INTRODUCTION

Dwelling assets be it landed properties or high-rise apartments, their sale and purchase, are the most common assets transactions ordinarily involving vendors, purchasers and financiers. The financiers will usually take the properties as collaterals; securing the loan. Ordinarily this known as a charge.. In the event of default or breach by the purchaser / borrower, the financier being the chargee will then obtain an order for the sale of the property commonly known as foreclosure proceeding.

UNCERTAINTY IN LIMITATION OF TIME FOR FORECLOSURE PROCEEDING

Under Section 21(1) of Limitation Act 1953, the limitation of time for the chargee to initiate foreclosure proceeding in obtaining order for sale on the charged land is as follows:-

No action shall be brought to recover any principal sum of money secured by a mortgage or other charge on land or personal property or to enforce such mortgage or charge, or to recover proceeds of the sale of land or personal property after the expiration of twelve years from the date when the right to receive the money accrued.

From the reading of Section 21(1) of Limitation Act 1953 above, it is clear that the limitation of time to initiate foreclosure proceeding is 12 years from the date when the right to receive money accrued. In other words, the 12 year period starts to run from the date when the right to receive the money accrued.

However, it is not certain as to when the right to receive money accrued. Until recently, there are 2 conflicting Court of Appeal decisions in relation to this matter, i.e firstly, the 12 year period starts to run from the date after the chargor / borrower failed to remedy the default specified in Form 16D notice (see Peh Lai Huat v MBF Finance [2009] 5 CLJ 69) and secondly, the 12 year period will run from the default of the chargor / borrower to make the monthly instalment (see Sivadevi V CIMB Bank [2018] 1 LNS 511).

THE FEDERAL COURT CASE OF CIMB BANK BERHAD V SIVADEVI A/P IVALINGAM

Due to such conflicting decisions,  the Federal Court, being the apex Malaysian Court, had in the case of CIMB BANK BERHAD V SIVADEVI A/P IVALINGAM [2019] 1 LNS 1904 revisited the laws on Section 21(1) of Limitation Act 1953 in view of bringing certainty to the law.

Brief facts 

The borrower took a housing loan from the bank on 18.01.2000 and a third party charge over the said land was presented to secure the housing loan. The borrower / chargor defaulted in making monthly payment. The last payment received by the Bank / chargee was on 12.05.2003.

The Bank / chargee then issued Form 16D which is the statutory demand to the borrower / chargor by giving 30 days period to remedy the default. The borrower / chargor failed to remedy the default even though the 30 days period has lapsed.

The Bank / chargee then initiate foreclosure proceeding to obtain order for sale over the charged property by filing originating summon in court on 08.08.2016.

The borrower / chargor in opposing the foreclosure proceeding argued that the proceeding is time barred since the 12 year time limit to initiate action has lapsed.

Issues

1. Whether proceedings commenced by a chargee for sale of land pursuant to Section 256 or section 260 of National Land Code 1965 (foreclosure proceeding) is subject to Section 21 (1) of the Limitation Act 1953?

2. If section 21 (1) of the Limitation Act 1953 applies to such proceeding, does the right to receive money accrued (the right of action) or limitation period begins to run following from which scenario: – 

i) Failure to make payment of loan instalment (even if the loan becomes payable upon demand issued by the chargee)?; or

ii) Upon failure to comply with the statutory demand in Form 16D

The finding of Federal Court

In relation to the 1^st issue, the court held as follow: –

“[20] The OS applying for an order of sale of the land charged under the NLC comes within the ambit of an action “to enforce such mortgage or charge” under section 21(1) of the LA. In other words, the reading of section 21(1) in full in respect of a charge on land is as follows – no action shall be brought to enforce such charge (i.e. charge on land) after the expiration of twelve years from the date when the right to receive the money accrued.”

Following therefrom, the court held that Section 21 of the Limitation Act 1953 applies to order for sale over charged land, as such, no action shall be commenced after expiration of 12 years from the date when the right to receive the money accrued. In other words, the cause of action or the 12 year period will begin to run from date when the right to receive the money accrued.

The next question is, when does right to receive the money accrues? Does it begin to run after the borrower / chargor defaulted in making monthly instalment or upon failure of the borrower / chargor to comply with demand in Form 16D?

For completion, it is important to note that when the Bank / chargee initiate an application for order for sale in foreclosure proceeding, the Bank / chargee does not commence an action and does not sue for a debt. Instead, the Bank / chargee merely enforces its rights as a chargee by exercising his statutory rights against the chargor.

A breach by the borrower / chargor in failing to make instalment payment, does not tantamount to  ‘right to receive money accrued’. The cause of action does not arise yet to entitle the chargee to apply for order for sale.

Section 254 of National Land Code 1965 provides as follows: 

(1) Where, in the case of any charge, any such breach of agreement as is mentioned in sub-section (1) of section 253 has been continued for a period of at least one month or such alternative period as may be specified in the charge which shall not be less than one month, the chargee may serve on the chargor a notice in Form 16D-

 (a) specifying the breach in question;

(b) requiring it to be remedied within one month of the date on which the notice is served, or such alternative period as may be specified in the charge which shall not be less than one month; and

 (c) warning the chargor that, if the notice is not complied with, he will take proceedings to obtain an order for sale.

(2) Where, after the service of any such notice, the charged land or lease becomes vested in any other person or body, the notice shall be as valid and effectual against that person or body as it was against the person or body on whom it was served.

(3) If at the expiry of the period specified in any such notice the breach in question has not been remedied–

 (a) the whole sum secured by the charge shall (if it has not already done so) become due and payable to the chargee; and

(b) the chargee may apply for an order for sale in accordance with the following provisions of this Chapter:

Provided that paragraph (a) shall not apply to any charge to secure the payment of an annuity or other periodic sum.

The Federal Court after visiting Section 254 of National Land Code above, made the following remarks: –

“[24] A breach by the chargor of the agreement in the charge, even one which has been continuing for one month or for such alternative period shall not be less than a month, does not make “the right to receive the money accrued”. Cause of action does not arise yet to entitle the chargee to apply for an order for sale. The chargee then has to serve on the chargor a notice in Form 16D specifying the breach in question, requiring the chargor to remedy the breach within one month from the date of service of the notice, and warning the chargor that if the notice is not complied with, the chargee will take proceedings to obtain an order for sale [section 254(2) of the NLC]. Then section 254(3) of the NLC comes into play. If at the expiry of the period specified in the notice in Form 16D, the breach in question has not been remedied, then the “whole sum secured by the charge shall become due and payable to the chargee”; (section 254(3)(a) of the NLC). Thus, it is clear to me that it is on this date that “the right to receive the money accrued”.”The Federal Court after visiting Section 254 of National Land Code above, made the following remarks: –

The above passage clarifies that the words “right to receive money” under section 21(1) Limitation Act 1953 only accrues after expiry of Form 16D and not from date of default / breach by the borrower / chargor. Therefore, the 12 year limitation period will be calculated  from the expiry date of Form 16D.

EFFECT OF THE DECISION

Following the Federal Court’s decision, the Bank / charge may have longer time to enforce the charge by way of order for sale since the 12 years limitation only runs upon the default / breach by the borrower / chargor upon the lapse of the notice period stipulated in the the Form 16D.

Having said that, it is not advisable for the bank to sit on its rights to enforce the charge as defences such as laches, acquiescence and other equitable defences may be used against the bank. This was highlighted by Justice Rohana Yusuf, FCJ in the case: –

[66] If the chargee bank takes forever to act or to enforce the charge, defences such as laches, acquiescence and other equitable defences may be pleaded against it. After all, section 256(3) of the NLC allows the chargor to raise the cause to the contrary when it states that:

“(3) On any such application, the Court shall order the sale of the land or lease to which the charge relates unless it is satisfied of the existence of cause to the contrary.”