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www.ipsofactoJ.com/archive/index.htm [1997] Part 5 Case 14 [CAM] |
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Judgment
Mahadev Shankar JCA
(delivering the judgment of the court)
This is an appeal from the judgment of the High Court dismissing the appellant’s application for a declaration that he was entitled to require the respondent (‘the bank’) to return the title deed to a house and land the appellant (‘the borrower’) had bought from a housing developer, upon payment of the full amount of a judgment, interest and costs which the bank had obtained on a loan agreement cum assignment (‘the loan agreement’). The bank had insisted on being paid the excess post-judgment interest which had accrued due to the bank at the contractual rate. The trial judge held that there was no merger of the borrower’s covenant to repay principal and interest in the judgment but that the terms of the loan agreement imposed an independent covenant to pay interest at the contractual rate up to the date of repayment.
The material terms of this loan executed on 26 March 1984 were as follows:
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Clause 1
Clause 5 For the consideration aforesaid, the borrower hereby assigns unto the lender all his rights title and interest in the said lot and the full and entire benefit of the said agreement by way of security for the loan hereby granted. PROVIDED ALWAYS that notwithstanding the assignment hereinbefore contained or any other provisions of this agreement, the borrower shall and hereby undertakes to continue to observe, perform and be bound by all whatsoever conditions covenants and stipulations on the part of the borrower expressed or contained in the said agreement. Clause 8 In the event that the borrower (or where the borrower shall be more than one person, if any one of them) shall:
then and in any of such cases, the loan and any interest thereon and all other sums of moneys (whether principal or interest) for the time being owing under this agreement shall immediately become payable by the borrower to the lender and the lender shall forthwith become entitled to recover the same with interest thereon at the prescribed rate and to exercise the rights and powers upon default herein by this agreement and by law provided without any previous notice to or concurrence on the part of the borrower. Clause 12 Upon issue of a separate document of title to the said lot by the government, the borrower shall at his own cost and expense and upon being so required to do by notice in writing from the lender, take a transfer of and execute a charge over the separate document of title to the said lot such charge to be in the lender’s standard form (with such variations thereof as the lender may require) in favour of the lender to secure repayment to the lender of the balance of the loan then due and all other moneys together with interest thereon at the prescribed rate payable and owing by the borrower to the lender under and by virtue of this agreement at the date of the execution of the charge. Clause 13 For the considerations aforesaid, the borrower hereby irrevocably appoints the manager of the lender for the time being in Kuala Lumpur the attorney of the borrower and in the borrower’s name or in the name of the attorney or otherwise and on the borrower’s behalf to deal with the said lot in any manner whatsoever and to enforce all rights and remedies under the said agreement and do all other things as fully and effectually as the borrower could do himself in connection therewith .... Clause 14 This agreement shall remain in force until and unless the transfer and charge referred to in cl 12 hereof is duly registered against the register title to the said land or the whole of the moneys secured by the said lot together with interest thereon and all the other moneys payable to the lender hereunder are paid in full whichever first happens. Clause 28 So long as any moneys shall be owing by the borrower to the lender and during the continuance of this agreement, the lender shall have the custody and possession of the borrower’s copy of the said agreement and of all other whatsoever documents evidencing any title to or right in the said lot or any benefits or rights annexed appurtenant or relating thereto or in any way connected therewith. [emphasis added] |
The document of title (‘the title’) to the land was not yet in existence when the loan agreement was executed. The borrower had on 27 July 1983 signed a sale and purchase agreement with a housing developer, Sri Donglai Sdn Bhd who undertook to build a house on the lot purchased by the borrower. Clause 5 of the loan agreement set out above assigned the benefit of this sale and purchase agreement to the bank. The title was issued only on 19 November 1984 and subsequently came into the possession of the bank by virtue of cll 12 and 13 of the loan agreement.
The borrower defaulted in paying four monthly instalments. On 10 December 1985, the bank’s solicitors issued a demand for the same stating that failure will result in ‘court action for recovery of the entire sum plus interest and costs’. The borrower did not comply.
On 7 March 1986, a second letter followed. The bank’s solicitors now demanded and recalled ‘the entire loan sum of RM63,341.09 only plus interest and costs’. Again, the borrower did not comply.
In breach of the loan agreement which prohibited the borrower from dealing with the land without the consent of the bank, and unbeknown to the bank, the borrower entered into an agreement in writing on 3 June 1985, purporting to sell and transfer the land to one Tan Ah Tong. The borrower and his solicitor must have been aware that the entire interest in the land had already been assigned to the bank. It is therefore very problematic what interest, if any, could have passed from the borrower to this Tan Ah Tong. To protect his interest, Tan Ah Tong filed a caveat Presentation No 206/86 Vol.27 Folio 106 (‘the first caveat’) on 8 April 1986. Furthermore, since the land was subject to an express condition that it could not be dealt with without the consent in writing of the State Executive Council, the efficacy of this purported sale is very suspect.
The mechanics whereby the bank’s interests in the land were to be protected under the loan agreement cum assignment was for the borrower to send a registrable memorandum of transfer to the bank together with a memorandum of charge duly executed. The title deed, upon issue, went from the developer directly to the bank. In 1986, Messrs Michael Chen & Lee were the bank’s solicitors. Lian & Co were the borrower’s solicitors. On 27 January 1986, they wrote to the bank’s solicitors as follows:
Dear Sir/s, Re: K118, Taman Cheras Indah Phase 2, Kuala Lumpur Purchaser: Chuah Eng Khong We refer to the above matter and return you herewith the duly executed Form 16A and duly attested by our Mr. Lian for further action. We shall forward you the duly executed memorandum of transfer as the same is now being forward to M/s Sri Donglai Sdn Bhd for their execution and return, to enable us to forward the same to the relevant stamp office for adjudication. Yours faithfully, sgd |
The plain meaning of this letter is that the borrower had forwarded to the bank the charge duly executed and attested, and that the transfer from the developer to the borrower would also be forwarded in due course.
Instead, on 3 June 1986, Tan Ah Tong by a written ‘assignment’ purported to assign all his rights to one Chuah Chok Kiang who is the borrower’s sister. This transaction was also not reported to the bank. Nor was Tan Ah Tong’s caveat removed notwithstanding the cessation of any further claims by him to the property.
On 5 February 1987, Lian & Co wrote to the bank’s solicitors as follows:
Dear Sirs, Re: K118, Taman Cheras Indah Phase 2, Kuala Lumpur Purchaser: Chuah Eng Khong We refer to the above matter and the telephone conversation with your Mr. Chandra. We have not been able to trace the memorandum of transfer. We have requested Mr. Chuah Eng Khong to call at our office to execute a fresh memorandum of transfer. Yours faithfully, sgd |
Despite this, no transfer was ever forwarded to the bank. The land continued to be registered in the name of the developer.
In December 1987, the bank filed a writ in the Sessions Court, Kuala Lumpur. The material portions of the statement of claim read as follows:
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(3) |
The plaintiffs’ claim against the defendant is for the sum of RM80,644.84 being monies payable by the defendant to the plaintiffs as at 12 November 1987 for monies lent by the plaintiffs to the defendant as bankers for the defendant at his request and for interest agreed to be paid upon money due from the defendant to the plaintiffs pursuant to a loan agreement dated 26 March 1984. PARTICULARS Housing Loan RM80,644.84 being the outstanding balance as at 12 November 1987 together with further interest thereon at the rate of 10%pa at yearly rests and penalty interest of 1% above the current rate on the arrears of instalments from 13 November 1987 until full settlement. |
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(4) |
Further, by way of security for the abovesaid loan, the defendant, by the said loan agreement dated 26 March 1984, assigned to the plaintiffs all its rights, title and interests in and to the property known as Plot 118, Block K, Taman Cheras Indah, Kuala Lumpur (‘the property’). |
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(5) |
The said loan agreement provides, inter alia, that in the event the defendant default in the payment of any of the said instalments or any interest thereon or any other sums or moneys due and owing to the plaintiffs:
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(8) |
By reason of the aforesaid, the whole outstanding sum due under the said charge [sic] became immediately due and payable by the defendant to the plaintiffs. |
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(9) |
On 30 November 1987, the plaintiffs through their solicitors issued another letter to the defendant recalling and demanding the payment of the full outstanding sum of RM480,644.84 as at 12 November 1987 and the delivery of vacant possession of the property. |
The prayers read:
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AND THE PLAINTIFFS CLAIM:
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The judgment recovered on 3 October 1988 was literally an order in terms except that the contractual rate of interest claimed was only allowed up to the date of judgment. Only 8%pa was allowed thereafter on the decretal sum until realization.
Quite why the bank or its solicitors did not timeously pursue the transfer or seek to register the charge is not clear. On 12 March 1992, the borrower’s sister, Chuah Chok Kiang, filed a caveat (‘the second caveat’) against the land claiming that Tan Ah Tong had paid the borrower in full but that Tan Ah Tong had yet to transfer the land to her. Again, her solicitor was Albert SF Lian.
By Originating Summons No 24–849 of 1992 filed on 2 November 1992 in the High Court at Shah Alam, the bank applied for the removal of the caveat (presumably the first caveat had lapsed.) According to the affidavit of the bank manager affirmed on 31 October 1992 when the title to the land came out, the bank was unable to register the borrower’s memorandum of charge because of the second caveat. The bank contended that Chuah Chok Kiang had no registrable interest in all the circumstances.
Chuah Chok Kiang resisted the application. Her affidavit is not before us. In a letter dated 13 January 1994, the borrower sought to mitigate his conduct by claiming that he had been unemployed but was now prepared with his sister’s assistance to settle the loan by instalments.
This offer must have been rejected because on 25 January 1994, the bank’s manager filed a further affidavit in reply in which it is stated that the purported assignments by the borrower to Tan Ah Tong and thereafter to Chuah Chok Kiong was a conspiracy to defraud the bank.
On 4 August 1994, the bank also filed a caveat on the land. On 15 August 1994, the bank’s solicitors issued a bankruptcy notice claiming the full amount due to them by way of decretal sum, interest up to 15 August 1994 and costs. The amount due came to RM132,177.76 and the bankruptcy notice gave the breakdown of how interest was calculated as per judgment.
On 17 November 1994, the borrower tendered through his new solicitors to the bank’s solicitors the full amount claimed, i.e. RM132,177.76 upon terms that the bank accept the same in full satisfaction and release the said title to him. The bank refused. It required payment of RM241,447.31 as at 2 December 1994.
The borrower then filed his originating summons on 22 December 1994 in the High Court at Kuala Lumpur. The first prayer was for a declaration that RM132,177.76 represented the entire debt owing from the borrower to the bank under the loan agreement and the judgment. The second prayer was for the return of the title upon receipt by the bank of RM132,177.76. The borrower also prayed for costs and such other relief as may be just. There were now three concurrent proceedings pending, i.e. the caveat removal application in the High Court, Shah Alam; the bankruptcy proceedings in the High Court, Kuala Lumpur; and this originating summons which was supported by an affidavit of the borrower. An affidavit in opposition was filed by the bank’s manager, claiming RM242,396.75 had to be paid in order to obtain the release of the title deed as at 31 December 1994.
The difference in figures came about because the bank had calculated interest due after judgment at the contractual rate, whereas interest at the judgment rate was a fixed 8% per annum on the decretal sum as from the 3 October 1988.
Unfortunately, the borrower’s originating summons was very imprecise as to the consequences he was seeking to establish. The summons was not brought under the heading assigned to the bankruptcy proceedings, i.e. D2–29–1832 of 1994. Nevertheless, this was referred to as being the subject matter of the application as well as the loan agreement. The summons and the affidavit in support have been very adroitly drafted so as to exclude all reference to the charge executed by the borrower and his other misconduct in regard to the purported assignments and caveats all of which must have been undertaken to frustrate the bank’s lawful claims. The prayers are now set out in full [translation]:
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(a) |
that full payment of RM132,177.76 by the plaintiff [the borrower] to the defendant [the bank] as claimed in the bankruptcy notice in the Kuala Lumpur High Court No D2–29–1832–94 must be deemed to be in full settlement and satisfaction of the debt of the plaintiff to the defendant under the agreement dated 26 March 1984 and the judgment dated 3 October 1988 between the two parties; |
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(b) |
that the defendant return the temporary document of title known as Register HS Mukim Ampang, No HS (M) 14801, No PT 5533 Lot 023815 to the plaintiff upon receipt of the amount of RM132,177.76 mentioned above, without any restrictions or rights on it; |
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(c) |
cost of the application to be borne by the defendant; and |
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(d) |
any other orders which are deemed fit by the learned court. |
In his judgment, the learned trial judge found as a fact that the borrower had not executed the charge, when the uncontested evidence before him was that he had done so. He also said that the bank’s application was to remove both caveats when in fact it was to remove the second caveat only. This error however is immaterial. What is critical is that the application to remove the second caveat was made so that the charge could be registered. Since the bank held the title deed as security, its caveat (as shown in the photocopy of the title deed exhibited in the appeal record) is a lien-holder’s caveat.
In the penultimate paragraph of his judgment, the learned trial judge found that cl 14 of the loan agreement was an independent covenant and merger does not apply because the moneys secured by the land and the interest therein at 12%pa have not been paid in full ‘and the transfer and charge remain to be registered’.
In point of fact, para 6 of the bank manager’s affidavit of 31 October 1992 only refers to the charge. There is no reference anywhere to any transfer executed by the borrower. Nor has such a transfer (if there is one) or the charge been exhibited in the affidavits.
We heard arguments in this appeal on 30 January 1997 and reserved judgment. We gave judgment in this matter on 25 June 1997, when we allowed this appeal with costs. It does not appear to have occurred to either counsel to inform this court that on 31 January 1997, the High Court in Shah Alam ordered that the second caveat be removed. This information was material because the way is now open for the charge, which the bank holds, to be registered. However, the photocopy of the title deed still shows the developer to be the registered proprietor. So a transfer from the developer is required which may require the bank to exercise its powers as the borrower’s attorney.
In addition to the authorities cited in the judgment of the court below and to us here, we think some help can be derived from the exposition in the Law of Mortgage (9th Ed) by Fisher & Lightwood at pp 595– 597. It reads as follows:
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Effect of judgment on mortgage interest. On the above principle, a covenant in a mortgage for payment of principal is merged in a judgment obtained on the covenant and the interest runs on the judgment at the rate of 7½% pa (see Sewing Machines Rental Ltd v Wilson [1975] 2 All ER 553 (CA) and note the point of there being no interest on county court judgments). If the mortgage provides for a higher rate, the right to recover the difference between the higher rate and the judgment rate depends on the form of the covenant for payment of interest and the nature of the proceedings – whether the claim is against the mortgagor personally, or is against the mortgaged property. If the effect of the covenant for payment of interest is to be payable so long as any principal money shall be due on the covenant for payment of principal, then it is extinguished in the judgment together with latter covenant. On judgment being obtained, no principal is any longer due on the covenant since it is gone. The principal is thenceforth due on the judgment. The interest covenant is considered to have this effect where it provides for payment of interest until the principal is repaid, or so long as the principal or any part thereof remains unpaid. A covenant of this nature is said to be ancillary to the main covenant, and the excess of interest cannot be recovered in proceedings against the mortgagor personally. Where the interest covenant is not merely ancillary but is an independent covenant, it is not extinguished in the judgment, and the excess of interest can be recovered in personal proceedings. A covenant for payment of interest so long as any principal remains due on the security is an independent covenant, since the principal is equally due on the security whether it is owing on the covenant or the judgment. Consequently, under a covenant in this form, the excess interest can be recovered in personal proceedings (Popple v Sylvester (1882) 22 Ch D 98. For a form of independent covenant, see p 680 in the Appendix, infra. Such provision is implied in a registered charge: see Land Registration Rules 1925, 5.76). But in proceedings in which the mortgagee’s claim is against the property, the full interest recovered by the mortgage is recoverable whether the interest covenant is independent or ancillary. |
It is necessary when looking at all the English authorities to keep in the forefront of our minds that there is a big difference between English mortgages where the legal estate passes to the mortgagee and charges under the National Land Code 1965 where the legal estate remains in the borrower. The term ‘security’ must mean the instrument upon which the lender relies to enforce his claim. Thus, the loan agreement would be a security. The memorandum of charge executed by the borrower is another security.
Notwithstanding an obviously erroneous reference to ‘the said charge’ in para 8 of the statement of claim, the bank’s action in the sessions court was on the loan agreement alone, and therefore against the borrower personally. The personal covenant for payment of principal and interest arising from the loan agreement was extinguished by the judgment.
The bankruptcy notice was predicated solely upon the judgment. We therefore think that the trial judge could and should have treated the matter before him as one that concerned the validity of the bankruptcy notice only and could have directed it be set aside upon payment of the sum stipulated therein.
To that extent, we allowed this appeal because the consequence of non-payment was that the bank would have been entitled to present a bankruptcy petition.
Our allowing this appeal should not be understood to mean that the bank is under any obligation to return the title until the parallel obligation to satisfy the charge has been fulfilled by the borrower. One of the complications in this case was that in 1986 and 1987 and up to the point when judgment was taken, the borrower who had executed the charge failed to forward to the bank the memorandum of transfer from the developer to the borrower. The full circumstances of this aspect of the matter cries out for an inquiry because the unilateral attempts of the borrower to bypass the bank by purporting to assign his rights to his sister, Chuah Chok Kiang, through Tan Ah Tong, taken together with their then solicitor’s contention that the transfer could not be traced is suggestive of sharp practice. On the material presented to us in the appeal record, it appears that this land is still registered in the name of the developer (see appeal record p 75).
This case has some similarity with Sim Lim Finance Ltd v Pelandok Enterprise Pte Ltd [1981] 1 MLJ 280. This is a Singapore decision. The plaintiff sued under the mortgage which provided for interest at 18%. The Court Rules only permitted 8%. The registrar refused to grant more than 8%. On appeal, C.J. Wee CJ held that the plaintiff could not get more than 8% on the judgment, but were entitled to retain their security until they were paid the principal sum plus interest at 18%.
The defendant was not represented in that case. The question as to whether if Sim Lim Finance collected the full amount of the judgment debt, it was still entitled to bring foreclosure proceedings to enforce recovery of the balance of the debt calculated at 18% was not answered.
Likewise, in our case, the bank’s rights to register the charge now that Chuah Chok Kiang’s caveat has been removed has not been tested. In such circumstances, it would be wrong for us to order the bank to return the title as prayed for by the borrower. His hands are very soiled, and specific relief is very much a discretionary remedy.
The borrower’s new solicitors may be forgiven for going for a declaration in so far as it affected the bankruptcy notice, since the borrower’s tender was conditional. The trial judge did not deal with this aspect. In our judgment, an act of bankruptcy was committed but that is now of academic interest in view of the time lapse. If the borrower wants to discharge the judgment now, he must pay principal and judgment interest up to date of realization. How the bank should go about enforcing the charge will have to await the determination of further facts.
This situation has been brought about by permitting this matter to continue in the court below as an originating summons when crucial issues of fact were contested. In so far as it concerned the bankruptcy notice, it should have been heard in that file. In so far as the claim for the return of the title was concerned, the action should have been by writ. The hybridized application without consolidation of the pending claims in different courts has also contributed to the present impasse. In view of the importance of the issues involved, this case may well be a proper one for an appeal to the Federal Court.
We may well ask ourselves:
Why did the bank’s solicitors not chase Lian for the transfer in 1987?
Why did the bank wait until 1992 to attack the first two caveats?
Why did the bank wait until August 1994 to file its own caveat and issue the bankruptcy notice?
Why has the bank not taken any action against Tan Ah Tong, Chuah Chok Kiang and SF Lian for knowingly attempting to pre-empt its rights? A conspiracy, if there was one, is actionable tort.
Why did the bank’s solicitors not disclose the terms of the charge in the court below?
The grey and shadowed areas of the facts in this case have compounded our difficulties in unravelling what was really going on between the parties. So far as the law is concerned, it is unfortunate that neither counsel drew our attention to RR Sethu’s excellent article on merger in ‘Chargee’s Rights: Real and Personal Effect of a judgment’ [1988] 1 MLJ cxxvii.
Our granting costs to the borrower here and in the court below is thus a matter for real regret which fortunately is not irremediable.
Cases
Sim Lim Finance Ltd v Pelandok Enterprise Pte Ltd [1981] 1 MLJ 280
Legislations
National Land Code 1965
Representations
Malik Imtiaz Sarwar & Karina Yong (Vazeer, Akbar, Majid & Co) for the appellant.
L.H. Chin (Ho, Loke & Koh) for the respondent.
Notes:–
This decision is also reported at [1997] 3 MLJ 173.
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