Law of Banking and
Security
DR. ZULKIFLI HASAN
Contents
Lending
Securities
Type of Securities
Introduction
When credit is extended, risks are inevitably
evolved.
To minimise these risks, B require some form of
security.
Bankers, financiers, creditors, lenders and
customers should know the law on lending and
securities
To ensure Banks are protected
To protect the rights of customers
Documentation is very important
Lending and Securities
Credit facilities
Securities
Letter of Offer
Facilities Agreement
Security Document
Charge
Assignment
Guarantee
Other kinds of securities
Letter of Offer
Signing the LO is considered as legally binding contract.
Lee Chong Lim v Standard Chartered Bank Malaysia Bhd
(2004) 6 CLJ 447
The 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.
What is security?
Taken before the loans and advances are given
to the customer
It 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.
What is security?
Security implies 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.
Lien Chung Credit & Leasing Sdn Bhd v Chang Chin Choi
[1994] 3 MLJ 488
The 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
Persons from whom securities are
taken
Individual- Above 18 years.
Companies
Partnerships
Sole proprietorships
Company
Separate legal entity. Can sue and be sued.
S67 of the CA 1965- Cannot deal in its own
shares
S 133- cannot provide any loan or security in
connection with its directors or to persons
connected with its directors. Penalty RM10K.
Notwithstanding a breach of 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 M;J
81
Persons connected with its directors S122A
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 directors'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.
Partnership
A maximum of 20 members.
Banks to keep the Partnership agreement
Register with the ROB, CCM.
To ensure the authority of a partner to borrow.
Sole Proprietor
Sole proprietor- company
To produce a copy of the Certificate of
registration issued by the CCM.
Types of Securities
(1) Land
(2) Debentures
(3) Contract moneys and book debts
(4) Life policies
(5) Stocks and Shares
(6) Cash
(7) Goods
(8) Ships
(9) Guarantees
Aspects for consideration
1. The value of the security
2. Realisability
3. Validity of title.
4. Indefeasibility of the security
5. Cost of stamping
Methods of Taking the security
Many forms.
Charge, pledge, lien, legal assignment, set off.
Assignment is an absolute one not purporting to
be way of charge only?
BBMB v Syarikat Kejuruteraan Hong Huat Sdn Bhd
& Ors [1988] 3 MLJ 328
Whether 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.
Land
Charge and Lien
NLC 1965
Effect of registration-s340- Indefeasibility of title
Freehold land: in perpetuity
Leasehold 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 Sementara
RDT: Original copy of the grant (Land Office)
IDT: Duplicate copy of the original grant (Owner)
Restrictions
Restriction in interest
1. For policy reason.
2. Malay reservation land
3. Customary land
4. Native Land
Any instrument of dealing registered in
contravention of a ROI would be a void
instrument.
Conditions of land use: 1. Agriculture 2.
Residential 3. Commercial 4.
Charge
On land or assets
Land: 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 receiver
Land with the IDT- Memorandum of charge
Land without the IDT- Deed if Assignment.
Charge
First 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.
Land search
To 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.
Documentation of a charge
The 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 administrator
Stamping
A charge is an instruments that attracts ad volerum
stamp duty
Stamp Act 1949- RM5 for every RM5000
Must 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.
Documentation of an Assignment
Land without title.
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.
Lien-holder’s caveat
Right 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.
Lienholder’s caveat: The B can enter LC which
is a notice to third parties that the land is
encumbered by that lien.
Lien on Fixed Deposit
Monies 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-nominal
Assignment of contract proceeds
Transfer to an assignee of the right to receive a benefit
from a debtor.
Assignment of contract rights
BBMB V Sykt Kejuruteraan Hong Huat Sdn Bhd &
Ors (1988) 3 MLJ 328
OD 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.
Debentures
An 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 agreement
Guarantees
Guarantor 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 Indemnities
Stamp duty: RM10
Life Assurance Policy
By 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
Pledge
Transfer 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
Goods
Goods can be a security for loan and credit
facilities.
A security over goods by way of 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.
