Absolute assignment not purporting to be by way of a charge

Introduction

1.   The effect of assignment has far reaching consequences, especially in relation to a party’s right, be it the assignor or assignee, to bring an action in respect of the assigned rights. There are a plethora of cases whereby the assignor’s case had been struck out for the lack of locus standi due to the rights having already been assigned to a third party assignee, and also whereby the assignee’s case had been struck out for the lack of locus standi due to its failure to join the assignor as a party to the proceedings.

2.   By and large, this conundrum is brought about by the statutory effect of section 4(3) Civil Law Act 1956. To bring matters to clarity, a short trip down the historical development of the law on assignment is required.

Development of the law

3.   Chitty LJ in Durham Brothers v Robertson succinctly stated the position of the common law on assignment prior to section 23(6) Judicature Act 1873 (the equivalent of our section 4(3) Civil Law Act 1956) in the following manner:-

“...As is well known, an ordinary debt or chose in action before the Judicature Act 1873 was not assignable so as to pass the right of action at law, but it was assignable so as to pass the right to sue in equity. In his suit in equity the assignee of a debt, even where the assignment was absolute on the face of it, had to make his assignor, the original creditor, party in order primarily to bind him and prevent his suing at law, and also to allow him to dispute the assignment if he thought fit. This was a fortiori the case where the assignment was by way of security, or by way of charge only because the assignor had a right to redeem. Further, the assignee could not give a valid discharge for the debt to the original debtor unless expressly empowered so to do.

...Now it was in order to afford some remedy for this state of the law that subsection 6 of section 23 was passed.

Two matters, as is apparent on the face of it, had to be regarded: first, the simplifying the remedy in favour of the assignee; and, secondly, the protection of the original debtor.”

4.   Therefore, prior to the enactment of section 4(3) of the Civil Law Act 1956, an assignment only confers an equitable right to the assignee and never a legal right.  Since the legal right remains with the assignor, only the assignor had the right to sue.

5.   Section 4(3) effectually changed this state of the law. Section 4(3) provides as follows:-

“3) Any absolute assignment, by writing, under the hand of the assignor, not purporting to be by way of charge only, of any debt or other legal chose in action, of which express notice in writing has been given to the debtor, trustee or other person from whom the assignor would have been entitled to receive or claim the debt or chose in action, shall be, and be deemed to have been, effectual in law, subject to all equities which would have been entitled to priority over the right of the assignee under the law as it existed in the State before the date of the coming into force of this Act, to pass and transfer the legal right to the debt or chose in action, from the date of the notice, and all legal and other remedies for the same, and the power to give a good discharge for the same, without the concurrence of the assignor.”

6.   Section 4(3) confers legal right to the assignee the assigned debt or chose in action in an absolute assignment not purporting to be by way of charge.  In other words, no right is left with the assignor since both the legal and equitable rights are transferred to the assignee. The only qualification to be made is that where in the event the absolute assignment was intended as a security to a loan, an equitable right of redemption exists in favor of the assignor upon full repayment of the said loan.

Absolute assignment and charge

7.   Post the enactment of Section 4(3) of the Civil Law Act 1956, the development of this area of the law revolves around whether the assignment is one which is absolute or merely purporting to be by way of a charge.

8.   As it is a common feature in loan transactions to assign the borrower’s asset to the lender as part of the security for the loan, a prevailing argument was that an assignment being a security for a loan is not absolute but merely purports to be a charge.

9.   However, case laws illustrate that an assignment can be absolute even if it is actually a security for a loan only.  This proposition is endorsed by our highest court and the English Court of Appeal. To name a few:

-  the Federal Court in Nouvau Mont Dor (M) Sdn Bhd v Faber Development Sdn Bhd [1984] 2 MLJ 268;
-  the Supreme Court in Hipparion (M) Sdn Bhd v Chung Khiaw Bank Ltd [1989] 2 MLJ 149;
-  the English Court of Appeal in Durham Brothers v Robertson [1898] 1 Q.B. 765; and
-  the English Court of Appeal in Hughes v Pump House Hotel Company Ltd [1902] K.B. 190.

10.   Abdul Malik Ishak J (as his lordship then was) also dealt directly with the issue on point in Chan Min Swee v Melawangi Sdn Bhd [2000] 7 MLJ 111 wherein his lordship held (at pages 117 – 118):-

“It is germane to note that in the Nouvau Mont Dor's case, the appellant assigned all the rights in the sale and purchase agreement to the Public Bank as security for a loan. The Federal Court held that such an assignment was absolute and not by way of a charge even though the assignment was by way of a security for a loan. In short, it can be surmised that one may have an absolute assignment even if the assignment is a security for a loan.

The Federal Court in the Nouvau Mont Dor's case also observed that:

(i)   the wordings of s 4(3) of the Civil Law Act 1956 was similar to the English s 25(6) of the Judicature Act 1873 which had since been replaced by the English s 136 of the Law of Real Property Act 1925.

(ii)   the English authorities on the interpretation of the English s 136 of the Law of Real Property Act 1925 served as guidelines to interpret s 4(3) of the Civil Law Act 1956.

(iii)   three English cases concerning assignments given as securities for loans were referred to and these cases showed that there can be an absolute assignment even for such securities: Durham Brothers v Robertson (1898) 1 QB 765 769, 770; Hughes v Pump House Hotel Co Ltd (1902) 2 KB 190 and Walter & Sullivan Bhd v J Murphy & Sons Bhd; Same v Same [1955] 2 WLR 919.

Chitty LJ in Durham Brothers v Robertson at pp 771-772 of the report said:

As the enactment requires that the assignment should be absolute, the question arose whether a mortgage, in the proper sense of the term, and as now generally understood, was within the enactment. In Tancred & Ors v Delagoa Bay and East Africa Railway 23 QBD 239 there was an assignment of the debt to secure advances with a proviso for redemption and reassignment upon repayment. It was there held by the Divisional Court (disapproving of a decision in National Provincial Bank v Harle (1881) 6 QBD 626 that such a mortgage fell within the enactment. It appears to me that the decision of the Divisional Court was quite right. The assignment of the debt was absolute: it purported to pass the entire interest of the assignor in the debt to the mortgagee, and it was not an assignment purporting to be by way of charge only. The mortgagor-assignor had a right to redeem, and on repayment of the advances a right to have the assigned debt reassigned to him. Notice of the reassignment pursuant to the sub-section would be given to the original debtor, and he would thus know with certainty in whom the legal right to sue him was vested. I think that the principle of the decision ought not to be confined to the case where there is an express provision for reassignment. Where there is an absolute assignment of the debt, but by way of security, equity would imply a right to a reassignment on redemption, and the sub-section would apply to the case of such an absolute assignment.”

11.   Therefore, the true answer to the question whether an assignment is absolute or by way of charge only is not through an observation of whether the assignment was intended to be a security only; but whether the rights were given absolutely without any reservation to the assignee.  In Wong Kim Wah, the High Court endorsed the test in Chitty on Contracts (27^th Ed.) Vol. 1, reproduced as follows:-

“The test seems to be, has the assignor unconditionally transferred to the assignee for the time being the sole right to the debt in question as against the debtor? If so, the assignment will be absolute; but if the debtor cannot tell whether to pay the assignor or the assignee without examining the state of accounts between them, it will be held to be by way of charge only.”

12.   In contrast, the definition of a charge was helpfully stated by Atkin LJ in National Provincial and Union Bank of England v Charnley [1924] 1 KB 431 at 449 – 450 as follows:-

“The first question that arises is whether or not this document does create a mortgage or charge, and to determine that it is necessary to form an idea of what is meant by a "charge." It is not necessary to give a formal definition of a charge, but I think there can be no doubt that where in a transaction for value both parties evince an intention that property, existing or future, shall be made available as security for the payment of a debt, and that the creditor shall have a present right to have it made available, there is a charge, even though the present legal right which is contemplated can only be enforced at some future date, and though the creditor gets no legal right of property, either absolute or special, or any legal right to possession, but only gets a right to have the security made available by an order of the Court. If those conditions exist I think there is a charge.”

13.   And in Swiss Bank Corporation v Llyods Bank Ltd [1982] A.C. 584, it was held (at page 595):-

“An equitable charge which is not an equitable mortgage is said to be created when property is expressly or constructively made liable, or specially appropriated, to the discharge of a debt or some other obligation, and confers on the chargee a right of realisation by judicial process, that is to say, by the appointment of a receiver or an order for sale: see Fisher and Lightwood, p. 14.”

14.   From the above definition, a charge:-

(i)  does not transfer the legal right and/or legal right to possession of the subject matter to the chargee/assignee;

(ii)  does not confer on the chargee/assignee the power to give a good discharge to the debtor; and

(iii)  the realisation of the security (the subject matter) is only available by an order of the Court.

15.   The case of Sakinas Sdn Bhd v Siew Yik Hau & Anor [2002] 5 MLJ 497 provides a good illustration (at least in the Malaysian context) when an assignment (whether termed to be absolute or not) purports to be a charge only. Abdul Aziz J held as follows:

“... The assignment is an alternative form of security necessitated by the fact that the apartment had no title to enable it to be charged under the NLC as security. If the apartment had a title, the title would have been charged under the NLC as security for the loan and there would have been no need for an assignment. The assignment is the second best substitute for a charge because a charge is not yet possible and it therefore serves the same kind of purpose as a charge. When title is eventually available, the apartment would be charged and the assignment would cease...”

Conclusion

16.   The distinction between an absolute assignment and one which purports to be a charge is not always easy to be distinguished. Over and above the four corners of the assignment document, one will have to keep in mind the overall purpose of the transaction and the true intention of the parties in executing the assignment document.

17.   Fortunately, the development of the law on interpretation of contracts allows the courts to do so. See Berjaya Times Square Sdn Bhd (formely known as Berjaya Ditan Sdn Bhd v M-Concept Sdn Bhd [2010] 1 MLJ 597; and Bank of Credit and Commerce International SA (in liquidation) v Ali & Ors [2001] 2 WLR 735:

“… The meaning of the agreement is to be discovered from the words which they have used read in the context of the circumstances in which they made the agreement…”