ASIAN DEVELOPMENT BANK

REGIONAL TECHNICAL ASSISTANCE

TA NO: 5795-REG

INSOLVENCY LAW REFORM

SECURED TRANSACTIONS

MALAYSIA

Rabindra Nathan
Shearn Delamore & Co

1. Problems of creation and registration of secured transactions

The creation of secured transactions begins with the consent of the parties to the transaction. The agreement would have to be registered under the relevant law or laws in order to give priority to the secured transaction. Once the security is placed on the register it will be deemed to be within the constructive knowledge of any subsequent creditor. This ensures priority to the registered charge over all subsequent registered and unregistered charges.
Submitting a transaction for registration is a matter of procedure. Upon registration, the register would show the registration date to be the date on which the transaction was submitted for registration.
The following securities are available under Malaysian law: -

(i) a registered charge over National Land Code land;
(ii) debentures which form fixed and floating charges over real and personal property;
(iii) legal and equitable mortgages of personal and intangible property;
(iv) pledges of personal property;
(v) liens over land; and
(vi) the assignment of proceeds of contracts or choses in action.

The following securities are those that must be registered with the Registrar of Companies pursuant to s.108 Companies Act 1965 or risk being held void as against a liquidator or creditor of the company:

(i) a charge to secure an issue of debentures;
(ii) a charge on the uncalled share capital of a company;
(iii) a charge on shares of a subsidiary of a company
(iv) a charge over land;
(v) a charge on book debts;
(vi) a charge on calls made but as yet unpaid;
(vii) a floating charge on the undertaking or property of a company;
(viii) a charge on a ship or aircraft or any share in a ship or aircraft;
(ix) a charge on goodwill, patent or licence, on a trademark or a copyright;
(x) a charge on a credit balance of a company in any deposit account.

A charge over (iv) above (land) must be registered under the s.243 National Land Code as well as the Companies Act 1965 as such a charge over land also falls within the scope of s.108(3)(e) National Land Code.
The problems most frequently encountered in this area are equitable charges that often are not reflected on the register. Most of the time these competing charges are equitable in nature in which case the first in time prevails. It is the usual experience that prompt registration of the above securities as well as examining the register before entering the above transactions would avoid the problems often encountered in the attempt to obtain priority for a certain security.
Where statutory charges over land are concerned, where more than one charge has been created and properly registered, where the security is enforced the proceeds of the sale are applied by the Court towards the satisfaction of the charges in the order of registration. Priority goes to the charge registered first in time.
Charges under the Companies Act have been held to be constructive notice of its existence but not of its contents. Such charges are treated in the usual way - priority is determined by the order of registration. The general principles of English law apply to security transactions that are not required to be registered under any applicable law.

2. Problems of enforcement

It is unusual for a borrower encountering financial difficulties to attempt to negotiate an arrangement with its creditors to repay the amount of the loan. The usual course is for the lender to issue the standard letter of demand specifying the date by which the borrower has to remedy its default. Where the borrower fails to do so, the lender would typically, depending on the nature of the security, either initiate legal proceedings or rely on self-help remedies or other extra-judicial remedies. It is entirely possible that where the lender and borrower enjoys a good relationship accommodation of the borrower's request will be entertained.
A relatively recent decision of Kimlin Housing Development Sdn. Bhd. (in Liquidation) (Receiver and Manager appointed) v. Bank Bumiputra (M) Bhd. [1997] 2 M.L.J. 805 affects situations where the land concerned is subject to a fixed charge and a statutory charge. It has been held that the land in such a scenario may not be sold by private auction. Sale must be effected by way of the mechanism laid down by the National Land Code for the enforcement of statutory charges. The safeguards provided by the Code would apply to this sale.
The enforcement procedures for different types of securities are as follows:
(i) Land subject to a statutory charge must be sold by public auction:

(a) Registry title land is sold after a hearing before a judge. A sale will be ordered unless the chargor can show cause to the contrary;
(b) Land office title or rural land is sold through quasi-judicial proceedings before a land administrator.

(ii) Land not subject to a statutory charge as well as vehicles, machinery, plant and stock-in-trade may be sold privately by a receiver;
(iii) Proceeds of a contract which have been assigned may be collected by the receiver or through court proceedings if necessary;
(iv) Shares in private companies may be sold privately by the lender or by the receiver through a power of attorney. Alternatively sale may be effected judicially through a charging order made by the High Court; and
(v) Listed shares of public companies can be sold on the open market through a broker. The nominee company would execute the necessary authorisation forms for the broker to effect the electronic transfer.
The only other problem is where a company has been placed in Special Administration under the Pengurusan Danaharta Nasional Berhad Act 1998. Where the special administrator has been appointed a moratorium comes into effect for the first 12 months of the duration of the administration during which no steps may be taken to enforce a security or execute upon a judgment or re-possess any asset or set-off any debt except with the prior consent of Danaharta Corporation (established under the above Act).

3. Problems of the relationship between secured creditor interests and the administration of an insolvent corporate debtor

The appointment of a receiver and manager replaces the power of the board of directors of the corporate debtor to administer the company. By virtue of its agency relationship to the company, the receiver and manager assumes control of the administration of the company via the debenture.
A receiver and manager appointed by a debenture holder has a duty to manage the assets of the company so as to secure the return of the loan made by the debenture holder. Where the interests of the debenture holder, whose interest is often secured, conflicts with the interest of the insolvent corporate debtor, the receiver and manager is only obliged to act in the interests of the debenture holder. Though not often enough, it is sometimes the case that a receiver and manager in carrying out its duties may work for the interests of the corporate debtor so far as it applies the assets of the company and manages its affairs in a manner to keep the company a going concern.
Although a receiver and manager may be appointed, the members and directors of the insolvent debtor company may nonetheless successfully initiate winding up proceedings. Where a liquidator is appointed, even where this appointment is made after that of the receiver and manager, the contractual rights of the debenture holders remains unaffected. The control the receiver exercises over the company's assets also remains unaffected.
The appointment of a liquidator would however affect the powers and duties of the receiver especially as agent of the company as the liquidator owes an obligation to the body of creditors generally. The liquidator would prevent any acts of the receiver that would work to the detriment of the collective body of creditors of the company. The appointment of the liquidator by the board of directors and members of the company may be ill advised where the receivers are trying to keep the company viable. The appointment of the liquidator would hinder this process and would thus affect the unsecured creditors if their repayments were dependent on the continuation of business or the sale of the company as a going concern.
It is worth repeating that the appointment of a special administrator by Danaharta Corporation either through the exercise of the Corporation's discretion or through a request by the board of directors of the affected company would create a moratorium for 12 months to come into effect. During the subsistence of this moratorium (which may be extended), creditors may not attempt to enforce their securities or execute judgment without Danaharta Corporation's prior consent.