Discuss the legal position of loan agreements cum assignments, and any problems which may arise in relation thereto, with reference to the relevant case law.
What is LACA?
LACA usually arises where there is no separate individual title yet, and a financial institution cannot issue a charge, so it gives borrower a loan on the execution of LACA.
#1 WHETHER ABSOLUTE OR CHARGE ONLY?
S4(3) Civil Law Act states that for a loan to constitute LACA:
- the assignment must be absolute
Nouvau Mont Dor (M) Sdn Bhd v Faber Development Sdn Bhd
- whether or not an agreement is an absolute one, not purporting to be by way of charge only, within the meaning of s 4(3) of the CLA
- gather from 4 corners of the instrument itself
- the assignment must be in writing & signed by the assignor
- assignee must give notice to the debtor
- not purporting by the way of charge
If by way of charge, assignor qualified to sue housing developer.
But if absolute assignment, problematic for the buyer if developer defaulted.
#2 WHETHER ASSIGNOR HAS RIGHTS TO SUE?
Homebuyer buys property from developer, no individual separate title yet. Bank would want them to execute deed of assignment. Assign rights of purchaser under SPA to the bank. Equitable interest, but is contractual right. Because no separate individual title, purchaser cannot create a charge in favour of bank.
Although the purchaser signed SPA, rights invested in bank. Confer power of attorney on the lender so that lender given power to deal with property on your behalf, able to sell property on default of repayment. That’s why issue arise when default on housing developer, does purchaser still have locus standi to bring case against developer without concurrence of bank?
Does assignor have right to sue developer in case of developer late delivery/faulty workmanship?
- If absolute assignment under s4(3), only the assignee can sue the developer/debtor, not the assignor (cos already assigned all his rights and has no more right to sue).
- Assignor has to persuade the assignee to personally sue the developer or sue in the name of the assignor. In most cases, the assignee bank will be reluctant to do so and it is always a time-consuming process to get the assignee to agree to this course of action, much to the advantage of the developer
- However, Look at Housing Developer (Control and Licensing) Amendment Act - purchaser has right to sue developer if default unless in assignment expressly stated need to get consent of assignee.
- FC in Nouvau Mont Dor (M) Sdn Bhd v Faber Development Sdn Bhd  2 MLJ 268 and Hipparion (M) Sdn Bhd v Chung Khiaw Bank Ltd  2 MLJ 149 held: clause in question is absolute assignment clause under s 4(3) CLA, notwithstanding would later be converted into a legal charge under the National Land Code 1965 (“NLC”) upon issuance of the individual title.
- unfair to the assignor if the assignee refuses to sue the developer
- especially when thousands of apartment and condominium units without individual strata titles were sold in Malaysia, and loans were secured by LACA similar to the one in Nouvau Mont Dor
- takes years before strata titles are issued when the assignments are then converted into a legal charge under the NLC which would then confer the assignor now a chargor the right to have direct recourse against the developer.
What if assignor default in loan repayment?
- absolute assignee bank can dispose of the property by way of assignment to a third party with notice to the developer and without the concurrence of the assignor borrower – assignor rights not guaranteed
What about assignment given by company?
- Requires registration as a charge under s 108(3)(e) of the Companies Act 1965 because it is an equitable mortgage (see Chuah Eng Khong v Malayan Banking Berhad  3 MLJ 97); otherwise the charge will be void against the liquidator and any creditor of the assignor. (s 108(1) Companies Act 1965.)
#3 WHETHER SHOULD BE TREATED AS EQUITABLE CHARGE / EQUITABLE MORTGAGE?
Should not be treated as equitable charge. Difference lies in document of title.
FC: there was title in Arunasalam Chetty (equitable charge), in Chuah Eng Kong & Phileo - no title - mortgage - no legal estate - cannot have said to have acquired equitable charge, where there is title, and it is possible to create a charge.
Chuah Eng Kong v Malayan Banking - LACA under which a borrower assigns absolutely his rights, title and interest under SPA is equitable mortgage. Different from an equitable charge where IDT has already been deposited with the lender.
Malayan Banking v Zahari Ahmad - NLC does not prohibit the creation of equitable charges and based on a body of authorities, Malaysia land law recognize equitable charges. In this case, the loan agreement and the deed of assignment between the parties created an equitable charge both in form and substance; the bank was an equitable charge as the IDT was yet to be issued.
Phileo Allied Bank v Bupinder Singh (FC) - described as equitable mortgage
Court should give effect to contract between parties, in relation to whether lender needs to get an order from court to sell the property. By POA, assignee has been given the power to handle the property, without need to get an order from court – can sell by private treaty.
LACA not possible to create charge yet cos no issuance of IDT, so should be treated as equitable mortgage, bank only acquire equitable interest, no title.
In conclusion, the latest position of LACA under the Malaysian land law is being recognised as an equitable mortgage but ONLY enforceable contractually. Under an absolute assignment, the rights, title and interest of the assignor in respect of the property under the sale and purchase agreement are transferred to the assignee.
Thus, the assignee is entitled to do anything once notice of default and notice of remedy has been issued to the assignor, including selling the property without obtaining a judicial order. However, by not requiring the sale to be judicially endorsed, the interests of the borrower would be left unprotected in the event of a default as the courts can no longer protect the borrower from any wrongful sale of the land.