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Claudia Cheah and Witter Yee examine a recent decision on an absolute assignment of rights relating to land

In the recent case of Damai Freight (M) Sdn Bhd v Affin Bank Berhad (unreported), the Federal Court was called upon to answer the following question of law:

"Whether a lender having an absolute assignment of rights to land may realise his security under the terms of the assignment, where the document of title to the land was issued subsequently, without the need to resort to the remedies under the National Land Code, 1965."

FACTS

This case concerns a piece of land located in Port Klang, Selangor Darul Ehsan ("Land") which was to be alienated by the State Government of Selangor to Perbadanan Kemajuan Negeri Selangor ("PKNS"). Pending the issuance of a title to the Land, PKNS entered into an Agreement to Lease dated 28 November 1988 ("the Principal Agreement") whereby it granted a lease over the Land to the appellant for 30 years.

In 1990, the appellant obtained loans from Bank Buruh (Malaysia) Berhad ("BBMB"). As security for the said loans, the appellant executed a Loan Agreement Cum Assignment dated 16 April 1990 ("LACA") whereby it assigned absolutely all its rights, title and interest under the Principal Agreement to BBMB. BBMB subsequently transferred and vested its business and assets (including its rights under the LACA) to the respondent.

In 2003, unknown to the respondent, the title to the Land was issued and registered in the name of PKNS.

The appellant defaulted in repayment of the loans and was indebted to the respondent for approximately RM1.3 million. On 26 February 2004, the respondent obtained judgment against the appellant for moneys owing under the loans.

In exercise of its rights under the LACA, the respondent conducted a public auction and sold its rights, title and interest under the Principal Agreement to the sole bidder at the reserve price of RM1.8 million. As the Land had already been registered in the name of PKNS, the respondent informed PKNS of the same. PKNS was prepared to consent to the auction sale, provided that the Deed of Assignment by way of Transfer was forwarded to PKNS.

PROCEEDINGS AT THE HIGH COURT AND THE COURT OF APPEAL

On 19 April 2006, the appellant filed an originating summons in the High Court against the respondent seeking, inter alia:

  1. a declaration that the respondent has no right to enforce the LACA;
  2. a declaration that the auction sale by the respondent was ultra vires the National Land Code 1965 ("NLC"); and
  3. an order that the auction sale be set aside.

The appellant's application was allowed by the High Court but the decision was reversed by the Court of Appeal. The Federal Court granted leave to the appellant to appeal on the question of law set out earlier in this article.

APPEAL TO THE FEDERAL COURT

Appellant's Contention

The appellant contended that once the title to the Land has been issued, the respondent loses its rights to sell the Land by way of a further assignment and is obliged to procure a legal charge over the title and thereafter, effect a sale pursuant to section 256 of the NLC. The appellant relied on the principles set out in the High Court cases of Ooi Chin Nee v Citibank Bhd [2003] 1 CLJ 548 and Jashin Scaffolding (M) Sdn Bhd v Chew Ai Eng Sdn Bhd, OCBC Bank (Malaysia) Bhd [2004] 6 CLJ 497.

The appellant also argued that if there is a power to sell privately any property with title, without an order of the court, then the provisions of sections 256 and 257 of the NLC and the Rules of Court 2012 would be rendered redundant at the option of financial institutions. The protection of the Court envisaged under a judicial sale would then be rendered nugatory.

Respondent's Contention

The respondent contended that the Court of Appeal in rejecting the principles propounded in Ooi Chin Nee and Jashin Scaffolding had in effect extended the principle enunciated by the Federal Court in Phileoallied Bank (M) Bhd v Bupinder Singh a/l Avatar Singh & Anor [2002] 2 MLJ 513 which recognized the power of the bank to auction off a property in a situation where no title had been issued, to one where title has been issued.

The respondent also submitted that it is settled law that an absolute assignment creates an equitable mortgage and not an equitable charge. The respondent also argued that in enforcing its rights against the appellant, the respondent did not sell the Land per se, but rather, it had sold its rights and title under the LACA and the Principal Agreement, namely its rights to a lease of the Land.

Decision of the Court

The Federal Court, by a unanimous decision, answered the question of law posed in the affirmative and dismissed the appeal.

The Federal Court rejected the appellant's contention that once the title to the Land has been issued, the respondent has to first create a charge under the NLC before proceeding with any foreclosure proceedings.

Their Lordships agreed with the judgment in Hong Leong Bank Bhd v Goh Sin Khai [2005] 3 MLJ 154, where the High Court had to determine a similar issue as to whether a lender having an assignment may realise his security when there is a title to the property, without first creating a charge and obtaining an order for sale from the court.

In Goh Sin Khai, the High Court disagreed with the reasoning and observations made in Ooi Chin Nee and Jashin Scaffolding and held that the issuance of the title to a property did not have the effect of extinguishing an absolute assignment of rights which has been created over a property. As such, the lender may proceed to sell the property under the assignment without the need to create a charge under the NLC and to obtain an order for sale from the court.

In essence, the Federal Court's findings are as follows:

  1. The LACA created an absolute assignment not by way of charge only. This means that the respondent should have all the rights, title and interest of the appellant under the Principal Agreement;
  2. When title was issued to the Land, the respondent did not lose its security or its power of sale under the LACA. The absolute assignment under the LACA survives;
  3. The respondent is thus empowered to realize its security for the loans by way of a private sale of the Land;
  4. The purchaser merely takes a legal right of the chose in action that was assigned to the respondent. The sale of a chose in action is permissible under section 4(3) of the Civil Law Act 1956;
  5. There is no necessity for the respondent to first create a charge or to resort to the statutory remedy of a foreclosure action under section 256 of the NLC to realize its security. The respondent's recovery action stands independently; and
  6. Section 206(3) of the NLC recognises the contractual operation of any transaction relating to alienated land or any interest therein. Thus, the respondent is entitled to exercise its powers of sale under the LACA and to transfer the chose in action under the Principal Agreement to a purchaser by way of a further assignment.

CONCLUSION

This landmark decision by the Federal Court has laid to rest the confusion caused by a string of conflicting High Court decisions on the rights of a lender under an assignment in a situation where the title to land has been issued.

This decision is welcomed by lenders as it allows a quick disposal of the security created under an assignment over land without the need to first create a charge under the NLC and obtaining an order for sale, thereby avoiding unnecessary delay and costs in the debt recovery process.

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SUBJECT MATTER: CASE COMMENTARY

WRITERS' NAMES: CLAUDIA CHEAH PEK YEE (L) & WITTER YEE (R)

WRITERS' PROFILES:

Claudia is a Partner in the Dispute Resolution Division of SKRINE. Her main practice areas are banking litigation and land disputes.

Witter is an Associate in the Dispute Resolution Division of SKRINE. He graduated from University Kebangsaan Malaysia in 2011.

 
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