Section 270(2).

3. Second and subsequent chargee can exercise the remedy to take possession if the Minister makes an order allowing the
subsequent chargee to take possession upon the recommendation of the National Land Council. See Section 270(3).

4. Limitation of taking possession (See Section 270(1)(a), (aa) and (b))

a. It cannot be exercise to land held under Land Office title or Qualified title corresponding the land office title.

b. It shall not be exercise in case the subject matter of the charge is an undivided share.

c. If the land is a village land or town land held by the Registry Office, it can only be exercise if the chargor is not
occupation of the land. Types of Taking Possession
 Effects of taking Possession

1. The chargee who has gone into possession of the land is entitled to manage the land and to take whatever profits
from the land. Section 274

2. The chargee will be liable to the chargor for any of his act that cause the value of the land is impaired or if the
chargor suffer any loss. Section 274(1)

3. In Section 274(2), the chargee who is in possession, is accountable for all the sum he actually received from the
proceeds of the land.

4. The same Section also provides that he is also accountable for additional sum that he might have received, if he
exercises his power to manage the land prudently.
5. The chargee is expected to act with diligent went exercising his power to manage the land which he had taken possession.

This was decided in Woon Foon Hoh v Muttiah Chetty (1934) MLJ 121

a. the chargor brought an action against the chargee who has taken possession of the charged land. He alleged that the
there were waste on the part of the chargee,

B. when the chargee over-tapped rubber tree on the land, as well as the chargee failure to cultivate by not taping the tree for
more than two months after taking possession.

The court held that, he (the chargee) must be reasonably diligent in getting the rent and profits. He will be held strictly accountable to
all profit or rent actually received by him or by but for his defaults, might have received.

6. Apart from that the chargee who is in possession can also grant a lease over the whole or any part of the land. Section 275. He
grants the lease in the name of the chargor or on his own behalf.