On 4 September 2025, the Court of Appeal by a unanimous decision in Nike Global Trading B.V., Singapore Branch v Pemungut Duti Setem, Malaysia (Civil Appeal No. W-01(A)-623-11/2023), handed down a significant judgment, holding that a novation agreement is not subject to ad valorem stamp duty as a conveyance on sale under item 32(a) of the First Schedule of the Stamp Act 1949 (“the Act”), but is subject to stamp duty as an agreement under item 4 of the said schedule.
 
Facts
 
On 1 May 2021, NIKE European Operations Netherlands B.V. (“NEON”) and NIKE Sales (Malaysia) Sdn Bhd (“NIKE Malaysia”) entered into an Intercompany Loan Agreement (“Original Loan Agreement”), under which NEON agreed to lend up to RM41,257,000.00 to NIKE Malaysia. The loan amount was fully disbursed and was due for repayment five years later.
 
On 17 December 2021, NEON, NIKE Malaysia and Nike Global Trading B.V., Singapore Branch (“Appellant”) entered into a Novation Agreement (“Novation Agreement”) whereby all rights, obligations, duties and liabilities of NEON under the Original Loan Agreement were transferred to the Appellant.
 
The Pemungut Duti Setem, Malaysia (“Respondent”) assessed stamp duty of RM1,716,004.00 to be payable on the Novation Agreement. The Appellant’s objection under section 38A of the Act was rejected by the Respondent who maintained the original assessment.
 
The High Court’s Decision
 
The Appellant appealed against the Respondent’s decision to the High Court.
 
The appeal was dismissed on the ground that the Novation Agreement operates as a transfer of the right of repayment of the debt under the Original Loan Agreement of the original lender (i.e. NEON) to the Appellant without monetary consideration. Hence, stamp duty is payable on the Novation Agreement under item 32(a) of the First Schedule of the Act as if it were a transfer or conveyance on sale by virtue of section 16(1) of the Act.
 
The Appellant appealed the High Court’s decision to the Court of Appeal.
 
The Court of Appeal’s Decision
 
According to the Court of Appeal, the main issue for determination is “whether the Novation Agreement is chargeable under subsection 16 (1) of the Act, read together with Item 32(a) of the First Schedule of the Act?”
 
Novation v Assignment
 
According to the Court of Appeal, the High Court had in essence determined the Novation Agreement to be a form of assignment as it transferred property, i.e. the receivable under the Original Loan Agreement and is thus subject to stamp duty under section 16 and Item 32(a) of the First Schedule of the Act.
 
The Court of Appeal was unable to agree with the High Court’s decision for the reasons set out below.
 
Section 63 of the Contracts Act 1950
 
Section 63 of the Contracts Act 1950 (“Contracts Act”) provides as follows:
 
“63   Effect of novation, rescission and alteration of contract
 
If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed.
 
ILLUSTRATIONS
 
(a) A owes money to B under a contract. It is agreed between A, B and C that B shall henceforth accept C as his debtor, instead of A. The old debt of A to B is at an end, and a new debt from C to B has been contracted.”
 
Their Lordships also referred to Halsbury’s Laws of Malaysia which clarify the position of section 63 of the Contracts Act in the following terms:
 
“[120.525] Novation: Substitute a new contract
 
Novation is a new contract; it extinguishes rights and obligations under the old contract for which the new contract is made. For the operation of the provision on the Contracts Act 1950 on the effect of novation, rescission and alteration of contract, the party claiming such a relief must not only show the intention to novate or that the terms of the subsequent contract are so inconsistent with the former one as to imply that intention, but he must also prove that all the parties to the former contract have consented to the terms of the subsequent one.
 
[120.526] Novation: Change in parties
 
Novation does not always involve a change in the terms of the contract by the parties. It may sometimes also relate to a change or substitution of the parties to the contract. It has been held that when there is a change in the parties in a novation, the new agreement does not amount to an assignment of the rights of the parties.”
 
The Court of Appeal also cited several cases, among others, the Malaysian Supreme Court decisions in LYL Hooker Sdn Bhd v Tevanaigam Savisthri KT Chitty & Anor [1987] 2 MLJ 52 and Housing and Development Board v Lee Sem Yoong Sdn Bhd [1987] 2 ML J 204, which explain the distinction between a novation and an assignment. The Supreme Court in LYL Hooker (supra) held:
 
“Novation is a new contract. It extinguishes rights and obligations under the old contract for which the new contract is made. Being a new contract, there must be consent by all parties and there must be consideration, and rights and obligations under it are not those transferred from the old contract which is already extinguished (see Chitty on Contract, Vol 1, (1983 Ed), at paras 1315— 1316).”
 
Based on the above authorities, the Court of Appeal said it can be deduced that: 

The learned Justices then referred to the following provisions of the Novation Agreement: 

The Court of Appeal held that clause 1.2 of the Novation Agreement clearly shows that the Appellant assumes all rights, obligations, duties and liabilities of the original lender, i.e. NEON, as if the Appellant were a party to the Original Loan Agreement.
 
The Court of Appeal ruled that the High Court had erred in concluding that the Novation Agreement did not constitute a novation but rather a transfer of the rights and benefits to receive the disbursed funds, and that this finding contradicts the explicit terms of the Novation Agreement.
 
The Court of Appeal further found that the terms of the Novation Agreement demonstrate that the Appellant did not merely acquire rights to receive repayments. Instead, it assumed active, ongoing obligations originally borne by NEON. This indicates that the Novation Agreement was substantively a substitution of parties, carrying forward existing obligations and rights rather than transferring property or debts alone.
 
The Court of Appeal concluded that the Novation Agreement cannot amount to an assignment, conveyance or transfer of property in law. The Court added that the Novation Agreement, properly construed, is strictly a novation - fully extinguishing the old contractual arrangement and substituting a new one.
 
Their Lordships also held that the mere presence of the term “transfer” in isolation cannot override the substantive legal character of the agreement as a novation.
 
The Court of Appeal added that the fact that NIKE Malaysia now owes repayment of the loan to the Appellant rather than to NEON does not imply a transfer or conveyance of property. It simply reflects the establishment of a fresh contractual relationship whereby the Appellant undertakes all the previous lender’s rights and responsibilities. As there was no property transfer or conveyance, the Court of Appeal was of the view that section 16(1) of the Act was inapplicable and the High Court’s reliance on that provision to impose stamp duty was wrong in law.
 
Absence of consideration?
 
The Court of Appeal further held that the High Court had erred in finding that the Novation Agreement lacked consideration. Citing Danaharta Managers Sdn Bhd v Melewar Leisure Sdn Bhd and Others [2008] 4 MLJ 448 and Arab-Malaysian Merchant Bank Bhd v Silver Concept Sdn Bhd [2008] 6 MLJ
295, the Court of Appeal said that consideration for a novation need not be monetary, and can validly consist of the parties’ mutual promises, such as the agreement to release one party from prior obligation.
 
The Court of Appeal allowed the Appellant’s appeal and made a consequential order directing the Respondent to stamp the Novation Agreement under item 4 of the First Schedule of the Act, which provides that stamp duty payable on an agreement is RM10.
 
Comments
 
This decision is significant as it clarifies that an agreement which satisfies the legal prerequisites of a novation agreement is not subject to ad valorem stamp duty as a conveyance on sale under item 32(a) of the First Schedule of the Act. Rather, based on this decision, the proper head of charge for such an instrument would be item 4 of the same schedule, which provides that stamp duty of RM10 is payable.
 
Note: At this juncture, we are unable to comment whether the Respondent will seek leave to appeal the Court of Appeal’s decision to the Federal Court.

 
Case Note by Sheba Gumis (Partner) and Victoria Low (Associate) of the Tax Practice of Skrine.