BANKS SECURITIES

Al Baqarah: 282. O you who believe! When you contract a debt for a fixed period,
write it down. Let a scribe write it down in justice between you. Let not the scribe
refuse to write as Allah has taught him, so let him write. Let him (the debtor) who
incurs the liability dictate, and he must fear Allah, his Lord, and diminish not
anything of what he owes. But if the debtor is of poor understanding, or weak, or is
unable himself to dictate, then let his guardian dictate in justice. And get two
witnesses out of your own men. And if there are not two men (available), then a
man and two women, such as you agree for witnesses, so that if one of them (two
women) errs, the other can remind her. And the witnesses should not refuse when
they are called on (for evidence). You should not become weary to write it (your
contract), whether it be small or big, for its fixed term, that is more just with Allah;
more solid as evidence, and more convenient to prevent doubts among
yourselves, save when it is a present trade which you carry out on the spot among
yourselves, then there is no sin on you if you do not write it down. But take
witnesses whenever you make a commercial contract. Let neither scribe nor
witness suffer any harm, but if you do (such harm), it would be wickedness in you.
So be afraid of Allah; and Allah teaches you. And Allah is the All-Knower of each
and everything.
DEFINITION

Lien Chung Credit & Leasing SB v. Chang Chin Choi [1994] 3 MLJ 488

The word security would seem to supply something which the creditor could
resort to in order to aid him in realising or recovering the debt, in case the debtor
failed to pay
Types of securities

Land

Debentures

Life policies

Stocks and shares

Guarantees

Lien

5 general principles

The value is ascertainable easily value, stable and value is more than the
amount borrowed by the customer.

Realisability easily transfer to cash and within short period.

Validity of title procedure of taking the security is not complicated

Indefeasibility free from any encumbrances

Charges borne by borrower eg. Stamp duty, tax etc.

Persons from whom securities

are taken

Companies

Partnerships

Sole proprietorships

Natural persons
LAND AS SECURITY

Offers the best form of security for a loan

Most tangible form of security

Its value can be easily calculated

If debtor default payment, the land can be sold and the proceeds of sale be utilised
to satisfy the debt.

Diff of mortgage and charge same concept except in mortgage, the ownership of
asset is transferred from debtor to creditor; no ownership of asset is transfer in
charge but still the creditor has certain rights eg. To sell the asset and have rights
to the proceeds to pay debt of debtor.

A. Legal charge (formal)

S.241 of NLC land can be charged for repaymt of any debt.

S.242 of NLC

Legal charge shall be effected by an instrument of charge in the

statutorily prescribed form F 16A and F 16B

any charge created, under the NLC, must be registered with the appropriate Land
Registry or Land Office to be effective as a security. (s.243 NLC)

Under the Torrens system, all dealings (which include charges) in land must be
registered. Once registered, the chargees interest in the land is indefeasible Tai
Lee Finance Co Sdn Bhd v Official Assignee & Ors.

Torren system

Mirror principle - the register (Certificate of Title) reflects (mirrors) accurately and
completely the current facts about a person's title

Curtain principle - one does not need to go behind the Certificate of Title as it
contains all the information about the title

Insurance principle - provides for compensation of loss if there are errors made by
the Registrar of Titles.

In practice, chargee would have disbursed the loan prior to the registration of the
charge

The lender normally disburses the loan upon the confirmation from its solicitors
that the charge documents have been presented for registration and that having
conducted the necessary searches, there are no encumbrances on the title, which
would prevent the charge from being registered in due course.

The lender may also insist on obtaining the solicitors undertaking to refund
monies disbursed in event the charge cannot be registered.

Solicitors often qualify their undertakings, if given, that they are not liable if the
non-registration is not attributable to their acts or omissions.

Discharge of charge

upon full settlement of all o/standing sums

Form 16N

The duties of chargor implied by the NLC (s249-250) include

pay all rents falling due to the State authority

pay all rates, taxes and other outgoing

keep in repair all buildings on the land charged; and

insure the buildings to their full insurable value

Upon default paymt, creditor has 2 remedies:

right to possession (s.271(1) NLC)

- The Bank, as chargee, has the right to possession when the chargor is in breach of
an agreement, expressed or implied
This right is expressly limited to charges over land held under a Land Office title, or in
the case of any other
town or village land, if the land is not occupied by the chargor. (s.270(1) NLC)

- This remedy of taking possession may either take the form of going into physical
possession, or where the property is subject to a lease or tenancy, by taking the rent.

power sale by public auction s.271(1) NLC.

The more widely used remedy is the exercise of the chargees power of sale.

The power of sale arises pursuant to express terms and conditions contained in
the Facilities Agreement and the charge annexure and terms of conditions implied
in the NLC.

s 253(1) of the NLC provides that the right to sell arises when the chargor has
defaulted in payment of interest and principal, and when the chargor has breached
the agreement.

- In the case of land held under Registry title (qualified title eg. H.S) the chargee may
apply to the Court for an order for sale of the charged land. If the land is held
under Land Office title (final title eg. Geran Mukim); and so the Bank has to apply
to the Collector of Land Revenue for an order for sale.

A third party first legal charge means that the security is not offered by the
borrower but by a third party - The word first here refers to priority, meaning that
this charge is not subject to any prior priority or encumbrance - The word legal
means that the charge must be registered in the relevant Land Office/Registry and
must comply with the National Land Code requirements.

Legal charges would confer upon the parties to the charge statutory rights and
obligations (such as the right given to the chargee to apply for order for sale). It is
not merely an equitable charge e.g. where the document of title and the relevant
charge form/document has been delivered and executed respectively by the
proprietor chargor but not registered however in favour of the chargee.

On the other hand, first party third legal charge means that the security is
provided by the borrower but the charge is third in priority - Third in priority means
that there are two prior registered charges, which are ranking in priority to the third,
unless they are stated to rank pari passu.

B. Equitable charge (not formal)

As a collateral for a loan

The moment a borrower deposits his issue of doc of title with a bank as
security a lien is created

Incapable of registration

S281 NLC lien can be created as security for loan by the deposit of title
deeds.

a lien holders caveat capable of registration thus creates a secured debt

A lien-holders caveat as a form of security may be offered to a bank in any of

the following situations:

The loan is of a temporary nature

A transaction does not involves a transfer of o/ship of land

A borrower refuses to pay extra stamp duties

A borrower does not want any encumbrances to be indorsed on his issue doc
of title

C. Security by way of deed of assignment

New housing unit/ flatted factory building under construction

A borrower may assign all his rights and interest in the assigned property to a
bank as a security for a loan

Mortgage in escrow together with deed of assgnmt, borrower will execute a

mortgage in favour of lender mortgage will become legal mortgage upon
the delivery of cert of title.

Caveat - notice that no action can be taken w/out informing person who gave
the notice.

A mortgage is the transfer of ownership of property to the creditor to secure

repayment of a debt, subject to the debtors right of redemption. On the other
hand, a charge does not involve any ownership change but gives the creditor
(chargee) certain rights over the property, such as the right to be repaid out of the
sale proceeds of the property.
cases

Tan Lay Soon v. Kam Theatre SB (Malayan Utd Finance B, intervener)

P__SP agreemt & caveat__D _ charge land as security__MUF

order to discharge caveat & order of sale

injunction to stop sale

HELD: injunction allowed and P can discharge the land on behalf of D

Standard Chartered Bank v. Mukah Singh

P land charge for bank loan RM300,00

- P asked for about RM100,000 of sale proceed after auction.

HELD: P is entitle bcoz the term of contract state .w/out prejudice to the right of sale
proceeds .

Kuching Plaza SB v. BBMB (1991) 3 MLJ

A charge land and building(KP) on land for loan 5 million

BBMB

A1,A2,A3,A4
(buy KP from A)

HELD: KP Plaza is own by A1,A2,A3 and A4 and BBMB can only recover the debt
from A since A1,A2,A3 and A4 has paid the price of KP Plaza to BBMB.

Chuah Eng Khong v. Malayan Banking Bhd (1997) 3 MLJ

A

charge land as security

caveat B

-A failed to pay debt and B asked for notice of bankruptcy from court (15/8/94) with
debt value RM132,177.76.

17/11/94 A paid RM132,177.76 and seek for discharge of caveat.

HELD: Caveat is not discharge untill all debts plus interest has been paid.
(RM241,447.00)

The Co-operative Central Bank Ltd. v. Feyen Dvlpmt SB (1994) 2 CLJ 34

B gave loan 3 million to director of Comp. and the loan is secured by land of
Comp.

HELD: charge of land is not valid as S133 Comp Act 1965 prohibit comp.
from giving loan to its directors.

NKM Properties SB v. Rakyat First Merchant Bankers (1992) 3 CLJ

S259(2) National Land Code in the absence of any bid at or above the reserve
price, withdraw the land/lease in question from the sale, direct that it be put up for
auction on a subsequent date, either at the same or at the reduced reserve price.

8 auctions - RM4.63 million.

EU Finance Bhd. v. Sim Sen Ong Bhd (1990) 2 MLJ

Market price is base on report of valuer and not desk valuation w/out surveying the
land and market price even though the is made by an expert.

THE DEBENTURE

A doc which contains an acknowledgement of indebtedness on the part of the

company.

S. 4(1) of the Companies Act 1965

-includes debenture stock, bonds, notes and any other securities of a corporation
whether constituting a charge on the assets of the company or not

Debenture holder creditor of the company

- legally not interested in the company

- entitled to all the remedies to obtain payment of any o/standing monies due to him

Only a corporation can create a debenture

Includes a company incorporated under the Company Act 1965

Must be empowered by its Memorandum of Association

Individuals, sole proprietorships partnership do not have the legal capacity to

create a debenture

Unsecured debenture

Issued without a charge over any of the company assets

Merely contains an acknowledgement of the companys indebtedness

Sometimes referred to as a naked debenture

Secured debenture

Issued with a charge over the companys assets

The assets covered by a secured debenture lands, the fixed assets, floating
assets

So, charges created in favour of a debenture-holder may be either fixed or floating

charges

A fixed charge

A charge on a some specific property belonging to the company and it immediately

attaches to that property

Lands, all the fixed assets, plant, machinery, equipment and motor vehicle of the
company

An equitable fixed charge or a charge by way of deposit is created when a

company deposits its doc of title or share cert with the bank as security for the
credit facilities

A floating charge

Includes all the undertakings, properties and assets of the borrower, both
moveable and immoveable, wheresoever situated, both present and future,
including the companys uncalled capital, goodwill, books debt, acc receivable,
stock in trade.

Re Yorkshire Woolcombers Association Ltd - the essential characteristics of a

floating charge

it is a charge over a class of assets present and future;

that class will be changing from time to time; and

until the charge crystallises and attaches to the assets, the chargor may carry on
its business in the ordinary way.

Registration of charge - S108 Companies Act

Within 30 days of creation

A charge that is lodged after 30 days cannot be registered unless accompanied by

a Court Order for extension of time.

Priority

Preferred creditor employees claims (wages, salary etc.)

Legal charge prevail over equitable charge

Fix charge prevail over floating charge

Two fix/floating charge the first charge (registeration) prevail over the 2 nd charge.

Re Benjamin Cope & Sons Ltd 2nd charge will prevail over 1st chrge if 1st charge
allow company to create 2nd charge with equal or higher priority.

Unsecured debt.

LIFE POLICIES

Not popular as security, usually accepted by foreign bank

Procedure absolute assignmt (std form agreem.):-

purpose of assignmt eg. Security for customer overdraft

Continuing security

Undertaking for paymt of premiums by customer, if failed then bank have to pay

Undertaking by customer to allow bank to have policy paid, sold or surrendered for
its surrendered value.

Disadvantages

Customer default regular paymt of premium

Non-disclosure or misrepresentation of by customer

Re Bahadun b. Hj Hassan (deceased) (1974) 1MLJ 14 if the name of the

beneficiaries have been inserted, they will get vested interest immediately in the
policy.

In the matter of Lim Yeow Seng (deceased) (1995) 3 SLR 363 A divorced wife
who is name as a beneficiary is the owner of the money under the policy

STOCKS & SHARES

Borlands Trustee v Steel Bros. & Co Ltd. - a share is defined as the interest of
the shareholder in the company measured by a sum of money, for the purpose of
liability in the first place, and for interest in the second, but also consisting of a
series of mutual covenants entered into by all the shareholders inter se

Normally, public listed shares are accepted as security.

Banker prefer public listed companies as share prices can be monitored and share
can be easily disposed.

Legal charge

Registered

Memorandum of deposit to be executed and stamped. share will be transfer to

bank where bank have power of sale and undertaking to complete any doc
necessary to perfect the banks title.

Bank will require the shares to be transferred to and registered in the name of the
Banks nominee company.

-The share certificates will be deposited with the Bank or lodged in the Central
Depository System if they are scripless shares. In the case of scripless shares,
these shares will be caused to be registered in the securities account of the lender
(mortgagee) and this account is called the Pledged Securities Account section
40, Securities Industry (Central Depositories) Act 1991

Equitable charge

A mere deposit of shares

Blank transfer if necessary, it can be completed by filling the name of the

nominee company

Pan Electric Industries Ltd. V. Sim Lim Finance Ltd. & Ors (1993) 3 SLR 24

P --------------------- 9th.D --------------------- D1-8

Facts: P deposit share blank transfer to 9th. D (Stockbroker) which latter charged the
share to D1-8 (financial institutions). Liquidator of P tried to get back the shares.
Held : 9th. D has beneficial interest in the share although share cert is still in Ps name.
9th. D is not given power to charge the share to D1-8, therefore D1-8 has no rights
towards the share.
GUARANTEE

A written promise by a person to be collaterally answerable for the debt, default or

miscarriage of another.

S79 Contracts Act 1950 A contract of guarantee is a contract to perform a

promise, or discharge a liability of 3rd. person in case of his default.

Std letter of guarantee no real security given networth of guarantor and how
willing he is to pay.

3 parties (a) guarantor, (b) principal debtor (borrower), and lender (creditor).

TYPES OF GUARANTEE

Several each guarantor may be sued separately and judgements obtained

against one does not discharge the others.

Joint guarantors maybe jointly liable all have to be sued in a joint action.

Joint and several guarantors maybe sued in any way the creditor deems fit.

Most popular type

Guarantors can be individual or company

Avoidance of LG

Letters of guarantee maybe avoided by non-disclosure or misrepresentation by

the bank or its officers.

Can be avoided also by undue influence

Public Finance Bhd. V. Lee Bee Rubber Factories Sdn Bhd &Ors (1994) 1
MLJ 495

Non est factum (not my act) also pleaded to set aside a guarantee.

Conclusive evidence clause A cert by an officer of the bank as to the money

and liabilities for the time being due or incurred to the bank from any or by the
customer shall be conclusive evidence in any legal proceedings against us or any
one of us or our personal representatives.
LIEN

Section 281(1) of NLC

Halsbury Laws of England defines Lien as Right of one man to retain the property
belonging to another man until certain demand of the man in possession of the
goods are satisfied. Lien do not need a registration for it to be created,
LIEN

In relation to accepting assignment of contractual rights as security such as assignment of

contract proceeds, this type of security can be in the form of assignment of debt owed by
third parties, assignment of proceeds of contract; and can be legal assignments or equitable
assignments. It is possible for a customer to assign a debt owed by a third party to the bank
as security for an advance.

The assignee has the right to take legal action to recover any moneys due under an
assignment Bank Bumiputra Malaysia Bhd v Syarikat Kejuruteraan Hong Huat Sdn Bhd
& Ors.

The banker also can accept the assignment of the proceeds of a contract as security.

However, such a security depends on the ability of the debtor to pay as well as the ability
of the contractor to perform, the contract and the payment in respect thereof.

(ii) The key principles to be considered by bankers and financiers when accepting this type
of security include the following:

it must be in writing and signed by the assignor (borrower)

it must be absolute; that is, the whole debt must be assigned and free from any conditions

express notice should be given to the debtor; and

the debtor should be requested to acknowledge the notice, confirm the debt and the
existence of any right of set-off or counter-claim, and also advise of any prior assignments.