Securities as a Collateral

SECURITIES AS A COLLATERALAminurasyed bin MahpopFaculty of LawUniversiti Kebangsaan Malaysia

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CONTENTSLendingSecuritiesType of Securities2INTRODUCTIONWhen credit is extended, risks are inevitably evolved.To minimize these risks, B require some form of security.Bankers, financiers,, creditors, lenders and customers should know the law on lending and securitiesTo ensure Banks are protectedTo protect the rights of customersDocumentation is very important3Lending And SecuritiesCredit facilitiesSecuritiesLetter of OfferFacilities AgreementSecurity DocumentChargeAssignmentGuaranteeOther kinds of securities4LETTER OF OFFERSigning the LO is considered as legally binding contract.Lee Chong Lim v Standard Chartered Bank Malaysia Bhd (2004) 6 CLJ 447The Pt was granted housing loan by the Dt via LO 27/06/01. The Pt accepted the offer and entered into FA and executed MOC. The Dt decided to withdraw the loan facility (false information). The Dt issued LOD and the Pt applied for SJ for SP.The Dt is duty bound to disburse the loan. The loan was not repayable on demand but repayable over 240 months.5WHAT IS SECURITY?Taken before the loans and advances are given to the customerIt can be regarded as insurance against defaults in payment of the loan.Possession of the holder of the security holds as against the grantor a right to resort to some property or some fund.If the debtor goes bankrupt, a secured creditor takes precedence over unsecured creditor in the distribution.6WHAT IS SECURITY?Security implies something which the creditor could resort to in order to aid him in realizing or recovering the debt, in case the debtor failed to pay.Lien Chung Credit & Leasing Sdn Bhd v Chang Chin Choi [1994] 3 MLJ 488The R gave a postdated cheque for RM35K as security for RM35K loan. The said cheque was not mentioned in the memorandum. The appellant claimed for repayment.Mohd Ghazali JC:The word security has several meanings, sometimes means the property- land is mortgaged the land.Postdated cheque cannot be termed as security.7PERSONS FROM WHOM SECURITIES ARETAKENIndividual- Above 18 yearsCompaniesPartnershipsSole proprietorships8COMPANYSeparate legal entity. Can sue and be sued.S67 of the CA 1965- Cannot deal in its own sharesS 133- cannot provide any loan or security in connection with its directors or to persons connected with its directors. Penalty RM10K.Notwithstanding a breach off s 67 and 133, the company's liability on the loan and security are unaffected by such breach.Lori M Bhd v Arab Malaysia Finance Bhd [1993] 3 MJ819PERSONS CONNECTED WITH ITS DIRECTORS S122A(a) a member of that director's family; or(b) a body corporate which is associated with that director;(c) a trustee of a trust under which that director or a member of his family is a beneficiary; or(d) a partner of that director or a partner of a person connected with that director.(2) a member of that director's family shall include his spouse, parent, child (including adopted child and stepchild), brother, sister and the spouse of his child, brother or sister.(3) a body corporate is associated with a director if (a) the body corporate is accustomed or is under an obligation, to act in accordance with the directions, instructions or wishes of that director;(b) that director has a controlling interest in the body corporate; or(c) that director or persons connected with him, or that director and persons connected with him, are entitled to exercise, or control the exercise of, not less than fifteen per centum of the votes attached to voting shares in the body corporate.10PARTNERSHIPA maximum off 20 members.

Banks to keep the Partnership agreement.

Register with the ROB, CCM.

To ensure the authority of a partner to borrow.11SOLE PROPRIETORSole proprietor company

To produce a copy off the Certificate of registration issued by the CCM.12TYPES OF SECURITIESLandDebenturesContract moneys and book debtsLife policiesStocks and SharesCashGoodsShipsGuarantees13ASPECTS FOR CONSIDERATIONThe value of the securityRealisabilityValidity of tittleIndefeasibility of the securityCost of stamping14METHODS OF TAKING THE SECURITYMany forms.Charge, pledge, lien, legal assignment, set off.Assignment is an absolute one not purporting to be way off charge only?BBMB v Syarikat Kejuruteraan Hong Huat Sdn Bhd & Ors [1988] 3 MLJ 328Whether or not an assignment is an absolute one nor purporting to be by way of charge only is to be gathered only from the four corners of the instrument itself.15LANDCharge and LienNLC 1965Effect of registration-s340- Indefeasibility of titleFreehold land: in perpetuityLeasehold title: for a term of years. S76- cannot exceed 99 years.Tenancies: cannot exceed 3 years unless renewed. Not acceptable as security.Forms of title: 1. Final Title: Registry title (grant) and Land Office Title (Mukim Grants). 2. Qualified title:Hak Milik SementaraRDT: Original copy of the grant (Land Office)IDT: Duplicate copy of the original grant (Owner)16RESTRICTIONSRestriction in interestFor policy reasonMalay reservation landCustomary landNative LandAny instrument of dealing registered in contravention off a ROI would be a void instrument.Conditions of land use:Agriculture ResidentialCommercial 17CHARGEOn land or assetsLand: Statutory creation. NLC 1965 Confers a right on the secured party to look to a particular asset in the event of the debtor's default, which is enforceable by either power of sale or appointment of a receiverLand with the IDT-Memorandum of chargeLand without the IDT- Deed if Assignment.18CHARGEFirst party charge: Both the borrower and the chargor are the same.

Third party charge: Where the chargor and the borrower are different.

First legal charge and second legal charge: S 241 NLC- It is permissible to create more than one charge on the same property. The rights of the subsequent chargee shall rank after the first chargee.19LAND SEARCHTo ascertain the ownership of the land, the existence of any encumbrances, any ROI and etc.

Land searches- land office. The land office will issue certificate of search.20DOCUMENTATION OF A CHARGEThe MOC- Form 16A

Execution: If company, common seal and in the presence of directors or company secretary. It depends on the board resolution

Attestation- attestation by magistrate, AA, notary public, land administrator21STAMPINGA charge is an instruments that attracts ad volerum stamp dutyStamp Act 1949- RM5 for every RM5000Must be paid within 30 days from the date of execution of the charge. If not, the charge is impounded.The charge will be inadmissible in evidence in a court unless the penalty is paid. RM25 or 4x the amount of the deficient duty.Eg. RM1M - RM5K. If impounded: RM20000+RM5K.22DOCUMENTATION OF AN ASSIGNMENTLand without tittle.

A loan agreement cum assignment: both the purchaser and borrower are the same.

A loan agreement and a deed of assignment: the purchaser and the borrower are different.

Power of attorney.23LIEN-HOLDERS CAVEATRight to hold the property of another as security for the performance of an obligation.

Banker's lien is the banker's right to enforce his claim upon the land until the debt is repaid.

Lienholders caveat: The B can enter LC which is a notice to third parties that the land is encumbered by that lien.24LIEN ON FIXED DEPOSITMonies kept under a fixed deposit account can be a pledged as security for the repayment of a loan.

Documentation: The Memorandum of Deposit- Ad valorem or Letter of Set-Off-nominal25ASSIGNMENT OF CONTRACT PROCEEDSTransfer to an assignee of the right to receive a benefit from a debtor.Assignment of contract rightsBBMB V Syarikat Kejuruteraan Hong Huat Sdn Bhd & Ors (1988) 3 MLJ 328OD facility RM2.8m- loan agreement. Security-Charge under the NLC and guarantee + deed of assignment of all the proceeds under the project undertaken known as Malacca Seafront Reclamation.Upon default, the Pt claimed the loan sum.The pt has right to take legal action against assignor for the loan recovery even without having to enforce the securities.26DEBENTURESAn instrument evidencing a debt by a company.

As a security for credit facilities granted to companies.

Debentures are secured by a fixed and a floating charge over the assets of the company.

Document: Debenture agreement27GUARANTEESGuarantor to guarantee the repayment.Additional personal obligations on the part of the principal debtor.Joint and several guarantee: the B has the luxury of either suing all of them jointly or choosing from any of the guarantors. Eg directors.Documentation: Guarantees and IndemnitiesStamp duty: RM1028LIFE ASSURANCE POLICYBy way of an assignment of the policy.

The proceeds under the policy will be paid directly to the B by the insurer upon the death of the assured provided the death occurred during the tenure of the loan.

Documentation: An endorsement on the policy and deed of assignment.29PLEDGETransfer of possession of a chattel eg stocks and shares.

A form of possessor security.

Power of sale in the event of a default on the secured obligations.30GOODSGoods can be a security for loan and credit facilities.

A security over goods by way off a pledge.

A pledge requires delivery of possession of the goods to the bank.

A security over goods by way of the Bill of Sale Ordinance 1950-possession of the goods remains with the borrower.31THE END 32SecurityLien Chung Credit & Leasing Sdn Bhd v Chang Chin Choi [1994] 3 MLJ 488, High CourtTan Wee Han & Anor v Meyappa Chettiar [1951] MLJ 227Halsburys Laws of England (Vol 32, 4th Edn)33Types of SecuritiesLand DebenturesContract moneys and book debtsLife policiesStocks and sharesCashGoods and produceShipsGuarantee34Methods of Taking SecurityHong Leong Finance Bhd v Staghorn Sdn Bhd & Other Appeals [2005] 2 CLJ 1Bank Bumiputra Malaysia Bhd v Syarikat Kejuruteraan Hong Huat Sdn Bhd & Ors [1988] 3 MLJ 328, High Court35Persons from Whom Securities are TakenCompaniesNature and Types of CompaniesSection 14(1), 15(1) of the Companies Act 196536Persons from Whom Securities are TakenCompaniesOperation of CompaniesSection 4 of the Companies Act 1965Panorama Development (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 71137Persons from Whom Securities are TakenCompaniesBank Lending and the Doctrine of Ultra ViresSection 19, 20, 30(2) Third Schedule of the Companies Act 1965Royal British Bank v Turquand (1856) 6 E & B 32738Persons from Whom Securities are TakenCompaniesProhibition Against Company Dealing in its Own Shares and Loans to Directors or Persons Connected with DirectorsSection 67, 133, 133A of the Companies Act 1965Utama Wardley Bhd & Anor v Lenggang Laut Development Sdn Bhd & Ors [1991] 3 MLJ 490 Chung Khiaw Bank Ltd v Hotel Rasa Sayang Sdn Bhd & Anor [1990] 1 MLJ 356Yap Sing Hock Holding Bhd & Ors v Chuah Teong Hooi & Ors [1990] 3 MLJ 97Kidurong Land Sdn Bhd & Anor v Lim Gaik Hua & Ors [1990] 1 MLJ 485Lori (M) Bhd (Interim Receiver) v Arab-Malaysian Finance Berhad [1999] 3 MLJ 81Che Wan Development Sdn. Bhd v Co-operative Central Bank Bhd [1990] 2 MLJ 365Co-operative Central Bank Ltd (in receivership) v Feyen Development Sdn Bhd [1997] 3 CLJ 365Aluminium Company of Malaysia v Ng than Chai & Ors [1994] 3 MLJ 544

39Persons from Whom Securities are TakenPartnerships

40Persons from Whom Securities are TakenSole Proprietorships

41Land as SecurityLand Law as GeneralSection 206 or the National Land Code 196542Land as SecurityEffects of RegistrationSection 340(2) of the National Land Code43Land as SecurityIndefeasibility of TitleSection 340(1), 340(2), 340(3) of the National Land Code Public Finance Bhd v Narayanasamy [1971] 2 MLJ 32 Tai Lee Finance Co Sdn Bhd v Official Assignee & Ors [1983] 1 MLJ 81 Owe Then Kooi v Au Thiam Seng & Anor, Development & Commercial Bank Bhd v Au Thin Chai & Ors (Owe Then Kooi, Intervener) [1990] 1 MLJ 234, MT [1991] 2 MLJ iiOCBC Bank (Malaysia) Bhd v Pendaftar Hakmilik Negeri Johor [1999] 2 CLJ 949OCBC Bank (Malaysia) Bhd & Ors v Lee Lee Fah & Ors & Another Appeal [2000] 1 CLJ 71Adorna Properties Sdn Bhd v Boonsom Boonyanit @ Sun Yok Eng [2001] 1 MLJ 241EON Bank Bhd v Hotel Flamingo Sdn Bhd [2005] 5 CLJ 253 Yong Tim v Hoo Kok Chong & Anor [2005] 3 CLJ 229Tan Ying Hong v Tan Sian San & Ors [2010] 2 MLJ 1

44Land as SecurityAlienation of LandSection 5, 40 of the National Land Code

45Land as SecurityFreehold LandSection 76 of the National Land Code

46Land as SecurityRent

47Land as SecurityOther Aspects on Title and RegistrationNik Haji Mahmud bin Daud v Bank Islam Malaysia Berhad [1998] 3 MLJ 393MBF Finance Bhd v Teguh Consolidated Sdn Bhd [2004] 3 CLJ 809

48Land as SecurityForm of TitleFinal titleQualified title

49Land as SecurityRegister Document of Title and Issue Document of Title

50Land as SecurityConditions and Restriction on TitlesRestriction on interestCondition of land useCollector of Land Revenue, Johor Bahru v South Malaysia Industries Bhd [1978] 1 MLJ 130Land Executive Committee of Federal Territory v Harper Glifillan Bhd [1981] 1 MLJ 234United Malayan Banking Corporation Bhd & Anor v Pemungut Hasil Tanah, Kota Tinggi [1984] 2 MLJ 87

51Land as SecurityChargesSection 5, 243 of the National Land CodeWiggins Teape (M) Sdn Bhd v Bahagia Trading Sdn Bhd, The East Asiatic Co Ltd & Ors as Objectors [1980] 2 MLJ 45 Co-operative Central Bank Ltd v Y & W Development Sdn Bhd [1997] 3 MLJ 373Eng Ah Mooi & Ors v Overseas Chinese Baning Corporation Ltd [1983] 1 MLJ 209Syarikat Kewangan Melayu Raya v Malayan Banking Bhd [1986] 2 MLJ 253Hong Kong and Shanghai Banking Corporation Ltd v Wan Mohd Bin Wan Ngah [1991] 3 MLJ 119Bank Bumiputra Malaysia Bhd v Esah Abdul Ghani [1986] 1 MLJ 16Gondola Motor Credit Sdn. Bhd v Almurisi Holdings Sdn. Bhd [1990] 3 MLJ 180Yee Ah Fern v Alliance Bank Malaysia Bhd [2010] 7 MLJ 547

52Land as SecurityLienSection 281(1) of the National Land CodeHong Leong Finance Bhd v Staghorn Sdn Bhd & Other Appeals [2005] 2 CLJ 1 Paramoo v Zeno Ltd [1968] MLJ 230

53Land as SecurityCaveatsSection 323 of the National Land Code Malayan United Finance Bhd v Tay Lay Soon [1991] 1 MLJ 504Chor Phaik Har v Farlin Properties Sdn Bhd [1994] 3 MLJ 345Pendaftar Hakmilik Negeri Kedah v Oversea-Chinese Banking Corp Ltd [1991] 2 MLJ 177MBf Finance Berhad v Pendaftar Hakmilik Negeri Perak & Anor [1990] 3 MLJ 437Development & Commercial Bank Bhd v Land Administrator, Wilayah Persekutuan & Anor [1991] 2 MLJ 180

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