HOPE AGAINST HOMELESSNESS: Now is the time to avail yourself of five defences against bank foreclosuresa
In my previous article (NST RED 17th August 2012), I asked Malaysian banks a question:
“Can Malaysian banks be relied upon to self-regulate and to act with caution and compassion and not to commence with wholesale foreclosure proceedings against their defaulting borrowers that would cause not only the economic destruction of their borrowers but would also precipitate a crash of the Malaysian property market with dire consequences for all Malaysians?”
The worst case scenario: I hope that Malaysian banks will voluntarily impose upon themselves a Malaysian-wide Housing Loan Repayment Moratorium for durations of between three to five years. I also hope that Datuk Seri Najib Tun Razak, Malaysia’s Prime Minister and Finance Minister will intervene and instruct Bank Negara Malaysia to impose a Malaysian-wide Housing Loan Repayment Moratorium to be implemented by Malaysian Banks for durations of between three to five years.
But, what if none of the above happens? Faced with these onslaughts from Malaysian banks, can the thousands of distressed borrowers defend themselves?
Playing field is not level: Until now, with a few exceptions, when Malaysian banks commenced with foreclosure proceedings against their borrowers, “the field is not level”. It is a slippery field for the borrowers. Even when the banks have a weak case, by the sheer weight and power of their money and their battery of high-powered litigation lawyers, Malaysian banks will invariably prevail and win against their hapless borrowers.
Justice requires level playfield: This article is not written against Malaysian banks. The objective of this article is to educate and inform the thousands of distressed borrowers who cannot afford to pay the lawyers’ fees to get the appropriate advice. They need to know their rights as provided for in the National Land Code of 1965 (NLC) and how they can stand up for themselves and know what to do when they are faced with foreclosure proceedings.
Malaysian banks’ lawyers always claim that their clients have solid and water-tight cases against the borrowers.
Are the banks’ lawyers correct?
Let me now take us on a journey through Malaysia’s National Land Code of 1965 to understand the respective rights and obligations of Malaysian banks and their housing loan borrowers.
For many average Malaysians, to have an encounter with the law can prove to be an unpleasant and sometimes traumatic experience.
Property as collateral for loans: When a person borrows money from a bank, normally the bank will require that the borrower provides the bank with a security (collateral) for the loan. For housing loans, the security is usually in the form of the subject property and the value of the property should be higher than the amount of the loan granted by the bank.
The property that is offered by the borrower to the bank as security for the loan will then be “charged to the bank”. The borrower is known as “chargor” while the Bank is known as “chargee”.
When the borrower fails to repay the loan, the bank in order to recover the loan amount will proceed to apply to the High Court or the Land Office for an “Order for Sale” to sell the subject property that is charged to the Bank by way of a public auction. In short, the bank will try to auction off the charged property when the borrower defaults on the loan.
Foreclosure under NLC: The NLC gives Malaysian banks the right to foreclose on the properties of their defaulting borrowers and to sell these foreclosed properties through public auctions to recover the loans.
However, there are very strict statutory rules that Malaysian banks are required to comply with before they can foreclose and sell their borrowers’ properties. If they fail to comply with any one or more of these statutory rules, they will fail in their attempts to foreclose and to sell their borrowers’ properties.
The requirement for strict compliance of statutory rules by Malaysian banks (with penalties for their failure to comply) provides distressed borrowers with plausible defences that they can avail themselves to when faced with foreclosure proceedings by the banks.
Borrowers’ 1st line of defence : When a borrower fails to pay the monthly housing loan instalment for four consecutive months and the lending bank commences with foreclosure proceedings against him, before the bank can apply to the High Court for an “Order for Sale”, Section 254 of the NLC requires that the bank issues to the borrower a “Default Notice” in Form 16D, a form prescribed in the NLC. This Form 16D must be served on the borrower in person.
It is mandatory for the bank to comply with the requirements stated in Section 254 of the NLC. If the bank fails to comply and did not issue and did not personally serve on the borrower the “Default Notice” in Form 16D, all subsequent foreclosure proceedings commenced by the bank, all the way to the issuance of the “Order for Sale” by the High Court would be considered irregular and cannot be enforced on the borrower.
There have been many previous Malaysian court judgments upholding the doctrine of “Strict Compliance” with Section 254 of the National Land Code 1965.
Served with a court summons?: When you are served by your bank with a court summons to foreclose your property, first and foremost, you should check your memory and your records to make sure “if you have personally been served by the lending Bank through their lawyers with the “Default Notice in Form 16D”. I emphasise the word “personally”. If you did not personally receive from the bank’s lawyers the “Default Notice in Form 16D”, even though it may have been given to your wife or left at your house or sent to you by post, for as long as you did not personally receive from the bank’s lawyers the “Default Notice in Form 16D”, the lending Bank did not comply with Section 254 of the NLC and the consequences for the bank will follow.
When you are sure you did not personally receive from the bank’s lawyer the “Default Notice” in Form 16D, immediately get yourself a lawyer and tell him the whole story. Your lawyer will know what to do next and he will take care of you from then on.
Borrowers’ 2nd line of defence: After you have ascertained that you did personally receive from the bank’s lawyer the “Default Notice”, you now have to study the form carefully. Is it Form 16D or Form 16E? Why the splitting of hairs? Does it matter whether it is Form 16D (issued under Section 254) or Form 16E (issued under Section 255)? Yes, it does matter if you want to stop the bank’s foreclosure proceedings
In essence, the difference between Form 16D and Form 16E is:
Form 16D is a default notice issued when the loan granted by the bank to the defaulting borrower is repayable by instalments over a period of time, like a Housing Loan repayable in monthly instalments over a period of 30 years.
Form 16E is a default notice issued when the loan granted by the bank to the defaulting borrower is repayable on demand in one payment like an Overdraft
granted to businesses.
If you have been granted by your bank a Housing Loan to be repaid in monthly instalments over a period of say, 30 years, and you personally received the “Default Notice” from the bank’s lawyer but it was Form 16E that you received instead of Form 16D. When you did not receive Form 16D, the Bank did not comply with Section 254 of the NLC and the consequences for the lending Bank will follow.
When you are sure you did not receive the “Default Notice” in Form 16D even though you were served with Form 16E by the bank’s lawyer, immediately get yourself a lawyer and tell him the whole story.
Borrowers’ 3rd line of defence: After you are sure that you personally did receive from the bank’s lawyer the “Default Notice” in Form 16D, you will now instruct your lawyer to request from the bank’s lawyer a copy of the Valuation Report on your property prepared by the bank’s valuer.
When the bank’s lawyer applies to the High Court for an “Order for Sale”, the bank’s lawyer will have to submit to the High Court a copy of the Valuation Report. The report will state the “market value” of your property as at the date of the Valuation Report.
Reserve Price of foreclosed property: Section 257(1)(d) of the National Land Code of 1965 states that: “Every order for sale made by the Court under section 256 shall require the Registrar of the Court to fix a reserve price for the purpose of the sale, being a price equal to the estimated market value of the land or lease in question.”
The definition of “Market Value” as adopted by the Board of Valuers, Appraisers and Estate Agents, Malaysia is as follows:
“Market value is the estimated amount for which an asset should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion.”
Right to challenge Valuation Report: As the owner of the property that is being foreclosed, the borrower has the right to challenge the accuracy and correctness of the Valuation Report prepared by the bank’s valuer and to challenge the valuer’s opinion on the “Market Value” of the borrower’s property that is the subject of the foreclosure proceedings.
In my previous article (NST RED 10th August 2012), I suggested that when two valuers are instructed at the same time to value a residential property like an apartment, terrace house or detached house located in Kuala Lumpur, the valuation of the property by the two valuers will not differ much one from the other. They will likely have adopted the same method, namely the Direct Comparison Method for their valuations. Similarly, the valuation of a valuer appointed by the borrower to value his house, a straightforward residential property in Kuala Lumpur is not likely to differ much from the valuation of the same property by the bank’s valuer.
However, when these two valuers are instructed at the same time to value a 50-acre plot of vacant land in Kajang, Selangor, they will likely produce Valuation Reports that are vastly different in their opinions of value with the difference
between the lowest value and the highest value ranging from 50 per cent (at the lower range) to 400 per cent (at the higher range). In absolute figures, Valuer A may value the 50-acre land at RM10 Million whilst Valuer B may value it at RM15 Million (50 per cent higher) or even RM40 Million (400 per cent higher).
Can either of the valuers be wrong or can they both be wrong? Who will decide which valuer is right and which one is wrong?
Overseas-Chinese Banking Corporation Ltd vs Kredin Sdn Bhd
This is a foreclosure dispute between Overseas-Chinese Banking Corporation Ltd (OCBC) and Kredin Sdn Bhd (the “Borrower”) that was heard and decided by the Kuala Lumpur High Court in December 1995.
In the Originating Summons No 31-1069-86 between OCBC and Kredin Sdn Bhd (Kredin), OCBC had in November 1988 appointed Encik Sulaiman Mustafa of Jones Lang Wooton to value five contiguous plots of residential zoned land located next to the Kuala Lumpur City Centre (KLCC), off Jalan Ampang, Kuala Lumpur (the subject properties).
In November 1988, Sulaiman valued the 206,531 sq ft (4.74 acres) land at RM19,000 (RM0.09 per sq ft).
In April 1993, the same Sulaiman prepared an update Valuation Report and re-valued the land at RM42,000 (RM0.20 per sq ft).
In July 1993, Kredin appointed Dr Ernest Cheong of Ernest Cheong PTL Chartered Surveyors (this writer) to value the same land.
In his Valuation Report dated 27th July 1993, Dr Ernest Cheong valued the 4.74 acres land at RM134,245,150 (RM650 per sq ft).
After hearing the evidence of both Sulaiman and Dr Cheong, Justice Rahmah Hussain held that:
“I am of the opinion that this Court can still follow the general guideline as laid down in that case (Supreme Court case of NKM Properties Sdn Bhd v Rakyat First Merchant Bankers Berhad  2 MLJ 349) that is the reserve price is a price equal to the estimated market value of the land in question.”
“In his valuation report dated 27 July 1993, Mr Ernest Cheong gave the basis of his valuation whereas in Encik Sulaiman’s update of his 1988 report, dated 5 April 1993, it was stated that the update was undertaken without re-inspection of the subject property and conducting title check but was based on information received in the earlier report.”
“As such, I am more inclined to accept Mr Cheong’s report. Furthermore, Encik Sulaiman has totally disregarded potential advantages of the said land. Mr Cheong however has given the fair market value at RM650 per sq ft. I am of the opinion that this is rather on the high side and that if I follow the value as suggested, the reserve price will be too high and there will be no bidders and the auction will be aborted. As such to my mind, a reserve price at RM525 per sq ft is more reasonable in the circumstances”.
The Court ordered that the Reserve Price be fixed at RM525 per sq ft totaling RM108,428,775 for the 206,531 sq ft (4.74 acres) land comprising the subject properties. A summary of the valuations are represented as follows (see Table 1):-
Borrowers’ 4th line of defence: After you have been granted the housing loan and before the loan amount was released to you, you signed all the legal documents to “charge” your property/house to the lending bank. After the “Legal Charge” was registered by the Land Office in the name of the bank, the “Original Copy” of the title document would be returned to the Bank for safekeeping as your “Trustee and Custodian” for the safety of your Title Document.
Have you ever wondered if the “Original Copy” of the title document to your house is safe in the bank’s custody?
Did you ever consider it possible the bank would lose the “Original Copy” of your title document? It is a fact Malaysian banks have actually lost the “Original Copies” of their borrowers’ title documents kept with them as “Trustee and Custodian”.
I am informed by officers of Malaysian banks that when the bank realised they had lost the “Original Copy” of a borrower’s title document, they would instruct their lawyers to apply to the Land Office concerned for a “Replacement
Title”. I am also informed by these bank officers that their bank did not inform and did not get the borrower concerned to be involved as they consider that as the “Chargee”, the bank has the right to apply for the “Replacement Title” without the involvement of the property owner (the proprietor) who is also the bank’s borrower.
Do Malaysian banks have the right to apply for Replacement Titles on their own? Section 166(1)(d) of the National Land Code 1965 provides for the “Circumstances in which title in continuation may be issued to land as a whole”, and for the application of Replacement Titles when the original issue document of title “has been lost or wholly or partially destroyed, or is being improperly or wrongfully withheld”.
Section 166(2) of the NLC stipulates that the person or body to apply for replacement titles are as listed below:-
a) The proprietor of the land in question
b) Any person or body claiming through the proprietor Section 166(2) of the NLC as quoted above did not provide for the “Bank” or “Chargee” to be included in the list of person or body permitted to apply for the replacement title.
Section 168 of the NLC stipulates that “Before issuing title in continuation in the circumstances described in paragraph (c) or (d) of subsection (1) of section 166, the Registrar or [Land Administration] shall:-
(a) cause notice of his intention to do so to be published in the Gazette in Form 10D; and
(b) cause copies of the notice to be served on every person or body having a registered interest in the land, and to be published in accordance with the provisions of Section 433
Request for copy of Title Document from Bank: When you are served by your Bank with a Court Summons to foreclose your property, immediately request from your Bank a photocopy of your Title Document that you had deposited with them as your “Trustee and Custodian” for the safety of your Title Document.
Your bank has to give you what you requested for as it is your right to ask them to give you a copy of your title document.
When your bank gives you a copy of your Title Document and you find that it is not a copy of your Original Title but a copy of a Replacement Title, and you are sure that you were not involved in the application for the Replacement Title, immediately get yourself a lawyer and tell him the whole story.
Borrowers’ 5th line of defence: When after you failed to stop the bank and they succeeded in obtaining an “Order for Sale” against your property and even sold your property at a public auction,
is this the end of the road for you? You still have one last line of defence available.
Extension of time to settle balance purchase price: The usual requirement under the Proclamation of Sale is that the Purchaser at the Public Auction is normally required to settle the balance of the Purchase Price within 90 days after paying the requisite 10 per cent of the Purchase Price.
The Chargor (borrower) must be consulted and his consent obtained if there is any application by the Purchaser for any extension of time to settle the balance of the Purchase Price. The Bank cannot on their own, unilaterally
grant the Purchaser the extension of time they applied for.
Failure on the part of the lending
Bank to obtain the Chargor’s (borrower’s) consent to grant the Purchaser’s application for the extension of time to pay the balance of the Purchase Price will render the Sale of the borrower’s property at the Public Auction void (has no legal effect and unenforceable) (refer to M&J Frozen Food Sdn Bhd v Siland Sdn Bhd & Anor  1 MLJ 294 SC).
Even after your property has been sold by the bank at the public auction, you will need to monitor the progress of the sale. You will know when the balance 90 per cent of the Purchase Price has to be paid by the Purchaser (90 days from the date of the public auction). On the 91st day from the date of the public auction, go to the bank to ask if the Purchaser has paid the 90 per cent of the Purchase Price which should have been paid to the Bank the day before.
If the bank refuses to answer your query or gives you a vague answer, immediately get yourself a lawyer and tell him the whole story.
Calling all distressed borrowers: If you have been served with a court summons to foreclose your property, please write to Datuk Seri Najib and appeal to him to save you and your family from financial ruin. Please request him to intervene to have Bank Negara Malaysia impose a Malaysian-wide Housing Loan Repayment Moratorium to be implemented by Malaysian banks for durations of between three to five years.
The Prime Minister’s address is: Datuk Seri Najib Tun Razak, Prime Minister’s Office, Blok Utama, Bangunan Perdana Putra, Pusat Pentadbiran Kerajaan Persekutuan, 62502 Putrajaya.
Please send me a copy of your letter to the Prime Minister. I will try to help you get help from “public spirited” lawyers who may be willing to help you at reasonable legal fees. Send me an email at email@example.com
This column is endorsed by the National House Buyers Association of Malaysia (HBA) to educate, inform and empower house buyers in Malaysia.