Introduction
Foreclosure is a legal mechanism through which a lender (“Chargee”) attempts to recover the balance of a loan from the owner of the land (“Chargor”) who has defaulted by forcing the sale of the asset used as collateral, typically real estate. In Malaysia, the foreclosure process is a critical component of debt recovery, particularly incases involving secured loans. The process is governed by a stringent legal framework that ensures the protection of both the Chargee’s and the Chargor’s rights. This article delves into the intricacies of foreclosure proceedings in Malaysia, outlining the legal framework, procedural steps, the Chargor’s rights, challenges, and recent developments in the industry.
Legal Framework Governing Foreclosure in Malaysia
Foreclosure in Malaysia is primarily regulated by the National Land Code 1965 (“NLC”). The NLC prescribes the procedures and legal requirements that must be followed when a Chargee seeks to foreclose on a property. Malaysian law mandates that the Chargee obtain an Order for Sale before proceeding with the foreclosure. This legal requirement ensures that the foreclosure process is conducted under judicial oversight, providing a safeguard against arbitrary or unjust actions by the Chargee.
An application for an Order for Sale can be made either to the High Court or the Land Office, depending on the type of land title. For land held under a Registry title, the application must be made to the High Court, while for land under a Land Office title, the application must be made to the Land Office.
The Foreclosure Process in Malaysia for Land Titles Held under Registry Title
1. Notice of Default (Form 16D)
The process begins when the Chargor defaults on their loan payments. The Chargee will issue a Notice of Default (Form 16D), formally notifying the Chargor of the breach and giving them a specific period to rectify the default. This notice is a prerequisite before any legal action can be taken.
2. Filing a Foreclosure Application
If the Chargor fails to address the default within the stipulated time, the Chargee may file a foreclosure application in court. The application includes documentation of the default and a request for the court to authorise the sale of the property.
3. Court Hearing
The court will then schedule a hearing to assess the Chargee’s application. During this hearing, the Chargor can present defenses or objections to the foreclosure by proving that there is an existence of a Cause to the Contrary. Common defenses include challenging the validity of the Notice of Default or arguing that the grant of the Order for Sale would be contrary to the law or equity.
4. Issuance of an Order for Sale
If the court is convinced that the Chargee has met all legal requirements, it will issue an Order for Sale. This order authorises the sale of the property through a public auction. The auction process is overseen by the court to ensure fairness and transparency.
5. Public Auction
The property is sold to the highest bidder at a public auction. The proceeds from the sale are used to settle the outstanding loan amount. If the sale proceeds exceed the debt, the surplus is returned to the Chargor. Conversely, if the proceeds are insufficient, the Chargee may pursue further legal action to recover the shortfall.
Chargor’s Rights and Defenses
Chargors are afforded several rights and defenses in foreclosure proceedings. One of the most critical rights is the Right of Redemption, which allows the Chargor to prevent the foreclosure by paying off the outstanding debt before the sale. This right provides the Chargor with an opportunity to retain their property if they can secure the necessary funds.
Chargor may also challenge the foreclosure on the ground that there is an existence of a Cause to the Contrary, such as proving exceptions to indefeasibility under sections 340(2), (3), and (4) of the NLC, or alleging that the Chargee failed to comply with procedural requirements — e.g., disputing the validity of the Notice of Default, or arguing that the grant of the Order for Sale would be contrary to some rule of law or equity.
Challenges in Foreclosure Proceedings
Despite the structured legal framework, foreclosure proceedings in Malaysia are not without challenges. Delays in the legal process are common, particularly if the Chargor raises multiple defenses or if there are disputes over the property’s valuation. These delays can prolong the uncertainty and financial strain on both parties.
The auction process can also pose challenges, especially if the property attracts low bids or if there is limited buyer interest. This scenario may result in the property being sold below its market value, which can be detrimental to the Chargor and insufficient for the Chargee to recover the full debt.
Recent Developments
1. A Speedy Departure – Thameez Nisha Hasseem v Maybank Allied Bank Bhd [2023] 5 CLJ 874
Conventionally, actions filed in court are bound by the Limitation Act 1953. However, the issue of whether foreclosure is an “action” coming within the Limitation Act 1953 was recently clarified by the Federal Court.
In 2020, the Federal Court in CIMB Bank Bhd v Sivadevi Sivalingam [2020] 2 CLJ 151 decided in the majority that applying for an Order for Sale within the act of foreclosure is not considered an “action”, thus having liberty over the 12 year limit stated in section 21(1) of the Limitation Act 1953. This was supported by the preceding case of Kandiah Peter v Public Bank Bhd [1994] 4 CLJ 332, which stated that a Chargee merely “enforces their rights” by exercising their statutory remedy against the Chargor in default – i.e., not an “action”.
Just three years later, however, the Federal Court then departed from that decision. In 2023, the Federal Court ruled in Thameez Nisha Hasseem v Maybank Allied Bank Bhd that the act of foreclosure is in fact an “action” when read in conjunction with the NLC, the Rules of Court 2012, and the Courts of Judicature Act 1964, hence being bound by the Limitation Act 1953, wherein no action can be enforced after 12 years from the date of the first payment default.
2. How Fatal is Fatal? – MIDF Amanah Investment Bank Bhd v Vahana Offshore (M) Sdn Bhd [2024] CLJU 31
In January 2024, the Plaintiff in MIDF Amanah Investment Bank Bhd v Vahana Offshore (M) Sdn Bhd failed to exhibit the NLC charge in its affidavit in support of its application for an Order for Sale. The key issue was whether it is possible for the Plaintiff to still be granted the Order for Sale despite this technical error which most would consider fatal.
As per Order 83 Rule 3 of the Rules of Court 2012, the Affidavit in support of the Originating Summons “shall comply with the following provisions of the rules”, one of the rules being “the Affidavit shall exhibit a copy of this charge”. The Defendant challenged the application on, inter alia, this ground of failure to exhibit the charge.
The Plaintiff then asserted that the requirements under Order 83 can be waived under Order 1A and Order 2 Rule 1 Rules of Court 2012. This was as it was a genuine oversight wherein the charge was mentioned in the affidavit although it was inadvertently not exhibited and even the Defendant had already acknowledged the charge. Moreover, the Plaintiff had also filed an amended affidavit, quelling the error.
In the High Court, Leong Wai Hong JC ruled in favour of the Plaintiff, highlighting that no prejudice was caused to the Defendant with the exclusion of exhibiting the NLC charge at first instance, suggesting that non-compliance of Order 83 may not necessary be fatal to the entire claim.
However, it is to be noted that the decision of the High Court has since been overturned by the Court of Appeal, suggesting a possible contrary view that compliance with Order 83 is indeed crucial. The grounds of judgment of the Court of Appeal, which has yet to be made available, remains much anticipated to provide clarity on the issue at hand.
Conclusion
When dealing with foreclosures in Malaysia, the NLC sets out the procedural and legal requirements to be followed. When applying for an Order for Sale it has to be clarified that the Order is bound by the 12 year limit stipulated in the Limitation Act 1953, while non-compliance of Order 83 could very well be fatal to an application for Order for Sale.
The law aims to bring a measure of certainty and fairness to legal matters, despite its imperfections. In the case of foreclosure proceedings, it would be prudent to carefully comply with the procedures as have been laid out by the laws.
If you have any questions or require any additional information, please contact Chuah Jo-Shua, Foo Lyn Min, or the partner you usually deal with at Zaid Ibrahim & Co. This article was prepared with the assistance of Leim Ivan.
This article is for general information only and is not a substitute for legal advice.