Methods of taking the security II

Assignment
An assignments is a transfer to an assignee of the right to receive a benefit (usually money) from a debtor. The law recognises legal assignment of the moneys due under the contract so that failure to pay to the assignee can form a claim in the courts against a party who has recognized the assignments. Bank Bumiputra Malaysia Bhd v Syarikat Kejuruteraan Hong Huat Sdn Bhd & Ors illustrates this principle.

Whether or not an assignment is an absolute one not purporting to be by way of charge only is to be gathered only from the four corners of the instrument itself.

Bank Bumiputra Malaysia Bhd v Syarikat Kejuruteraan
Hong Huat Sdn Bhd & Ors
[1988] 3 MLJ 328, High Court

Facts:
By a loan agreement made on 11 October 1983 between the first defendant and the plaintiff, the latter agreed to grant to the first defendant an overdraft facility up to the limit of RM2,800,000 for principal only upon the terms and conditions appearing in the said agreement. As security, the first defendant created a charge under the National Land Code 1965 and also caused its directors to execute a joint and several guarantee. As further security for the overdraft facility the first defendant also executed two deeds of assignment in favour of the plaintiff of all the proceeds under a project undertaken by the first defendant known as Malacca Seafront Reclamation Project. However, instead of proceeding to enforce any of the securities, the plaintiff chose to issue a writ against the first defendant and four others claiming the sum of RM3,710,380.68, interest and costs.
The plaintiff contended that the said deeds of assignment were not absolute and the assignee could not maintain a suit against the assignor’s debtors. It also contended that the right to sue for the debt was not assigned and that only part of the debts of RM12,000,000 and RM15,470,000 was assigned for the overdraft facilities granted up a sum of RM2,800,000.
The plaintiff applied for summary judgment under Order 14 against the first defendant and also applied for summary judgment against two other parties. Both applications were heard and dismissed by the senior assistant registrar. The plaintiff appealed to the judge.

Held:

(1) Whether or not an assignment is an absolute one (not purporting to be by way of charge only) within the meaning of section 4(3) of the Civil Law Act 1956 is to be gathered only from the four corners of the instrument itself.

(2) Looking at the whole of the deeds of assignment of 12 October 1983, the learned judge was of the opinion that the documents were absolute assignments and not purporting to be by way of charge only within the meaning of section 4(3) of the Civil Law Act. The assignments were absolute in the sense that the assignor intended to transfer to the assignee ‘all money, interest and rights now or thereafter become due and payable all assignor’.

(3) Even if the assignments were not absolute, nevertheless, clause 7 of the deeds of assignment gave the plaintiff the right to take legal action at any time against the assignor itself for the recovery of the banking facilities or any part thereof together with interest thereon without having to enforce the securities given under the said loan agreement.

(4) The plaintiff was given liberty to sign judgment as prayed against the first, fourth and fifth defendants.

Gunn Chit Tuan J: … As pointed out by the Federal Court in Nouvau Mont Dor (M) Sdn Bhd v Faber Development Sdn Bhd [1984] 2 MLJ 268 at p 270, whether or not an assignment is an absolute one (not purporting to be by way of charge only) within the meaning of section 4(3) of the Civil Law Act 1956 is to be gathered only from the four corners of the instrument itself. Now, in this case, the two assignments of 12 October 1983 were in the form of a deed signed by the first defendant as assignor and the plaintiff as assignee. After reciting (a) that the assignor has been awarded the Malacca Seafront Reclamation Project to the value of RM12,000,000 and RM15,470,000 payable by Messrs Pembinaan Bandar Melaka Sdn Bhd and Messrs Pembinaan Kota Laksamana (Melaka) Sdn Bhd and (b) that the assignor has requested the assignee to provide banking facilities to enable the assignor to perform the said contracts and the assignee has agreed to provide banking facilities in the form of an overdraft facility up the sum of RM2,800,000 with interest at 2 ½ % above the plaintiff’s base lending rate, the first defendant duly executed the deeds of assignment providing, inter alia, as follows:

(1) In consideration of the bank advancing to the assignor the principal sum of ringgit two million and eight hundred thousand only (RM2,800,000) the assignor assigns to the bank all moneys interest and right now or hereafter become due and payable to the assignor by Messrs Pembinaan Kota Laksamana (Melaka) Sdn Bhd under the said contract.

(2) In the event that no moneys or interest is received by the bank under the assignment under clause 1 above, or if the moneys actually received do not fully satisfy the principle sum with interest thereon the whole principal sum and interest or part thereof that remained unpaid shall become due and immediately repayable.

(3) The assignor further covenants that any receipt issued by the bank in respect of any payment made by Messrs Pembinaan Bandar Melaka Sdn Bhd (Messrs Pembinaan Kota Laksamana (Melaka) Sdn Bhd) as hereinbefore mentioned shall be a sufficient and valid discharge.

(4) In the event of the bank receiving any moneys in excess of the principal sum and the accrued interest thereon at 2 ½ % above BBMB’s base lending rate the bank agrees to refund after deducting all the necessary incidental expenses any such excess to the assignor forthwith or as soon as it is practicable.

After the signatures by the parties there were the following indorsements:

(1) We, Messrs Pembinaan Bandar Melaka Sdn Bhd, hereby acknowledge the existence of the assignment agreeing to credit all proceeds of the contract direct into Kejuruteraan Hong Huat Sdn Bhd’s account no: 001-18846-86 with you.

Pembinaan Bandar Melaka Sdn Bhd
(Signed)

(2) We, Messrs Pembinaan Kota Laksamana (Melaka) Sdn Bhd, hereby acknowledge the existence of the assignment agreeing to credit all proceeds of the contract direct into Kejuruteraan Hong Huat Sdn Bhd’s account no: 001-18846-86 with you.

Pembinaan Kota Laksamana (Melaka) Sdn Bhd
(Signed)

Looking at the whole of the deeds of assignment of 12 October 1983, it was my opinion that the documents were absolute assignments and were not purporting to be by way of charge only within the meaning of section 4(3) of the Civil Law Act. The assignments were absolute in the sense that the assignor intended to transfer to the assignee ‘all moneys, interests and rights now or hereafter become due and payable to the assignor’. Even any receipt issued by the bank in respect of any payment would be a sufficient and valid discharge and the debtors in each case have acknowledge the existence of the assignment and agreed to credit all proceeds of the contracts direct into the first defendant’s account with the plaintiff. The debtors therefore knew to whom they had to pay their debts.
However, if I was wrong in my opinion that the assignments were absolute, nevertheless, the above quoted clause 7 of the deeds of assignment gave the plaintiff the right to take legal action at any time against the assignor itself for the recovery of the banking facilities or any part thereof together with interest thereon without having to enforce the securities given under the said loan agreement. In all the circumstances I therefore allowed the appeal against the decision of the learned senior assistant registrar and gave liberty to the plaintiff to sign judgment as prayed for against the first, fourth and fifth defendants.
An assignment is usually taken when there is no title involved or where the security consists of moneys under the contract such as charter-party hire fee in the case of ships, book debts as in hire-purchase agreements or the benefit of a life policy. Usually the assignment is absolute and not by way of charge only. An assignment can be legal or equitable.
If notice in writing has been given to the debtor, the assignment passes the legal right to the debt together with all legal remedies for non-payment. A legal assignment transfers the ownership to the lender. An equitable assignment leaves the ownership with the borrower and the assignee has the right to sue if the debtor fails to pay up.

Set-off
A set-off as a security is the lender’s right to self-help on the moneys deposited with the lender against the borrower. In another context, a set-off may be defined generally to be the merging (wholly or partially) of a claim of one person against another in a counter-claim by the latter against the former. This power to set-off is made available by law as well as by the borrower when he executes a latter of set-off or where he executes an agreement containing a set-off clause.

Hypothecation
Hypothecation is actually a charge on property as security for the payment of a sum of money where the property remains in the possession of the debtor. This type of security differs from that of a pledge where the lender assumes physical possession of the things or goods pledged. In hypothecation the borrower recognises the lender’s right to those goods or things which are the subject of the security and still retains possession of them. The concept is analogous to a pledge, minus the possession. Thus the mortgage of a ship or her freight or cargo may well be by hypothecation. In this method of security, the owner of the goods, things or ships may undertake to give possession when called upon so to do.

Guarantee
A guarantee is an undertaking by a person to the lender to pay up in the event the borrower has defaulted. In other words, it is a promise by one person (ie the guarantor) to answer for another (ie the borrower). In nature, the liability is secondary. A guarantee as a security is personal to the guarantor and is evidenced by a letter or agreement.

Indemnity
An indemnity is a collateral contract or security to prevent a person from being damnified by an act or forbearance done at the request of another. It is a personal security of primary liability. It means that the person who has signed the letter of indemnity can be called upon to indemnify the lender direct and without reference to the borrower. The difference between the guarantee and the indemnity can be illustrated thus: In a guarantee, the person says to the lender, ‘If you lend money to X and if he doesn’t pay you, I will’ whereas in an indemnity, the person says to the lender, ‘If you lend money to X, I shall see that you are paid’.