Understanding charge as security instrument

CHARGE is a common form of security registered in favour of the financial institution in exchange for the granting of a loan facility to the purchaser in financing the purchase of property. The financial provider is the chargee and the borrower is the chargor. In return for the financial assistance to the chargor, the registered charge on the property gives the chargee certain rights to protect this interest in the event of chargor default on the repayment of the loan instalment.

We have commonly heard the words “mortgage” and “charge”. Both words have been widely used interchangeably and this has blurred the distinction between them. However, there is a significant difference on where the title rests. For charge, the ownership of the property remains with the purchaser/chargor. The chargee has the right to register the charge on the title of the property. Once the loan, including all the interests, has been completely paid off, the charge shall be removed by the financial provider. On the other hand, a mortgage transfers the title of the asset to the lender as security for the loan. Such transfer is subject to an agreement between the lender and borrower. The agreement shall state that the lender will transfer the ownership back to the borrower once the loan is paid off. In Malaysia, we adopt the practice of charge.

There are two types of systems that govern the practice of charge: the “Torren System” and the “English Land System”. The Torren System gives a conclusive and indefeasible title or interest if the name of the person is duly registered on the title of the property. Indefeasibility of title means once the title or interest is registered, the right in the property cannot be void or defeated by any past event, error or omission. This is different from the English Land System where there may be equitable interest even if it was not duly registered or shown on the title.

Charge under the Torren System

Malaysia practises the Torren System, which is similar to Australia’s land system. This system significantly eases the job of Malaysians because we only have to check the title that comes with a complete list of registered title and interest. Hence, once the charge is duly registered, the financial provider has an indefeasible interest on the encumbered land or property.

Nevertheless, the above situation is only applicable if the title to the property has been issued by the relevant land office. In cases involving strata development, it may take years for a strata title to be released to each unit. If a borrower intends to obtain a loan by using the property as security consideration, the borrower is required to sign a loan agreement that comes with a deed of assignment. The deed of assignment is an agreement to assign all the owner’s rights to the financier. In simpler words, it is akin to a mortgage, where the financier is effectively the “owner” of the property until full settlement of the loan facility.

As for a company, it has the power to borrow or raise money if it is not restricted by its Memorandum or Article of Association. In this case, it is not only governed by the National Land Code 1956 but also the Companies Act 1965 (Companies Act). There are various ways for the company to gain funds in order to acquire property, and different types of security may be given to the borrower or investor. However, limited to acquiring property by securing a loan by using property as a security, the chargee has to register the charge at the land office and also fulfil the requirements laid down in the Companies Act. The Companies Act imposes a duty on the chargee to lodge Form 34 from the Companies Act with the Registrar of the Companies Commission Malaysia within 30 days of its creation; any late lodgement or failure to do so will result in a penalty of a RM1,000 fine plus any default penalty.

Promoting a fair trading market

A charge on the assets of the company in order to secure money borrowed by the company may be a fixed charge or a floating charge or a combination of both. The nature of the charge as security is an agreement between the borrower and the creditor. A fixed charge is a type of charge that charges one or more specific or ascertained and definite property of the company. The company will then be prevented from dealing freely with that property because it is subject to the interest of the chargee.

On the contrary, a floating charge is an equitable security on some or all of the company’s present and future property. Thus, a floating charge constantly fluctuates until something occurs which causes it to crystallise, whereupon it becomes a fixed charge. A floating charge is enforceable when it crystallises on the occurrence of certain events such as default of payment of interest and winding up of the company.

Even though there are two different charges in the “company” context, the fixed charge is commonly used rather than the floating charge mainly because the floating charge is classified as an unsecured creditor and is harder to enforce.

On the side note, there is no difference in terms of documents to be signed when a company purchases a property without title.

A charge is a facility of funding. Such facilities open the door of opportunities to individuals and companies. The Malaysian Law has carefully crafted a system to protect the interest of all parties in the process of funding. The system reveals encumbrances on the property, which promotes a fair trading market.

Chris Tan is a lawyer, author, speaker and keen observer of real estate locally and abroad. Mainly, he is the founder and now Managing Partner of Chur Associates.

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Disclaimer: The information here does not constitute legal advice, please seek professional legal advice for your specific needs.