The Basics On Securities In Malaysia

• Published date: 22 November 2022
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Charges, Mortgages, Indemnities, Financial Services, Corporate and Company Law, Securities
• Law Firm: One Asia Lawyers
• Author: Mr Yuki Hashimoto and Clarence Chua Min Shieh

The Basics on Securities: What are Charges and what do they do?

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1．Introduction

When proceeding in a business venture, ensuring a streamline of finances is vital to any such venture. There are times whereby obtaining such finances poses a challenge to such a business, to which there are various ways in responding to such challenges. Obtaining a debt is being one of them. In the local regime, charging of a property is a common way in providing security towards such debt. With that in mind, we shall attempt to provide an overview on what a charge is, the two types of charges that are commonly used (ie: fixed charge and floating charge), and certain practical points.

2．What is a Charge?

A charge refers to the collateral, given for securing the debt, by way of mortgage on the company's or an individual's assets. The party providing the charge is a "chargor" while the party benefiting from the charge is called a "chargee" Unfortunately, there no one specific statutory definition on what a charge is, as it is based on context. Having said that, the most common reference is made to the National Land Code and the Companies Act 2016. The two statutes are often read together, as in practice, parties that would need extensive funding will end up being body corporates.

Under the National Land Code, which is the core statute for real estate regulation in the country, it provides that "every charge created under this Act (ie: the National Land Code) shall take effect upon registration so as to render the land or lease in question liable as security in accordance with the provisions thereof, express or implied"¹. On the other hand, in the event the chargor is a company, then Sections 352-364 of the Companies Act 2016 shall apply. It should be noted that in the Companies Act 2016, charges can be made towards other properties beside real estate, such as stocks, equipment, and other tangible or intangible property². In the event that the charged property is not a piece of real estate, then the National Land Code would not apply.

The above explanation is usually read alongside case law. In the case of National Provincial Bank of England v Charnley³, an English case which is relied in the local courts⁴, has held the following conditions are to exist to create a charge:

• An intention of the parties that the property (existing or future) shall be made available as security;
• It is security for the payment of debt; and
• And the creditor has the right to have made it available, even though the creditor has no legal right on possession.

It should be noted that individuals can also charge their property. Having said that, it is incredibly rare for individuals to have high-value property beyond real estate. In practice, security provided by an individual will be usually under a personal guarantee, which operates like a floating charge (whereby how a floating charge works will be discussed later).

In normal conversations, a charge is sometimes referred to as a mortgage and the two words sometimes are used interchangeably. Although both mortgage and charge have the same function and outcome (being a method of security and the failure of repayment will result in possession of property that was used as security), the principles behind them are different. In the case of a charge, only the interest is transferred to the chargee; the ownership remains with the chargor. In the case of a mortgage, both the interest and ownership are with the mortgagee and the mortgagor only has a right to redeem the land back upon full payment⁵...