The Chargee’s In Rem Right Is Not Defeated By The Chargor’s In Personam Claim To Rescind The Purchase Of The Charged Property
05 July 2021
Key Contacts:
EXECUTIVE SUMMARY
In the recent case of Alliance Bank Malaysia Bhd v. Sureendhran Subramaniam & Anor [2021] 5 CLJ 362, the High Court held that a chargee bank’s foreclosure proceedings should not be stayed/postponed on the ground that the chargor-purchaser has a pending court suit against the developer-vendor with regards to the charged property.
BRIEF FACTS
At the Defendants’ request, the Plaintiff granted loan facilities to the Defendants. In consideration thereof, the Defendants charged a property (“charged property”) in favour of the Plaintiff as a security. Subsequently, as a result of the Defendants’ default in repayment of monthly instalments, the Bank terminated and recalled the loan facilities and commenced foreclosure proceedings against the charged property. The Defendants then filed a stay application of the Bank’s foreclosure proceedings pending the Defendants’ civil suit against the developer company who had sold the charged property to the Defendants (“SPA Suit”). In the Defendants’ SPA Suit, the Defendants sought for inter alia rescission of the sale and purchase agreement and refund of the purchase price, whereby the Defendants alleged that they had entered into the sale and purchase agreement to purchase the charged property due to alleged false representation of the developer.
SALIENT FINDINGS OF THE COURT
The High Court dismissed the Defendants’ stay application and granted an order for sale of the charged property based on inter alia the following reasons: -
- The Defendants in their notice of application and affidavit-in-support relied solely on preservation of status quo and have not shown “something quite exceptional” as required in the Court of Appeal case of Ling Peek Hoe & Anor v. Golden Star & Ors [2020] 9 CLJ 601. The High Court stated that by this reason alone, the stay application should be dismissed.
- The Plaintiff’s rights cannot be defeated or adversely affected by the Defendants’ disputes with the vendor/developer, and the Plaintiff’s interest as a registered chargee is indefeasible in spite of the Defendants’ disputes with the vendor-developer: The Federal Court’s decisions in CIMB Bank Bhd v. Ambank (M) Bhd & Ors [2017] 9 CLJ 145; [2017] 5 MLJ 142 and Chang Yun Tai & Ors v. HSBC Bank (M) Bhd & Other Appeals [2011] 7 CLJ 909 were cited in support of this point.
- The balance tilts in favour of allowing the foreclosure proceeding to continue without further delay, as a delay would increase the accruing interests under the loan facilities, even though the Plaintiff would still be able to readily recover the shortfall amount from the Defendants.
- The Defendants have not shown any “cause to the contrary” to warrant a stay or postponement of the Plaintiff’s exercise of its statutory remedy of foreclosure sales.
- The Defendants have not alleged or shown any breach of the facilities agreement on the part of the Plaintiff bank; even if there were mere breaches by the chargee of the said agreement, such in personam claim would not defeat the in rem right of the Plaintiff to an order for sale.
- The outcome of the SPA Suit, even if it were in favour of the Defendants, will not have a critical impact or significant influence on the outcome of the current suit by the Plaintiff for an order of sale pursuant to legal charge.
- In the further alternative, even if the Court were to apply the test of nugatoriness or special circumstances, the result is still the same, i.e, this present case is not appropriate for grant of stay. In the Defendants’ affidavits, there is no allegation or evidence that the developer would be unable to pay monetary compensation to the Defendants if the Defendants were to succeed in their claims against the developer in the SPA Suit. The Plaintiff’s foreclosure sale of the charged property, which property the Defendants (according to their SPA Suit against the developer) also do not want to retain, would not render the subject-matter of the SPA Suit in any way nugatory. If the Defendants were to succeed in their claims in the SPA Suit against developer, the Defendants would still recover monetary compensation against the developer.
It is interesting that the High Court has also stated the following, albeit
obiter:
“In this regard, it is also pertinent to note that if the court were to grant a stay of foreclosure proceedings pending the outcome of the borrower-purchaser’s suit against the developer or vendor wherein the borrower-purchaser alleges misrepresentation or breach or any vitiating circumstance to avoid or rescind the sale and purchase agreement, then all foreclosure proceedings by banks and financial institutions would similarly be liable to be easily stayed and delayed by the borrowers-purchasers, as what the borrowers-purchasers need to do is merely to file a court suit against the developer or vendor with allegations to avoid or rescind the sale and purchase agreement. Such stay of foreclosure proceedings would be very detrimental to the banking and financing system as a whole. As wisely observed by the Federal Court in Chang Yun Tai & Ors v. HSBC Bank (M) & Other Appeals, “banking business will be rendered impracticable and burdensome if this was so. In this regard the courts should not impose such a requirement that may impede the flow of commerce”. The court should not exercise its discretionary power in a way or to an extent which renders banking business impracticable or burdensome or which impedes the flow of commerce.”
Conclusion
This case is important as it affirms the position that the chargee’s right to enforce its statutory remedy of sale is an
in rem right. Such right is separate from and not affected by the
in personam claim of the chargor, be it on the ground that there is a breach by the developer/vendor in respect of the sale and purchase agreement of the charged property, or a breach of the loan agreement by the chargee.
This article is co-written by
Wong Chee Lin,
Claudia Cheah and
Nurzahirah Mohd Zaki.
This alert contains general information only. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such.