SECURITIES FOR DEBTS

• Securities are usually taken at the outset before the loans and advances are disbursed.
• Almost anything of monetary value can be taken as security, eg diamonds, antiques
and paintings.
• Securities are regarded as insurance against defaults in payment of the loans,
advances, credit facilities or interest.
• The word ‘security’ has been defined as a possession such that the grantee or holder
of the security holds as against the grantor a right to resort to some property or some
fund for the satisfaction of some demand, after whose satisfaction the balance of the
property or fund belongs to the grantor.
• The word ‘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, High Court

Types of securities
(1) land;
(2) debentures;
(3) contract moneys and book debts;
(4) life policies;
(5) stocks and shares;
(6) cash;
(7) goods and produce;
(8) ships;
(9) guarantees.

Aspects to be considered
1. the value of the security must be capable of being ascertained without much difficulty
and such value must be consistent over the years. Needless to say, where the value of
security depreciates, there will be a problem in respect of that security as the lender’s
margin of advance or loan may have been touched. Where the value of the security
appreciates, it is possible that the borrower may want much more advance or credit
facilities than what he has received;

2. The second test of acceptable security is that of realisability. The ease with which the
security can be sold is a factor to bear in mind. Ideally, the security should have some
 documents of title which can be transferred without much cost or trouble such as
going to court;

3. Connected with the above requirement is that of the validity of such title. The title to
the security should be perfect and unquestionable. One should not be put into
considerable expense or undue trouble when perfecting such title. Expenses may
include legal fees, costs and charges as well as stamp duties;

4. On the title aspect; one should also consider the indefeasibility of the security as
prospective purchasers would not want to buy that security if the title can be subject
to dispute by third parties which may have a claim on that security. Thus, wherever
possible, the title to the security must be free from liability to third parties and free
from any sort of encumbrance. This will also ensure that the security can be easily
realised by way of sale or otherwise.

5. The fifth aspect is considered from the borrower’s point of view. Most conveyances,
charge documents and agreements have to be stamped and there will be some cost
(including legal cost) involved in the taking of the security, all of which are usually
borne by the borrower.

Methods of taking the security

The forms in which security may be taken include a charge, pledge, lien, legal
assignment, set-off, hypothecation, guarantee and indemnity.

1. Charge
A charge is the legal expression signifying that certain property is encumbered. A charge
can be on land or assets of the company. Where a charge is on land, the concept is a
statutory creation as the National Land Code 1965 provides for registration of charges as
security for loans and advances. The Companies Act 2016 also uses the term charge
which is registered as a security with the Companies Commission of Malaysia and which
expression usually covers the fixed and floating assets of the company.

2. Pledge
A pledge in law means the transfer of the possession (but not ownership) of a chattel,
which includes stocks and shares and cheques by a debtor to his creditor as security for
the payment of a debt or performance of an obligation; in default of which the chattel may
be sold
 3. Lien

A lien denotes a right to hold the property of another as security for the performance
of an obligation.
A lien can either be on personalty or on realty. In law, when the term is applied to
personalty, a lien is understood to be the right of a bailee to retain the possession of a
chattel entrusted to him until his claim upon it is satisfied.
A banker’s lien is the banker’s right to enforce his claim upon the land until the debt
is repaid. This is recognised in the National Land Code where the lender can enter a
lienholder’s caveat which is a notice to third parties that the land is encumbered by
that lien.
A lien is a form of security although its effect is to prohibit further dealings on that
land. A common law lien lasts only so long as possession is retained, but while it lasts
it can be asserted against the whole world.

4. Assignment

An assignment is a transfer to an assignee of the right to receive a benefit (usually

money) from a debtor. The law recognises legal assignment of the moneys due under
the contract so that failure to pay to the assignee can form a claim in the courts against
a party who has recognised the assignment. - Bank Bumiputra Malaysia Bhd v
Syarikat Kejuruteraan Hong Huat Sdn Bhd & Ors illustrates this principle.
An assignment is usually taken when there is no title involved or where the security
consists of moneys under the contract such as in project financing, charter-party hire
fee in the case of ships, book debts as in hire-purchase agreements or the benefit of a
life policy. Usually the assignment is absolute and not by way of charge only. An
assignment can be legal or equitable.
If notice in writing has been given to the debtor, the assignment passes the legal right
to the debt together with all legal remedies for non-payment. A legal assignment
transfers the ownership to the lender. An equitable assignment leaves the ownership
with the borrower and the assignee has the right to sue if the debtor fails to pay up.

5. Set - off
A set-off as a security is the lender’s right to self-help on the moneys deposited with
the lender against the borrower. In another context, a set-off may be defined generally
to be the merging (wholly or partially) of a claim of one person against another in a
counter-claim by the latter against the former. This power to set-off is made available
by law as well as by the borrower when he executes a letter of set-off or where he
executes an agreement containing a set-off clause. This is commonly used when cash
deposits (in the form of fixed deposits or time or term deposits) are used as collateral.
 6. Guarantee

A guarantee is an undertaking by a person to the lender to pay up in the event the

borrower has defaulted. In other words, it is a promise by one person (that is, the
guarantor) to answer for another (that is, the borrower). In nature, the liability is
secondary. A guarantee as a security is personal to the guarantor and is evidenced by a
letter or agreement. However, strictly speaking, a guarantee is not a security but a
mere contractual right.

7. Indemnity
An indemnity is a collateral contract or security to prevent a person from being
damnified by an act or forbearance done at the request of another. It is a personal
security of primary liability. It means that the person who has signed the letter of
indemnity can be called upon to indemnify the lender direct and without reference to
the borrower. The difference between the guarantee and the indemnity can be
illustrated thus: In a guarantee, the person says to the lender, ‘If you lend money to X
and if he doesn’t pay you, I will’ whereas in an indemnity, the person says to the
lender, ‘If you lend money to X, I shall see that you are paid’. Here again, the
indemnity is, strictly speaking, not a form of security.

Land as security
Land is made available as security by way of charge or lien.
It is the most sought-after security by lenders whether they are moneylenders,
bankers, investment bankers or financiers.
It is the most tangible form of security and its supply is inelastic. It is ascertainable
quite readily and its value can be calculated so that a sufficient margin can be reached
which will form the basis of the loan or advances. Its value can be stable over the
years subject to occasional fluctuations when there is a land boom, or to a depression
as when people sell out.
Under the National Land Code, there are rules as regards the titles to lands which
make them indefeasible. Under the system of registration of titles and charges, third
party claims can be minimised, and the transfers of such titles can be effected with
reasonable safety subject to the usual caution in the making of searches to ensure that
there are no encumbrances or caveats.
Prospective purchasers will transact on land on the basis that the title is good and can
be transferred and the National Land Code in fact facilitates the registration system.
Land as security – Charge
 Having been satisfied that the title of the land is good security, it is important to make
the necessary arrangements to secure the lending.
 In West Malaysia, the system of taking security over land comprise the taking of
charges by registration and liens by deposit of title document and entry of a lien-
holder’s caveat over the land.
 A charge is registrable under the National Land Code 1965. The charge registrable
under the National Land Code 1965 is a special security transaction. This is provided
for in section 243.

Land as security – Lien

 Security on land can also be effected through a lien.
 This method of taking security is usually used when the borrowing is short-term or
where it is felt that the lender, despite having a first legal charge of another piece of
land, would require ‘collateral’ security of a lien of title of another piece of land. The
National Land Code recognizes the concept of a lien over the title.
 Although a lien is not registered in the issue document of title it is endorsed in the
register document of title at the Land Office or Registry Office and the deposit of the
issue document of title gives the lender a strong hand and effectively prevents
subsequent dealings on that land.
 This deposit of the issue document of title affords further security to a lender. In a
system of registration, it is the register document of title that finally establishes
proprietorship and interest on the land.
 Hence, the statutory system of lien does allow the holder of the title the rights almost
similar to the chargee who is registered. The mere possession of the title gives the
holder a strong right to keep it especially when money has been lent and he has an
interest in that lien. Thus, the statutory lien under our Torrens system may appear to
be akin to the concept of the equitable mortgage in English law.
 Statutory lien may be created only by a proprietor or lessee of land depositing the
issue document of title or the duplicate lease, as the case may be, with the bank or the
financier as security for a loan. The bank or the financier must then apply for the entry
of a lien-holder’s caveat and it becomes entitled to a lien over the land or lease only
upon the entry of such a caveat.
 There are no other circumstances and no other methods whereby a statutory lien over
land may be created. The lien is created only upon compliance with the provisions of
the National Land Code 1965, that is, by the entry of a caveat. Unlike a private caveat
a lien-holder’s caveat will continue to subsist until the caveat is withdrawn.
 Only the registered proprietor of land is entitled to create a lien by depositing his title
with the financier. - Hong Leong Finance Bhd v Staghorn Sdn Bhd & Other Appeals
[2005] 5 MLJ 101, Court of Appeal.
Stocks and shares as security – Memorandum of Deposit
 Stocks and shares are also widely used as securities in loans and advances by the
lender. Shares as securities differ in value depending on whether these are from a
public listed or an unlisted company which may be public or private. The former type
of shares is more sought after as there is a market for such securities and they are
easier to dispose of when the lender wants to realise them.
 Share certificates are more appropriately charged by mortgage than by pledge. The
mortgage of the shares can be either legal or equitable. The mere deposit of
certificates will constitute an equitable mortgage. To create a legal mortgage, apart
from the acceptance of the actual certificates of the shares, there should also be a
memorandum of deposit and the execution by the registered owner of the blank
transfer to those shares. In the event the shares are deposited in the Central Depository
System, there is no physical deposit of the share certificates with the lender as
nowadays, shares are basically scripless.
 A condition for the mortgage to be a legal mortgage is the transfer and registration of
the shares in the lender’s name or its nominees. The lender’s nominee company
normally serves this purpose. The memorandum of deposit contains a clause giving
the lender a power of sale in case of default, and where the shares are partly paid up a
clause authorizing the lender to pay any call and debit the customer with the amount.
Note that the shares deposited may be the customer’s own shares or that belonging to
a third party such as a company’s shares which the customer controls. If partly paid-
up shares belonging to a third party are deposited, the customer should authorise the
lender to debit his account with any calls necessary to protect the security.
 The memorandum will recite that in consideration of the lender granting
accommodation to, or continuing the account of the stated customer, the stocks and
shares described in the schedule have been charged as security for all moneys owing
by the customer either solely or jointly. As well as signing the memorandum, the
depositor of the shares is usually called upon to initial the schedule. There may also
be a clause which provides that the securities may be freely exchanged with the
consent of the lender or where the shares are suspended or delisted, to call for other
securities acceptable to the lender to be deposited so that the value of the advance or
loan is adequately covered according to the lender’s margin of safety.

Company debenture as security

 This security can only be given by corporate bodies. Besides charging its land and
buildings, a company may be required to create a charge over its other assets such as
its plant, equipment, machinery, furniture, motor vehicles, book debts, stock in trade,
raw materials and goodwill as security. This is effected by way of an instrument
known as the debenture.
 A debenture is basically a loan agreement which may or may not incorporate a fixed
and floating charge or a fixed charge or a floating charge. The word ‘debenture’ is
defined in section 2(1) of the Companies Act 2016 as follows: ... ‘debenture’ includes
debenture stock, bonds, sukuk, notes and any other securities of a corporation whether
constituting a charge on the assets of the corporation or not.
  When a fixed charge is created, the chargor cannot deal with the assets that are the
subject matter of the fixed charge. Consequently, subsequent lenders cannot
jeopardize the security of a debenture holder under its fixed charge. The assets which
are subject to the fixed charge must be sufficiently identified so as to be capable of
being traced and identified should they be disposed of by the chargor and fall into the
hands of third parties.
 A floating charge is one which is created by a limited company over all its assets and
the charge floats in the sense that the assets of the company can be dealt with and
disposed of in the ordinary course of business notwithstanding the creation of the
charge. Acquisition of new assets subjects them to the charge.
 The charge ceases to float when the chargee becomes entitled to enforce his security
or where the chargee gives notice in writing on the same pursuant to the terms of the
debenture. In such an event, the charge is said to crystallize into a fixed charge. The
chargor then can no longer deal in those assets. Whether a fixed or floating charge is
preferred over fixed assets or otherwise depends on whether the chargor is permitted
to deal in the assets charged. Each debenture must be construed on its own to
ascertain whether it was intended to create a fixed or a floating charge.

Assignment of contractual rights

 Debts due or accruing to a person may be assigned by him to another person, either
absolutely or by way of security.
 Debts are by no means ideal security, since the value of the security depends upon
both the ability of the debtor to pay and the ease or otherwise of enforcing payment if
for any reason the debtor does not pay promptly.
 An assignment must be in writing and must be absolute. Express notice in writing
must be given to the debtor. A prudent banker would send the notice in duplicate
requiring the debtor to sign the duplicate by way of acknowledgment and return it to
the financier.
 It is advised that the form of acknowledgment should provide for the debtor to
confirm the amount of the debt, whether or not he has any right of set-off or
counterclaim against the assignor and whether he has received notice of any prior
assignments.
 If the financier does not give any notice he runs the risk that further equities or rights
of set-off might thereafter arise as between the debtor and the assignor, and these
would rank ahead of the banker, whereas after notice is given, any subsequent equities
arising between the debtor and the assignor will not affect the financier’s right.
 The financier also runs the risk that a subsequent assignee of the same debt, who takes
by assignment without notice of the banker’s rights, may acquire a legal title in
priority to that of the financier by giving notice to the debtor. Sometimes the contract
under which the moneys are payable contains a prohibition against assignment. If
there is such a prohibition, and nevertheless the debt is assigned, the assignee will
have no right to recover the debt from the debtor and the assignment may be
completely invalid: Hilstan Securities v Hertfordshire County Council
 If the assignment is executed by a registered company, it must be registered at the
Companies Registry under section 353 of the Companies Act 2016.
Fixed deposit and credit balances
 sometimes, credit balances with a banker are used as security for advances to a third
party or to the customer himself. For such purposes, the person with the credit balance
is called ‘the depositor’ and the person to whom the advances are made is called ‘the
borrower’. For advances made to the customer or depositor himself, the ‘depositor’
and the ‘borrower’ is one and the same person.
 In such a case there should be a written document signed by the depositor stating that
the credit balance for the time being is held as security for all moneys due from the
depositor and giving the bank power either to debit the account with the depositor’s
liability, or to transfer from the credit balance such moneys as may be necessary to
discharge the depositor’s liability at any time without notice to the depositor. Such a
document is commonly called a memorandum of deposit coupled with a letter of set-
off, in practice.
 Where corporate depositors object to the execution of a document which requires
registration at the Companies Registry, bankers may sometimes agree (for very good
and financially strong customers) to dispense with an express charge over the credit
balance. In such cases, there should be some document containing a clause giving the
bank a lien over ‘all securities belonging to me now or hereafter held by the bank and
all moneys now or hereafter standing to my credit with the bank on any account or
other account’. In practice, the banker would rely on a letter of set-off.
 A fixed deposit per se is not subject to a lien, but if the fixed deposit is considered
together with a letter of set-off, the bank has a lien on the money kept in the fixed
deposit. The bank has a general lien on all securities deposited with the bank by a
customer: Rahimah bte Abdullah v Bank Bumiputra Malaysia Bhd [1994] 1 MLJ 477,
High Court

Life policies
• Assignment of a life insurance policy is a very general form of security for an
advance up to the surrender value of the policy. It increases in value the longer it is
held, provided that any premiums due are paid. It is also useful as a supplementary
security, because in the event of the borrower’s death, part or whole of the debt is
liquidated as soon as the policy moneys are paid over by the insurer.
• Before taking the security of a life policy, the banker should examine the policy
closely. In particular, bankers should note the name of the insurer which issued the
policy and consider whether they are satisfied with the financial strength of the
company. The banker should also note whether there are any special conditions
attaching to the policy, such as a special suicide clause, a clause limiting the amount
recoverable in the event of the death of the assured within a specified period or even
restrictions against certain activities.
• The banker should check with the insurer whether the policy is still in full force and
effect, whether the last premium has been paid and whether it has received notice of
any other assignments.