ICC_Program_2021

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Learning Objectives
Upon completion of this module, you should be able to:

• Explain the purpose and content of the loan agreement.

• Describe the various forms of security and the
documentation
• Describe the law relating to guarantees and indemnities
• Describe the documentations and enforcement of
guarantees

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Introduction
• Full and proper documentation for both a loan and
associated security must be executed and maintained at all
times.
• Both lender and borrower must execute the documents that
are legally enforceable
• Proper documentation will ensure timely settlement of
loans.
• It is the job of the credit officer to ensure the accuracy and
perfection of the security documentation.

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Roles & Responsibilities
Credit Officers Solicitor
• ensure the document of title, • Drafting and verifying documents
ownership and possession of the relating to the loan and charge
securities are consistent. documents.
• terms and conditions in the loan • Conduct searches related to the
agreement are duly explained and fully borrower and securities documents.
understood by borrower.
• Ensure valid stamping of legal
• ensure impartiality and objectivity at all documents.
times
• Presentation of charge with relevant
• separation of duties between authorities and registration of charge
processing officer and officer verifying at the court.
the loan, and release of facilities
• Explain contents of document to
borrower before documents are signed
• Witness the execution of charge
documents

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The Loan Agreement
• Sets out the contractual and legal relationship between the
lending bank and the borrower.
• Has to be drafted properly, signed by authorised signatories,
stamp duty paid, registered with appropriate authorities,
documents kept safely and usually contain :
1. Structure and terms of the loan facilities
2. Conditions precedent
3. Conditions for drawdowns
4. Continuing conditions
5. Covenants and Credit control
6. Compliance and monitoring of covenants
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1. Structure and terms of the loan facilities

• Types of facilities
• Amount (value in RM)
• Tenure
• Repayment terms / instalment amount,
• Interest / profit rate charged
• Security requirements

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2. Conditions precedent

• Conditions imposed by the Bank, to be fulfilled by

Borrower, prior to drawdown of facilities.
• Examples
• Increased in paid up capital
• Furnishing the title documents
• Submission of Board resolution accepting the
facilities.
• Settlement of Service Charge written off by one of
the Director with the Bank
• Non-fulfilment of conditions precedent would prevent
the loan drawdown by the borrower
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3. Conditions for drawdowns

• These are specific conditions that need to be fulfilled

prior to a drawdown.
• Provide lending bank some control over the use of loan
funds
• At this stage, documentation would have been
completed and condition precedent met.
• Example :
• For progressive release of loan, there will be
condition requiring the submission of Architect
Certificate confirming the percentage completed.

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4. Continuing conditions

• Designed to ensure borrower maintains discipline and

proper conduct over the use of loan facilities
• On-going compliance of these continuing conditions
will prevent an event of default
• Examples:
• No further advances to directors / subsidiary
company throughout the loan tenure.
• Submission of quarterly cashflow for the Bank’s
Assessment.

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5. Covenants and Credit control

• Imposed to mitigate the Bank’s risk / protect the

creditworthiness of the borrower
• A breach of covenants can trigger an event of default
• Covenants can be financial and non-financial and also
referred to as restrictive (negative) or non-restrictive
(positive)
• Restrictive covenants do not allow the borrower to
undertake activities or make specific decisions without
prior consent from the lending bank

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5. Covenants and Credit control…..cont
Some common convenants in business loan agreement
Common Description and objective Nature
Financial
Covenants
Minimum imposed to cover up any losses with new capital injection A positive covenant
equity within a specified period. This is to capture continuing and financial in nature
Covenant shareholder support and prevent adverse gearing. Typically
an amount is indicated
Working capital to ensure sufficient net current assets and prevent over A positive covenant
Maintenance reliance on current liabilities or over-trading and financial in nature

Sinking fund to create and maintain a specific fund for asset replacement A positive covenant
Requirement or loan redemption. This is done to avoid future cash and financial in nature
shortage
Borrowing and to deters excessive borrowings and/or trade liabilities by This is a negative
debt the borrower and preserves the financial solvency. This is a covenant and financial
Restriction restrictive covenant in nature

Dividend to prevent excessive cash outflow which requires prior This is a negative
payment approval of the lending bank covenant and financial
restriction in nature

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5. Covenants and Credit control…..cont
Common Non-Financial Description and objective Nature
Covenants

Valid licenses and trade to renew all licenses, franchise agreements and Positive
agreements permits before the expiry dates covenant and general
in nature
Insurance coverage all assets and key executives to be covered with Positive
adequate insurance and the policies assigned to the covenant that is
bank. general in nature
Non-disposal of key shall not sell or transfer certain specified assets Restrictive in
assets of the borrower such as landed assets without prior consent of the nature and is a general
lending bank Covenant
Restriction on any investment outside the core activities of the Restrictive
investments outside borrower is not allowed without prior consent of general covenant
normal business the bank
Operations
Restriction on shall be no change in majority shareholdings in the Restrictive general
change of business company without prior consent of the lending bank. Covenant
Ownership

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6. Compliance and monitoring of covenants

• Lenders should not overburden borrower with

covenants that are irrelevant.
• A declaration from borrower that all covenants have
been complied with would put the responsibility on
the borrower.
• Another option would be to get the auditors to confirm
that all covenants and terms and conditions relating to
loans have been complied with.
• Generally covenants are applicable to business lending

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Events of Default
• A breach of the provisions in the loan agreement
• It can be non-compliance with terms of the facility or the
occurrence of an event that increases the risk profile of a
loan
• An event of default gives lender the reason to terminate a
loan and commence recovery proceedings
• Usually borrower will be notified when there is a breach and
time given to rectify the breach

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Events of Default…..cont
For individual For business
• Delinquent payment of instalment or interest. • Non-payment of interest and
principal.
• Breach of any positive or negative covenants
stipulated. • Non-compliance with any terms,
conditions, or covenants.
• Loss of job or cessation of employment.
• Lapse of business license or
• Cross-default on any other loan with any other
franchise agreement.
financial institution (a ‘trigger’ or warning sign).
• Security value no longer enough
• Legal proceedings against the individual,
to cover the loan.
including for bankruptcy.
• Death of a personal guarantor
• Breach of Section 47(2)(e) of the Financial
Services Act 2013 relating to Bank Negara
Malaysia’s standards on restriction of loans to
related parties.
• Breach of loan margin for shares and unit trust.

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Cross Default Clause
• Specifies that a default of the loan has occurred if the
borrower defaults on any other loans from any other lending
institution
• This clause / covenant is necessary to give the Bank the right
to set off another loan / account with the Bank.
• Serves as a reminder to the Borrower to maintain financial
discipline at all times

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Security Requirement
• For a lender, security provides a fall back in the event
borrower cannot repay the loan. Lenders have to evaluate a
loan thoroughly to mitigate risk of default
• Having a security does not mitigate the risk of default
• Loan officer has to assess the security offered and ensure the
security-to-loan ratio meets the bank requirement.
• Under circumstances where borrower may not have
adequate security a guarantor/s may be offered.
• It is vital to assess the strength of the guarantor in terms of
net worth and reputation.
• A good security, an asset must possess MARKETABILITY,
STABILITY OF VALUE, ENFORCEABILITY & TRANSFERABILITY
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Attributes of a good security

• Marketability - refers to the saleability of the security.

Landed property is usually much easier to sell than plant and
machinery.
• Stability of value – some security are determined by the
market and subject to price volatility like shares, while
others like plant and machinery depreciate in value. Over
time, land appreciates in value
• Enforceability – it relates to the ease of possession of an
asset. Freehold land is not movable while stocks can be
easily moved and thus are difficult to repossess and control
• Transferability – if an asset offered as collateral cannot be
legally transferred, it would be a security that is less
desirable
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Security arrangement
• Security documentation secures the lender’s claims over the
asset, enabling the lender to realise the asset to repay the
loan
• Security agreement is separate from the loan agreement.
Borrower agrees to provide the security and the
documentation requires compliance with regulations
• The security must be legally documented to enable lenders
to possess and enforce security to repay the loan
• Proper security documentation is vital to prevent incorrect
particular, fraud and forgery. The process would require
proper stamping and registration with appropriate authority.
• Assets offered as collateral would be landed property, fixed
deposits, shares, unit trusts, equipment, plant and
machinery, raw material and finished goods and receivables
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Basic Steps for Taking a Security
Creating the Security Interest
• first step is to obtain a security agreement.
• it is a contract between the lender and security provider.
• the security agreement must be made in writing and needs to
comply with the laws of the country so that the lender’s rights to the
security will not be jeopardised
Perfecting the Security Interest
• security has to be enforceable.
• it can be taken on first party or third party basis.
• in both cases the security owner must execute the documents.
Security must be enforceable against claims by other creditors.
• the procedures for perfecting a security would differ from one
security to another.

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Securities & Documentation
1) Fixed Deposit Accounts
2) Stocks, Shares, and Securities
3) Unit Trust Investments
4) Insurance Policies
5) Assets under Hire-Purchase Financing
6) Leasing
7) Letters of Hypothecation
8) Debentures
9) Pledge
10) Negative Pledge
11) The Power of Attorney
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Securities & Documentation-Fixed Deposit (FD)Accounts
• Monies kept in fixed deposit can be pledged as security for repayment of
a loan to the depositor himself or a third party.
• The instrument creating the security is Memorandum of Deposit (MD)
and/or Letter of Set-off.
• Original FD is kept by the bank.
• The difference between MOD and letter of set off lies in the stamp duty
payable. MOD attracts ad valorem stamp duty while letter of set-off RM
10.00 is payable
• Letter of set-off allows lender to set off the FD proceeds to the loan
account in the event of default without notice to the borrower.
• If FD belonging to a company is charged to a bank, the charge has to be
registered with CCM. This serves as a public notice to the bank’s claim
• Lien on fixed deposit – stamping a lien on FD is not enough as a lien is
merely a right to retain possession .
• Upon settlement, the lien is lifted , MOD cancelled and the FD is
returned to the borrower/owner
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Securities & Documentation-Stocks. Shares & Securities
• Generally shares of listed companies are preferred as collateral as they
have a ready market with established value. Preferred shares that have
trustee status
• In the event of default, disposal is done via Bursa Malaysia.
• Private company shares not preferred as cannot determine values and
there may be restrictions on transferability.
• Share to avoid
• suspended shares
• volatile or highly speculative shares
• shares exceeded bank’s quota
• non-dividend paying shares
• shares where the bank has imposed restrictions
• shares which are designated as “trustee shares” under Section 4 of
the Trustees Act 1949
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Form of Security Over Shares
1. Legal mortgage – here legal ownership passes to the bank/nominees
• Borrower only has equitable rights which is the right to redeem the
shares upon full settlement.
• MOD is taken to give the bank power to sell shares in the event of
default. MOD executed by 3rd party should be executed voluntarily.
• Public-listed companies shares are in the Central Depository System
(CDS) account.
• An outright transfer will be done directly through the CDS
• When taken as collateral , the shares are transferred into the bank’s
nominee company.
• Bank becomes the legal mortgagee of the shares while borrower is the
beneficial owner. It is cast iron security and allows for speedy recovery
of any loans in default

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Form of Security Over Shares….cont
2. An Equitable Mortgage – the legal ownership of the shares remains with
the borrower. It is usually taken for shares of private companies
• Memorandum of Deposit (MOD) is signed and stamped ad valorem
• Share certificates lodged with the bank with pre-signed blank transfer
forms.
• If no blank transfer form is available, a power of attorney (PA) in favour
of the bank must be obtained. The PA must be filed and registered in
the High Court
• Private company shares can also be transferred to the bank’s nominee
as the legal mortgagee.
• New certificates will be issued provided the Memorandum and Article
of Association of the company allows it.
• Once lender becomes a shareholder there may be responsibilities that
goes with it

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Form of Security Over Shares….cont
Realisation and release of securities
• In the event of default, the first step is to demand payment from
borrower.
• Upon expiry of the notice period and the debt remains unpaid, lenders
would proceed to sell the shares in the open market through a
securities broker.
• Release of security – requires transfer of the shares from bank’s
nominee company to the beneficial owner. The transfer is complete
once shares are registered in the name of the beneficial owner and
shares are credited to CDS account

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Securities & Documentation-Unit Trust Investment
• Unit trusts are collective investment scheme where investors pool their
funds into investment vehicles.
• Investor entitle to dividends and bonuses as income and usually can be
sold when they want to. Ex: ASB unit trust
• Documentation – MOD in favour of the bank and to facilitate disposal , a
power of attorney is also executed to given Bank to sell the unit trust on
behalf of the borrower.
• Dividends will be credited to the loan account while bonus shares will be
credited to the account. Note that dividend and bonus shares will reduce
the value of each unit.
• Upon default, the lender will sell the units to the unit trust manager who
will in turn sell it to other investors
• Release of security is complete once the unit trust company transfers the
units to the beneficial owner. The MOD would also be cancelled by the
lender

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Securities & Documentation-Insurance Policies
• Insurance policies – can be taken as security or credit support for loans
taken depending on the rate at which policy accumulates its surrender
value.
• Surrender value is the cash amount the insurance company will pay prior
to death, maturity or permanent disability. This depends on profits of the
insurance company and bonus declared.
• Endowment policy – has a greater element of savings than protection.
The longer the policy in force, the greater the cash value. The policy is
assigned to the bank and once surrendered to the insurance company,
the cash value is paid to the lender. Policy also has an element of life
insurance cover. Here payment may be paid upon death, permanent
disability or critical illness
• Term life policy – only provides protection with no savings element. Since
it has no cash value it cannot be a security. It can serve as credit support
in the event the assured dies or faces permanent disability

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Securities & Documentation-Insurance Policies…..cont
• Investment linked policy – it is a hybrid of term policy and unit trust.
• Part of the premium is paid for term assurance while balance is
invested in units of a pool of funds ( similar to unit trust). Cash value
is decided by the net asset value of the funds.
• The policy can be a support as well as security.
• The difference with endowment and whole life policy is that its
(investment linked policy) value would fluctuate with the value of
the unit trust investment
• Note the term assurance is used for life insurance policies while non-life
policies are referred to as insurance

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Securities & Documentation-Insurance Policies…..cont
Creating security interest and realisation of collateral
• A legal assignment is taken with an endorsement of the policy by way of
an absolute assignment.
• A notification of the assignment enables the financier to sue in his own
name, establish prior claim and ensures monies are paid to the financier.
• Stamping – the insurance policy as support or security is stamped ad
valorem.
• Realisation of policy – forward the policy to the insurance company nd
obtain undertaking from them to forward the monies under the policy to
the lender.
• Releasing the policy – upon settlement , lender will discharge the
assignment and release policy to the borrower

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Securities & Documentation-Assets under Hire-Purchase
Financing
• HP financing is governed under the Hire Purchase Act 1967
• The possession and disposal of assets must comply with the Act.
• The financier is the asset owner and will transfer full ownership title
upon full settlement
• Creating security interest – financier draws up a standard HP agreement.
In essence the financier retains ownership but the hirer can use the asset
while making regular payments. For motor vehicle, ownership claim is
endorsed on the registration card.
• Realisation of security – In the event of default give notice of intention to
repossess the asset. Notice is given when default is 2 months and
repossession can take place after 21 days (Section 16 of the HP Act 1967)
• Release of security – upon settlement ownership will be transferred to
hirer. In the case of motor vehicle, ownership claim on the card is
rescinded and registration card returned to hirer.

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Securities & Documentation-Leasing

• Leasing – under a lease arrangement the lender or lessor agrees with the
borrower or lessee to acquire an asset and leases it out for a series of
monthly payments.
• Creating security interest – transacted under normal contract law under
Contracts Act 1950. The lease agreement gives the bank the right to
repossess the asset. Ownership is with the lessor while borrower has the
privilege to possess and use the asset.
• Realisation of security – upon default, bank will repossess the asset and
proceed to sell it to recover loan. Any shortfall then claimed against the
lessee
• Release of security – upon settlement ownership of the leased asset will
be transferred to the lessee with the relevant documentation.

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Securities & Documentation-Letters of Hypothecation

• Another form of securing assets to protect a loan given. A weak security

and therefore must be premised on a strong and trustworthy borrower.
• Lender has the security and legal title to the assets. Borrower executes
the letter of hypothecation for the release of the assets and legal title.
The letter of hypothecation authorises the bank to take possession of the
assets in the event of default by borrower. Usually happens in maritime
trade when shipping documents are released to the borrower.
• Registration – in legal terms it needs registration with CCM but for
practical purposes this is not done.
• Realisation of security – in the event of default lender will take
possession and sell the assets to recover the loan.
• Release of security – upon settlement the letter of hypothecation is
cancelled and returned to the borrower

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Securities & Documentation-Debentures

• Debenture – Under the Companies Act 2016, a debenture is defined as a

document acknowledging a debt by a company. Where land is involved a
fixed charge is also registered with the land office.
• Creation of security interest – A fixed charge is a legal claim over
identified assets that are immovable while a floating charge is one that
covers those assets that are mobile and fluctuates in form in the daily
course of business.
• Creating security interest – upon execution of a debenture by lender and
borrower, it is registered with CCM under the Companies Act 2016.
• Crystallisation of floating charge –happens when encumbered assets are
frozen especially when a default has taken place. It happens when the
bank recalls the loan and an official receiver is appointed to deal with the
assets.
• Release – upon settlement,, the debenture is released and the release is
registered with CCM.

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Securities & Documentation-Pledge

• A pledge is a physical surrender of the asset to the lender as security and

the borrower is deprived of taking away or use of the asset.
• Creation of pledge – a memorandum of pledge is signed by the borrower
where the terms for repayment and redemption are stated. Key provision
is the power of sale by the bank.
• Realisation of security – when default occurs the bank holding the MOP
and asset exercises the right of sale to recover the loan.
• Release – upon settlement, the MOP and asset returned to the borrower.
• Negative pledge –is an undertaking by the asset owner to keep the asset
free from any encumbrances. It operates similar to a loan covenant and
restricts borrower from mortgaging its assets.

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Securities & Documentation-The Power of Attorney (PA)

• PA – binds the borrower or security owner as if the donor is present and

has acted accordingly. It grants the holder the power to act on behalf of
the donor in his or her absence.
• The legal counsel must verify the following:
• The scope of PA
• Properly executed by the correct party
• PA registered with the High Court
• Attested by a lawyer or commissioner of oaths
• Original documents are authentic and valid

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Revocation of the Power of Attorney (PA)

• Donor or principle gives written notice of revocation. Deed of revocation

need to be filed with the High Court.
• Donee or attorney renounces his appointment in writing and registers
with the High Court where the PA was originally registered.
• Death or unsoundness of mind of either the donor or donee.
• Donor is a bankrupt.
• A PA which is given for valuable consideration and expressly stated to be
irrevocable cannot be revoked unilaterally without the consent of the
attorney. It will not be revoked in the case of death, mental incapacity or
bankruptcy of donor

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Unsecured Lending
• Can be granted where the borrower has the lowest risk of
default.
• Even if an event of default does occur, the borrower would
still have the means to meet the obligation.
• Viability of the business is beyond doubt.
• Borrower is organized and disciplined with low risk taking.
• Borrower has a huge asset base which can be a fall back in
the event of default.
• Borrower must have an excellent track record, reputable
business, integrity & the competence to conduct business.
• While credit cards are a form of unsecured lending, it is still
given taking into account the probability of default and the
returns for credit risk 38
Landed Securities & Credit Support
• Property as security/ collateral
• Process of securing property as collateral
• Risk elimination
• Types of searches
• Security documentation
• Malaysian land laws

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Land & Properties
• Land and landed properties used as security assets for the
lending banks
• Creation of security interests must be in line with land laws
• Non compliance may affect the validity of security thus can
result difficulty to realise the security for loan settlement
• Documents obtained must be in accordance with terms of
the loan.
• Land mortgages and land titles must be stamped and
presented to the land office for registration

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Alienation of land
• Under National land Code 1967, all lands belong to the state.
• Parties intending to acquire land may apply for a title to the
land from the state.
• Once approved, state will grant title to the land. Title confers
legal ownership to the land.
• Above process is called alienation of land.
• Land can be freehold, leasehold, tenancies, Malay reserved
land, customary land and native land
• Credit officer must be conversant with the different types of
land that can be accepted as security

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Types of land
• Freehold land – land is vested in the owner and successors in
title in perpetuity or for an indefinite period.
• Leasehold land – here title vests in the owner or successor
for a specific period such as 30, 60 or 99 years.
• In Peninsular Malaysia a lease is the letting of land for
more than 3 years while in Sabah and Sarawak the above
is called a sub-lease and it relates to letting of land for
more than 1 year.
• Lease is the letting of the land by the lessor, as owner or
not, to a lessee for an agreed period

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Types of land…..cont
• Tenancies –refers to the letting of land in Peninsular for up to
3 years.
• In Sabah and Sarawak it also refers to letting of land for
period not exceeding 1 year.
• Tenancies need not be registered. The word rent or lease
is also used interchangeably

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Forms of Title
Two types of land titles under the National Land Code 1965
• Final title – confers on the person or entity concerned a title
to land which is indefeasible, which means it cannot be
annulled or revoked.
• Qualified title – is issued in the event final title cannot be
issued. Confers same rights as final title but boundaries may
change.
• Both titles may be registered at the Registry of the State or
the Land Office ( Registered by the collector of Land revenue)
• Temporary occupation licence- does not confer an interest
on the land and usually for 1 year and renewed annually.

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Applicable land laws
The applicable land laws relating to land matters in Malaysia are:
• National Land Code 1965 – applicable throughout Peninsular
Malaysia
• Sarawak Land Code Chapter 81
• Sabah Land Ordinance Chapter 68
Note: The above laws are only applicable to land with title. Land
without title, the rights and liabilities of the parties are governed
by contract i.e Loan Agreement & Deed of Assignment

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Registration system and effect of indefeasibility
• Registration is key to land dealings. Registration confers
indefeasibility, which means it cannot be challenged or set
aside.
• Section 340(1) of the National Land Code 1965
• Sections 119 and 132 of the Sarawak Land Code
• Section 88 of the Sabah Land Ordinance
• The effective date of registration of any document would be
the date and time as entered in the Presentation Book
maintained at the Registry of Land Titles.
• Once a charge is registered , it confers legal interest on the
land to the lender.
• Stamping and registration is vital to ensure indefeasibility
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Exceptions to indefeasibility
• The indefeasibility principle is not absolute. That means even
though charge or transfer has been registered, it can still be
set aside
• The exceptions to indefeasibility are:
• Where there has been fraud or misrepresentation.
• Where registration obtained by forgery, insufficient or
void documents.
• Where the title or interest was unlawfully acquired
Note: Nothing shall affect any title or interest acquired by any
purchaser in good faith and for valuable consideration

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Banking and indefeasibility
• Only a bona fide purchaser who has provided valuable
consideration shall enjoy the benefits of indefeasibility
• The chargor is the owner of the land and the chargee is the
person to whom it is conveyed to.
• The exceptions to indefeasibility is not extended to the
chargee.
• A chargee that has obtained a charge using forged
documents does not enjoy indefeasibility , even though
there may be valuable consideration.
• The risk of forgery is minimized by making sure solicitors
attest the signature/s of chargor/s

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Strata Title Act 2013 and Strata Management
Act 2013
• The above act has come about due to the existence of
apartments, condominiums, townhouses and gated
communities.
• The above have common areas and facilities for residents.
• The Act requires developers of apartments etc to apply for
sub-division and issue and transfer of strata title to individual
owners.
• The formation of management corporation for collection of
maintenance fees
• The establishment of Strata Title Board to hear and
determine any disputes
• The Act itself must be consistent with the provisions of the
National Land code
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The Strata Title (Amendment) Act 2013
• The above act is now in force and has major changes to strata
developments.
• The act is now extended to Labuan.
• There is now Electronic Land Administration system of strata titles
• Compulsory for original proprietor to apply for sub-division of a building
or land at super structure stage.
• For phased developments provisional strata titles for provisional blocks
allowed.
• Designation of limited common property.
• Creation of one or more subsidiary management corporations to
represent the different interests of parcel proprietors.
• The execution of transfer documents of ownership of strata titles by the
purchaser within 30 days of issue of title by the Land Administrator.

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Dealings over land
• Transfer – The transferor is the person or entity transferring the land
while transferee is the person or entity to whom it is transferred. The
transfer is effected by a memorandum of transfer (MOT)
• Charge – is a transaction whereby the registered owner of a land or lease
conveys its legal interest to another for payment of debt. The owner of
the land or lease is called the chargor and the person to whom it is
conveyed (normally the financial institution) is called the chargee
• Assignment – is a contract in writing whereby the assignor assigns all his
rights , title and interest in the property to the assignee as security for a
loan. Normal to obtain a deed of assignment, loan agreement and deed
of power of attorney (PA gives power to sell, assign, lease, deal and take
possession). The above three documents are sometimes made into a
single document called Loan Agreement cum Assignment (LACA).

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Dealings over land…..cont
• Lien – Another form of security that can be taken on land with title.
• A lien is a right to retain possession of an asset until a debt is repaid.
• A lien holders caveat is created when proprietor of land surrenders
the document of title to the bank and bank lodges the caveat at the
Registrar of Land Office using Form 19D.
• Mere deposit of title does not create security interest and only the
owner can create a lien holders caveat.
• The advantages of a lien-holder’s caveat are
• Fewer formalities as compared to a charge; and
• No stamp duty payable
• The practical disadvantage of a lien-holder’s caveat lies with its
enforcement
• A judgment of the court must first be obtained against the borrower
before the property secured under the lienholder’s caveat can be
formally foreclosed
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Types of charges
• A charge means a security transaction whereby a land is pledged for
repayment of debt. In the event of default a chargee is entitled to
enforce the security by foreclosure.
• First Party & Third Party Charge
• First party charge is where the borrower and chargor are the same
• Third party charge is where the borrower and chargor are different
• If sole proprietor is borrower and charger the the charge to be taken
is first party charge. No separate legal entity.
• Once a charge is registered , it will prevent any further dealings on the
land

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Types of charges.....cont
• First Legal Charge & Second Legal Charge
• It is permissible to create more than one charge on the and.
• If the first and second chargee are the same no consent is required.
Where the first and second chargee are different, consent from the
first chargee is needed.
• The rights of each subsequent chargee will rank after the first
chargee in the event of default. Proceeds from foreclosure would be
paid to the first chargee unless the subsequent charges rank in
priority or parri passu with the first charge.
• The first chargee’s right to foreclose the land is not affected by the
status of loans granted under subsequent charges,
• The first chargee always retains the issue document of title.
• The second or subsequent chargees have similar rights of
foreclosure even though the loan with first chargee may not be in
default

54
Types of charges.....cont
• Principal and subsidiary charge
• The difference lies in the stamping of the charge instruments
• Arises when two or more titles are offered as security for the loan.
• Stamp duty is payable on the principal loan amount and excludes
interest
• Ad valorem stamp duty is payable on the charge amount for the
principal document while nominal duty is payable on the subsidiary
document. There must be a declaration as to which is the principal
charge and which is secondary charge
• Bank is entitled to enforce both the principal and the subsidiary
charge.
• The memorandum of charge must be stamped before it can be
registered at the Land Office
• The charge wherein the ad valorem stamp duty is paid is called the
principal charge, whereas those charges on which only nominal
stamp duties are paid are called the subsidiary charges.
55
Land searches
When accepting land as collateral, lenders have to conduct a land search.
Types of searches are :
• Preliminary search – a search is conducted before a purchaser
enters into a legally binding contract.
• Final search –this is done before the completion of the sale. It is to
detect any flaws on the title before payment of the balance sum

Ways to Conduct a Land Search

• Private search – this is done by the person himself at the land office
upon payment of the required fee.
• Official search – an application is made to the registrar for an official
search. Upon payment of a fee, registrar will issue a certificate of search
which will contain details such as name of owner and summary of entries
in the document of title

56
Purpose of Land Searches
• To ascertain the ownership of the land – this is to determine whether
the person dealing in the land is the registered owner.
• To reconfirm particulars of the document of title – this is to confirm
details such as title number , lot number , land area etc.
• To ascertain the existence of any encumbrances – to ascertain whether
there is a charge or private caveat on the land. Private caveat can be
entered by any person having registrable interest.
• Private caveat will remain in force for 6 years unless withdrawn by
the caveator or the Registrar. Where a caveator has interest in part
of land, no consent is required from a caveator if a person wants to
register any dealings on the land
• A private caveat cannot prevent the registration of a dealing on the
land if it was presented before the date the private caveat was to
take effect. A registrar’s caveat can however prevent a dealing on
the land even if it was filed after the dealing on the land was
presented at the land office. This will surely create a risk for lenders
who may have advanced moneys when the charge was presented
even though it was not registered
57
Purpose of Land Searches…..cont
• The registrar can file a caveat for the following reasons
• To prevent fraud or improper dealings on the land.
• To protect the interest of the Federation or State authority , any
minors or persons suffering from mental disorder.
• To satisfy the whole or part of debt due to the federation
• Encumbrances by way of a prohibitory order which is obtained by a
debtor who is owed money can also prevent registration. Note that a
prohibitory order is obtained from the court and if not extended
would expire after 6 months

58
Purpose of Land Searches…..cont
• Restriction of interest – common for some land be subject to restriction.
Ex Leasehold land. Failure to obtain the consent , the subsequent
transfer or charge can be rendered void.
• Conditions of title – this is related to category of land use such as
industry, agriculture or housing. The land use must comply with the
specified condition and failure to do so may result in forfeiture by the
state authority or a fine imposed. Land can only be used for another
purpose when approval is obtained from the state authority to convert
use of land

59
Purpose of Land Searches…..cont
Malay reserved, customary and Native land
i. Malay Reserved Land –
• The Malay Reservation Enactments of the respective Malay states seek
to secure to the Malays their interests in land.
• Any dealings on the land in violation of the Enactments shall be null
and void. No action shall lie for recovery of any loan or foreclosure.
• A charge created on Malay reserved land in favour of non-Malay is null
and void.
• Exceptions to prohibition may be available in the form of consent from
the Ruler of the State in Council.
• The definition of Malay varies from state to state. A body corporate
that accepts a charge must meet the definition of Malay as otherwise
the charge may be null and void.
• Power of attorney or trust covering Malay reserved land in favour of
non-Malay would also be void
60
Purpose of Land Searches…..cont
ii. Customary Land –
• Customary land – is covered under the National Land Code (Penang and
Malacca ) Titles Act 1963. Customary land in Malacca can only be
charged, leased or transferred to a Malay
• Definition of Malay would be:
• Professes the religion of Islam.
• Speaks Malay and conforms to Malay custom
• Before Merdeka day, born in the federation OR
• Born of parents where at least one of them was born in the
Federation

61
Purpose of Land Searches…..cont
iii. Native land–
• Any instruments of dealings affecting native lands in Sabah and
Sarawak are also subjected to restrictions and prohibitions.
• Sabah land ordinace – non native may not purchase any land held by
natives or acquire any interest therein.
• Sarawak land Code – it is illegal for a non native to acquire any rights or
privileges over native land.
• Any moneys paid in contravention, no action can be taken to recover
the monies paid. In addition , any person who contravenes this section
shall be guilty of a criminal offence

62
Bankruptcy Search
• Bankruptcy search is conducted with the Director General of Insolvency
(DGI) to determine whether the chargor has been adjudicated a
bankrupt.
• The National Land Code does not prohibit the bankrupt from charging
the land to a financial institution.
• Under the Insolvency Act 1967 as at 1st November 2017, the bankrupt
is required to surrender the land to the DGI.
• The transfer is only complete when the property is registered in the
name of the DGI.
• A bank would not grant a loan to a bankrupt as the bankrupt’s ability to
pay would be in doubt

63
Documentation Of a Charge
Stages in the Preparation of a Charge (Process Flow)

64
Memorandum of charge
• The instrument creating the charge is
• Form 16A – National Land Code 1965
• Schedule XV of the Sabah Land Ordinance.
• Form H (1) or H (2) – Sarawak Land Code
• It’s a mandatory documents and process must be strictly followed.
• Procedures to follow would be:
• Preparation of charge document
• Execution by all parties and attestation
• Stamping
• Presentation
• Registration at the relevant land office

65
Particulars of land, the charger and the chargee
• The full particulars of the land, the charger and the chargee must be
stated correctly
• The particulars must be type-written
• Details such as particulars of charger covering name and identity card
number, in the case of companies the name of company and number
must be correctly filled.
• All errors must be neatly cancelled and initialled by the attesting officer.
The use of eraser and correctional fluid is not allowed.

66
Execution and Attestation
• The execution of any instrument of dealing including a charge by a natural
person shall consist of his signing it or affixing his thumbprint.
• Signature must be in permanent black or blue-black ink. Pencils and
ballpoint pens are strictly prohibited.
• Signature of the charger must be attested (witnessed). Who can attest the
charge depends on which state the title is located
• No bank officers are empowered to attest a charge

67
Execution and Attestation…..cont
The officers or persons authorized to attest instruments of dealing

National Land Code Sabah Sarawak

• Magistrate; • Magistrate; • Magistrate;

• the State Director; • Land Administrator of • the Director of Land
• the Registrar; Land and Surveys; and Surveys;
• Land Administrator; • Superintendent of • Superintendent of
• Advocate & Solicitor; Lands and Surveys; Lands and Surveys;
and and and
• Notary Public. • An advocate • An advocate.

Note: Malay reserve land – attestation by Land Administrator

68
Stamping
Stamp Act 1949 as at 1st July 2014
• Charge attracts ad valorem stamp duty
• Duty is RM 5 per thousand
• Stamp duty must be paid within 30 days of execution.
• Charge is impounded if stamp duty is not paid within 30 days of execution
• Once charge is impounded, it is not admissible in evidence in court unless
penalty paid
• Penalty RM 25 or 5 % of deficient duty if paid within 3 months after the
time for stamping, RM 50 or 10% if stamped between 3 and 6 months and
RM 100 or 20% of the amount of the deficient duty, for any other case.
• Very normal for charge to be dated and stamp duty paid just prior to
registration

69
Presentation for registration
• Loan usually disbursed once charge has been presented for registration at
the land office.
• Charge has merely been presented but not registered as the process takes
time.
• Effective date of registration of charge would be date and time presented
as entered in the Presentation Book.
• Once deemed effectively registered, the charge is indefeasible.
• Prudence would require one final search just before presentation of
charge as there may be caveats or prohibitory orders filed after the
previous search. Note that the rejection of any charge and notification
would take place later

70
Charge annexure and loan agreement
• The chargors’s and chargee’s rights are either implied in NLC or by express
agreement by the parties.
• All rights and obligations are clearly mentioned in the annexure of the
charge executed by the parties.
• Express conditions clearly mentioned in the annexure.
• Annexure must be registered together with the instrument of charge at
the Land Registry of Registry Office

71
Charge under sub-sale for land with title
• Purchaser wants to buy house from another person. Property has a
separate title.
• Purchaser would first conduct a search at the land office. Bankruptcy
search is also done
• Purchaser usually pays a deposit of 10%. May be lower or higher. Private
caveat is lodged on title
• If property is charged, purchaser would need to find out the redemption
sum
• The vendor and purchaser will then be required to execute Form 14A
which is a memorandum of transfer.
• Memorandum of transfer sent for adjudication and stamping.
• To facilitate registration of transfer and charge , caveat must be removed
using form 19G.

72
Adjudication of the Memorandum of Transfer
• Transfer can only be presented once required stamp duty has been paid.
• Adjudication is the process of determining the stamp duty payable based
on current market value. Stamp duty is not based on sale and purchase
agreement price.
• Stamp duty is 1% for first RM 100,000, RM 100,001 but up to RM 500,000
is 2%, RM 500,001 to RM 1 million is 3% and above RM 1 million it is 4%.
• Lender must ensure that the transfer is registrable as the transfer and
charge are presented for registration at the same time. The charge cannot
be done if the transfer cannot be effected

73
Documentation for purchase of property from
developer
• Strictly governed by the Housing Developer’s (control and licensing) Act
1966 (HDA).
• HDA does not apply for shop office and shop lot in a shopping complex.
• Form of relevant S&P must follow Schedule G (landed property) and
schedule H for condominiums and apartments.
• For shop offices and shop lot no need to follow Schedule H and G.
• For properties covered by schedule G and H , release of loan must follow
the Third Schedule of HDA.
• The disbursement schedule is not followed for shop office and shop lots.
Disbursement should follow the schedule provided in the agreement and
request for drawdown must be supported by proper presentation of
certificate.

74
Documentation of deed of assignment
• Not all properties have separate title. E.g in the case of condominiums and
apartments
• Documentation obtained would be:
• Loan agreement cum assignment – first party situation where
purchaser and borrower are same.
• Loan agreement and a Deed of Assignment – taken when purchaser
and borrower are different.
• Power of attorney – is to secure the financiers interest and in the
event of default, the assignee may enforce under the rights available.
• Assignment may be by way of charge (does not absolutely transfer
property to assignee) or absolute assignment (serve as security for
loan and borrower will occupy the property as bare licensee)

75
Eliminate risks under deed of assignment
• As there is no title, verifying ownership may be a problem.
• Important that developer is given notice in writing for an assignment.
• Proper notice would mean a duly stamped S&P, duly executed deed of
assignment and full payment of all sums and outgoings.
• Obtain the original S&P and if it is lost police report and statutory
declaration must be obtained
• Ensure the lodgement of private caveat on the master title unless there is
prior arrangement with the developer that the private caveat is not
necessary. This (private caveat) is allowed under the law even though the
financier may only be financing a small portion of the property.
• Private caveat will not facilitate the process of sub-division of the master
title. Practical solution would be for the developer imposing a prohibition
against the lodgement of private caveats

76
Execution of Deed of Receipt and Reassignment
• Once loan is fully settled and the assigned property is redeemed, The
Deed of Receipt and reassignment must be executed.
• The Power of Attorney , registered with the High Court must be revoked.
• Unlike a charge, there is no provision for a second legal assignment. This is
because an assignment is absolute in nature and the owner is left with no
further interest in the land.
• To secure additional facilities, only a supplemental loan agreement need
to be signed

77
Documentation – purchase land with title from
developer
• S&P signed by purchaser and developer
• Purchaser applies for loan & accepts letter of offer.
• Lender’s solicitors prepare the charge document for execution by both
lender and borrower.
• Lending bank obtains various undertakings from developer.
• Both parties execute the charge & Stamping of charge
• Search conducted by lending bank’s solicitors
• Legal opinion issued by solicitors and redemption sum released and
private caveat lodged
• Registration of charge and transfer and removal of caveat. Final search
also done.
• Legal opinion given and if all in order, loans disbursed against architects
certificate
78
Documentation – Sub-sale ( land with title)
• Buyer conducts search on land.
• S&P signed and 10% paid. Private caveat lodged by buyer.
• Application for loan and once approved buyer or borrower accepts letter
of offer.
• Bank’s solicitors prepare the charge . Transfer is done by vendor’s
solicitors.
• Both charge, transfer and removal of private caveat lodged at the same
time. If redemption is involved, lender would pay redemption sum to
vendor’s bank and lodge a private caveat.
• Bank’s solicitors will conduct a final search
• Legal opinion given and if all in order , balance of purchase price released
to vendor’s solicitors

79
Documentation – Purchase from developer-
land without title
• Developer and buyer signs S&P
• Purchaser applies for loan from financier.
• Purchaser accepts letter of offer.
• Lender prepares loan agreement cum assignment and buyer delivers
original S&P.
• Lender’s solicitors obtain various undertakings from developer. This would
include consent for creation of assignment, undertaking to deliver strata
title, not to encumber master title etc

80
Documentation – Sub-sale ( land without title)
• Both vendor and purchase sign S&P
• Purchaser applies for loan.
• Purchaser accepts letter of offer
• Lender’s solicitors prepare loan agreement cum assignment.
• Various undertakings obtained from vendor’s solicitors.
• Execution of LACA by purchaser and bank’s power of attorney holders.
• Stamping for assignment on ad valorem basis.
• Legal opinion provided by lender’s solicitors and loan is released based on
the terms of the agreement.

81
Redemption
• Becomes necessary when property is charged to another financial
institution.
• Charge is to be discharged if a new charge to a new lender or transfer is to
be effected.
• Existing chargee will want loan to be settled in full before a discharge is
given.
• The loan can be settled by the vendor or purchaser redeeming the title by
using loan proceeds.
• Where redemption is involved, bank has to make sure their interest is
protected. At this point , the loan is released without the charge in favour
of the lender

82
Redemption…..cont
• The vendor’s solicitors will upon the request of the bank, request for the
redemption sum.
• Chargee will forward redemption statement together with undertakings to
refund the redemption sum and to forward the discharge and title.
• The bank has to ascertain that the difference between loan amount and
purchase price has been settled.
• Upon release of redemption sum, a private caveat is lodged on the title to
prevent further dealings on the land

83
Disbursement of the loan
• Loan released once bank’s solicitors confirm that the charge has been
presented for registration at the land office.
• Lender must also confirm that all terms and conditions stipulated in the
letter of offer have been complied with.
• Lender must also make sure that a final search on the title has been done
at the time of presenting the charge for registration at the land office.

84
Guarantees in the Malaysian banking system
• The bank may require one or more guarantors to guarantee the repayment of
the loan granted to the borrower.
• It is an agreement by the guarantor to pay to the bank in the event the
borrower fails to pay
• A guarantee is defined as a legally binding contract under Section 79 of the
Contracts Act 1950.

85
Guarantees in the Malaysian banking system
Types of guarantees:
a) Foreign guarantees
• A foreign guarantee is issued by a party outside the jurisdiction of
the country of the beneficiary.
• The main issue would be the enforceability of such guarantees.
• There is always a risk of a legal challenge to the guarantee as there
may be disputes between the parties involved.
• Enforceability may be a problem as the guarantor’s country may not
recognize the guarantee. For this reason a standby letter of credit
under UCP 600 rules of the International Chamber of Commerce
(ICC) and the International Standby Practices (ISP) 98 is preferred.
• Knowing the laws of the guarantor’s country may be difficult and the
enforcement itself can be very costly and lengthy.

86
Guarantees in the Malaysian banking system
Types of guarantees:
b) Joint and several guarantee
• Joint guarantee - It requires lender to institute proceedings against
all the guarantors.
• Joint guarantee - There is no option to choose which guarantor to
sue.
• Where the liabilities of the guarantors are joint and several, their
liabilities can be joint or several. The bank has the luxury of suing all
or just one.
• Section 91 of the Contracts Act 1950, the discharge of one of the
guarantors will not discharge the others

87
Important characteristics of a Guarantee
• Involves 3 parties namely the guarantor, the bank and the
borrower. The 3 parties must co-exist before the guarantee can be
recognized as valid.
• The guarantor’s liability to pay is secondary. Borrower is primarily
liable to pay the mount owed.
• Debatable guarantee would be when borrower guarantees his own
loan or a sole proprietor guaranteed loan granted to a sole
proprietorship.
• Loans granted to sole proprietorship and partnership constitutes
loans granted to the proprietor/partners as they are not considered
separate legal entity. They would be considered unenforceable.
• Sometimes lenders may take a guarantee from partners to make
them liable for amounts owed even after they left the partnership

88
Considerations on the need for a guarantee
• The debt service ratio is below the lender’s guideline.
• Loan tenor may exceed the retirement age of borrower.
• Income of the borrower is unstable
• Income cannot be substantiated.
• The lenders would have to assess whether the guarantor can
provide a meaningful financial support.
• Lenders should not combine income of the borrower and guarantor
for assessment of debt service for a loan.
• Generally the guarantor should be financially more stable than
borrower.
• One way to make a guarantee effective is to get a standing
instruction to debit guarantor’s salary/income in the event of
default by borrower
89
Past consideration
• Consideration of a guarantee is always in respect of loan to be
granted to the borrower.
• A past consideration guarantee arises when loan in question has
already been granted before guarantee was obtained.
• Situations where past consideration can arise:
• No guarantee taken when loan was first given but guarantee
obtained after loan turned bad.
• One or more guarantors want to be replaced as guarantors and
the new guarantors would be executing a guarantee that is past
consideration. (Can overcome this by obtaining a
supplementary agreement.)
• After loan has been disbursed, bank seeks additional
guarantors .

90
Past consideration – legal position
• Explained under the Section 80 of the Contract Act 1950 as – “ A
sells and delivers goods to B. C afterwards without consideration
agrees to pay for them in default of B. The agreement is void.”
• In the above scenario the agreement is void as there is no
consideration.
• In banking, past consideration would not be applicable for
overdraft facility. It is because the facility is evergreen
• For term loans and HP facility a guarantee can be affected by past
consideration.
• Where there is a request for a guarantee to be substituted, there is
no legal duty by the bank to accommodate the request.

91
Documentation of Guarantees
• There is no standard form. It is an agreement and a binding
contract.
• A guarantee does not require attestation. A bank officer can attest
a guarantee.
• To avoid forgery, it is normal for banks to require that a guarantee
is witnessed by a solicitor.
• Banks should discourage the execution of a guarantee in the
guarantor’s home or office.
• A forged signature would render a guarantee invalid under the law.
• In the case of a forged guarantee, the recovery process would be
frustrated, the officer who witnessed the signature may be subject
to disciplinary action but no criminal liability imposed on person
who has not properly witnessed a signature.

92
Forged guarantee
• Forgery is a criminal offence and if a person claims forgery a police
report should be lodged.
• It is unlikely for a person to lodge a report if a guarantee was not
forged.
• Where police report has been lodged, bank should withhold legal
action against the guarantor.
• If guarantee is executed outside the bank, the lender should ensure
their representative is present at all times when the guarantee was
signed.
• The practice of dating a guarantee after all guarantors have signed
will not affect the validity of the guarantee.

93
Stamping and discharge of guarantees
• Under the Stamp Act 1949 as at 1st July 2014, the amount of stamp
duty that needs to be paid is RM 10 for personal guarantee
• A guarantee can be discharged under certain circumstances as
defined under the Contract Act 1950.
• When a guarantee is discharged, liability of the guarantors will
similarly be discharged.

94
Enforcement of guarantees
• BNM has issued guidelines requiring inter alia, that a bank must
have recourse against the borrower before proceedings can be filed
against the guarantor, under the following situations:
• Guarantee executed after 9th October 1995.
• Loan amount does not exceed RM 250,000.
• Loans granted to an individual borrower.
• Loan granted to individual whose spouse is not the guarantor.
• The guarantor has not in writing ,voluntarily waived his rights
under the guideline

95
Enforcement of guarantees…..cont
• Under the guidelines (previous slide), banks are required to:
• Use best endeavours to recover debts from the borrower
• Commence proceedings against guarantor 1 year after
proceedings commenced against borrower.
• Execute judgement against guarantor unless all legal remedies
against borrower has been exhausted. Ex: Writ of seizure,
bankruptcy proceedings, prohibitory order or garnishee order.

• Above provisions not absolute. Exceptions where:

• The action against guarantor, if not taken may be time barred
• Borrower cannot be located, already a bankrupt or borrower
deceased

96
Enforcement of guarantees…..cont
• Legal process against guarantor is long and winding.
• Even if judgement has been obtained, there is no guarantee the
debt would be repaid.
• To enforce judgement, lenders may have to obtain an order for
attachment of goods, writ of seizure and sale, prohibitory order,
garnishee order, bankruptcy proceedings or even winding up in the
case of companies.
• Legal costs can also be very prohibitive
• Proceedings can be long and protracted.
• There is no guarantee that even after action has been taken,
payment would be received from the guarantor.
• In case guarantor has been declared a bankrupt, the assets of the
guarantor would have to be sold and proceeds shared with other
creditors.
97
Enforcement of guarantee and
insolvency act 1967
• A new set of guidelines came about under the Insolvency Act 1967
as at 1st November 2017.
• Above act prohibits commencement of any bankruptcy action
against a social guarantor (a guarantor of loans such as study loan
and does not profit from the loan)
• There are also protection for other type of guarantors where
creditors would have to show that he has exhausted all modes of
execution and enforcement to recover from the debtor first.

98
Indemnity
• It is covered under Section 77 of the Contracts Act
• Unlike a guarantee, an indemnity is an undertaking by a person
giving the indemnity to pay.
• The undertaking to pay is not dependent upon default by the
borrower
• It constitutes a primary obligation on the part of the person giving
the indemnity to repay when demanded by the bank.

99
Undertakings
• It is assumption of duty or responsibility by a party.
• The term has been used generally with legal intent and without.
• An undertaking without legal intent might not constitute a contract
enforceable by law.
• For an undertaking to be a legally binding document , it must:
• Have an offer and acceptance
• There is consideration for the contract
• There are parties that have the legal capacity to contract.

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The End

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