CHARGES

Sharifah ZubaidahLAW 3111- Section 1

Sem. 1-2012/2013

05/02/23 1SZA

Coverage:

• 1) What is a CHARGE?• 2) Registered Charge• 3) Difference between a Charge and a

Mortgage• 4) Powers of Charging• 5) Effect of Registered Charge• 6) Unregistered Charge

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What is a Charge?

• It is a security transaction relating to land created under Part 16 of the NLC between the

proprietor of land (chargor) and the lender (chargee).

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chargor chargee

borrows

Gives loan

Land owner Financier

The Requirement of Registration

• A charge is registered in Form 16A/16B. • (See s.5 NLC’s definition of a ‘charge’)• If not registered, the charge may be held to be

an ‘equitable charge’.• Equitable chargee not entitled to statutory

remedies under the NLC.

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Effect of a Registered Charge?

• The land becomes LIABLE AS SECURITY for the loan.

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Chargee’s Remedies:

• How to enforce the charge?

• The chargee has 2 statutory remedies to enforce the charge upon default of the chargor.

• i) Apply for an order for sale of the land; or

• Ii) Apply for an order of

possession.

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DIFFERENCE BETWEEN A CHARGE AND A MORTGAGE

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Is a Charge similar to a Mortgage?

• Both are security transactions relating to land.• A mortgage is a pledge of the land by the land

owner to a lender that conveys to the lender the title to the land in consideration for the loan.

• Both, mortgagor and mortgagee agree by contract that upon repayment of the loan, the mortgagee is to re-transfer the land back to the mortgagor.

• Right of the mortgagor to redeem the land is called ‘equity of redemption’.

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The Torrens Charge Is NOT a Mortgage

• A charge under the Torrens system is not the same as a mortgage under English law.

• The Torrens charge is a charge on land – there is no passing of the legal ownership of the land from the land owner/borrower to the lender.

• Effect is just as a security and not a transfer of the land so charged.

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Gan Khor v Soan b. Pelita (1935)

• “It must be remembered that a chargeis a very different transaction to a mortgage.

There is no such thing as a mortgage of land known to the law of the FMS.

Charges alone are recognised…”

• (per Samuel Thomas, CJ)

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Paramoo v Zeno [1968]

• “The Land Code makes it quite clear that here a charge (we have no mortgage in the Malay

States) is quite distinct from a lien.”

• (per Suffian, FJ)

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BBMB v Doric Dvpmt S/B [1988]

• “In the first place, the premise that a charge under the NLC is the same as an English mortgage at common-law is patently erroneous…..”

• “…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.”

• (per Peh Swee Chin, J.)

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How is a Charge different from a ‘Mortgage’?

MORTGAGE:• Created through

contract.• Legal title to land is

transferred to the mortgagee.

• Mortgagor only has an equitable title and the equity of redemption upon full repayment of the loan.

CHARGE:• Created through

statute.• Legal title to land

remains with the chargor.

• Chargee has a registered interest in the land.

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Cont.:

Mortgage• Upon default of the

mortgagor, mortgagee has a right to foreclose the land.

Charge

• Upon default of the chargor, the chargee has statutory remedies of sale or taking possession of the land.

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Powers of Charging

• Who can create a charge? - A registered proprietor (See s. 43 and 241(4) NLC)

• What can be charged? Whole land and a lease. (s.241(1))

• J Raju v Kwong Yik Bank Bhd [1994] – a charge may be created on a part only of land if it were an ‘equitable charge’.

• Reason? Such charge cannot be registered.

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Can the chargor create a 2nd charge on the land?

• Yes. (241(2))• Although not stated in the NLC, usually must

get the consent of the 1st chargee.• In R&I Securities S/B v Golden Castle Finance

Corp. (M) Bhd. [1979], it was held that where the consent for the creation of a second charge is not obtained, there cannot arise an instrument of charge in a registrable form.

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Create charge for what purpose?

• To secure repayment of money. (see s.241(aa) and (bb))

• ‘any sum other than a debt’? e.g. bonds, overdrafts, cheques, payment on demand.

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FORM to Create a Charge

• S.242:• i) Form 16A – to secure a debt• Ii) Form 16B – to secure payment of annuity or

other periodic sum.• As to ‘other periodic sum’, the case of Tan Yen

Yee & Anor. v. Equity Finance Corp. Bhd. [1991], held that monthly payments under a lease of equipment agreement is a ‘periodic sum’. Charge is in Form 16B.

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Tan Yen Yee & Anor. v. Equity Finance Corp. Bhd. [1991]

• Important observation by Richard Tallala JC:• Use of the wrong form will not invalidate the

charge as long as it has no substantial effect or be calculated to mislead.

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NATURE OF INTEREST ACQUIRED BY THE CHARGEE

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Is a charge considered an ‘interest in land’?

• Yes.• Ho Giok Chay v Nik

Aishah [1961] 1 MLJ 49• See decision of

Hepworth, J.

• No.• T. Bariam Singh v

Pegawai Pentadbir Pesaka Malaysia [1983] 1 MLJ 232

• See decision of Mohamed Zahir, J.

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Effect of a Registered Charge?

• See s.243 NLC• Upon registration of a registered charge:• 1) The land becomes a security.• 2) The chargee gets indefeasibility of title

(s.340)• 3) The chargee is entitled to statutory

remedies to enforce the charge under the NLC.

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POSITION OF AN UNREGISTERED CHARGE

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Is an unregistered charge recognised under Malaysian law?

• Yes, by case law, the courts have accepted the concept of an ‘equitable charge’.

• See Mahadevan v Manilal & Sons [1984], Salleh Abas, CJ’s decision.

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Mahadevan v Manilal

• “Examination of court decisions clearly shows that the courts have resorted to equitable

principles and consistently held that 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

NLC…is created.”05/02/23 SZA 25

What Is the Legal Basis for Judicial Recognition of an Equitable Charge?• Read pp. 248-254 of your textbook for ideas

to answer this question.• More discussion on this during tutorials.

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The term ‘equitable charge’ can also refer to the following:

• i) Where charge instrument has been executed but not presented for registration. (Standard Chartered Bank v Yap Sing Yoke [1989] 2 MLJ 2 MLJ 49)

• ii) No title to land issued yet, so security created over land under a loan agreement and deed of assignment. (Malayan Banking v Zahari b. Ahmad [1988] 2 MLJ 135.)

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More situations:

• iii) Although the IDT is available, parties do not wish to create a charge. Borrower just hands over the IDT to the lender as security.

• iv) IDT available but parties wish to enter into the customary security transaction called ‘Jual Janji’ and not a charge.

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Difference between a legal charge and an equitable charge

Legal Charge• 1) Registered.• 2) Chargee entitled to

statutory remedies provided under the NLC.

• 3) Chargee has indefeasible interest over the charge.

Equitable Charge• 1) Unregistered.• 2) Chargee not entitled

to statutory remedies but only claim ‘in personam’.

• 3) Chargee has no indefeasible

interest. Interest can be attacked.

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Who Holds the IDT in a Charge Transaction?

• See S. 244(1) – ‘first chargee’• Chargor can request for IDT by written request

to the chargee,if needed and chargee will produce at the Land office. (s.244(2))

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Powers of Chargee over the charge:

• 1) First chargee holds the IDT.• 2) May enforce the charge upon default of

the borrower.• 3) May transfer the charge to another

person or body under section 216 NLC.

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Powers of Chargor after creation of the Registered Charge?

• 1) May create a second or subsequent charge. (s.241(2)).

• 2) Chargor may create a lease or tenancy on the land charged u- s.251 and 226 but with

consent of chargee and such consent should not be unreasonably withheld.

• (See Leisure Complex S/B v Malaysian Credit Finance Bhd.[1994] – consent should not be unreasonably withheld where chargor wishes to sub-lease the charged property.)

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More:

• 3) Right to a Discharge the Charge

Chargor may pay off the amounts owing under the charge and the chargee may then apply through Form 16N (s. 278 NLC) for a discharge of the charge.

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Priority of Charges

• A charge is given priority in order of creation. (See Lai Soon Cheong v Kien Loong Housing Development & Anor. [1993])

• Priority of charges can be changed through agreement by using the following methods:

• 1) consolidation (s.245)• 2) tacking (s.246)• 3) postponement (s.247)

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Consolidation of Charges

• Chargor charges

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Land

A

Land

B

Loan RM100,000

Loan RM80,000

BANKC

Concept of Consolidation of Charges

• The chargee (Bank C) requires both charges to be consolidated so that when the chargor wants to discharge the charge on Land A, he must also pay up the loan secured by Land B.

• Result of consolidation: To discharge Land A, the chargor must also discharge Land B.

• NLC in s.245 restricts consolidation of charges. (see)

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Tacking for Further Advances

• Jan. 2008 - ‘A’ charges land to ‘B’ for RM100,000 with a right to tack.

• March 2008 - ‘A’ charges same land to ‘C’ for RM50,000 (2nd Charge)

• August 2008 – ‘A’ borrows another RM50,000 from ‘B’

• ‘A’ subsequently defaults under the 1st charge. • ‘B’ obtains an order for sale of the land.

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Tacking, continued:

• Total owing to ‘B’? • RM, 150,000• Let’s say the sale of land in a public auction obtains

RM160,000 for the land, minus costs , what is left is RM150,000.

• As ‘B’ has a right to tack, ‘B’ gets all the RM150,000 and ‘C’ does not get anything.

• If ‘B’ had no right to tack, ‘B’ would only get RM100,000 and ‘C’ would get another RM50,000.

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Tacking is recognised u-s.246 NLC

• Chargee may tack further advances in 2 situations:

• 1) where it is expressly authorised by the prior charge; or

• 2) where the advance/s are made with consent of the 2nd Chargee.

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Effect of tacking for further advances?

• It adversely effects subsequent charges.• Thus, tacking as well as consolidation may

effect priority of charges.

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Postponement (s.247)

• Before a charge can be postponed, it must first be registered.

• Postponement will give the subsequent chargee priority over the first charge.

• Carried out by Form 16C.• See Ling Tee Huah Credit & Leasing S/B v Lii

Tat Credit Mortgage S/B [1990] 1 MLJ 46.

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