When You Execute a Charge, You Have Already Created One
When You Execute a Charge, You Have Already Created One
High Court of Malaya, Kuala Lumpur (Commercial Division) | KAJ Development Sdn Bhd v Sinohydro Corporation (M) Sdn Bhd & Suruhanjaya Syarikat Malaysia [2020] 1 LNS 2193
A developer signed a set of security documents it believed it controlled. A Security Agreement, a Charge Form and a Charge Annexure — all executed on the same day as part of a RM1.3 billion reclamation contract for a major infrastructure project. The arrangement required the developer to create land charges over its own land in favour of the contractor as performance security. The developer’s job was to present those charge documents at the Land Registry within eight months. In the developer’s mind, nothing had truly been created until the Land Registry said so.
That assumption was wrong and it cost the developer the case.
What Happened
KAJ Development Sdn Bhd appointed Sinohydro Corporation (M) Sdn Bhd as design-and-build contractor for reclamation and related works at the Melaka Gateway project. The contract sum was RM1,343,059,326.13. In place of a standard performance guarantee, the parties agreed that Sinohydro would pay a performance security of RM142,364,288.55 — 10% of the contract sum — in two tranches. The first 25% tranche was payable once Sinohydro lodged private caveats over KAJ’s land. The second 75% tranche was payable only after KAJ successfully created and perfected all land charges under the National Land Code (“NLC”) in favour of Sinohydro.
On 8 February 2018, the parties executed the amended letter of award, the Security Agreement, the Charge Form (Form 16A) and the Charge Annexure. Sinohydro’s solicitors lodged the Statement of Particulars (Form 34) at the Companies Commission of Malaysia (“CCM”) on 1 March 2018, reflecting a secured liability of RM724,586,444.00.
Then the land registration fell apart.
When Sinohydro’s solicitors presented the charge documents at the Melaka Land Registry on 5 March 2018, the Registry rejected them. A charge, the Registry said, cannot be registered in favour of a non-financial institution. The legal charge the parties had structured everything around could not be perfected.
KAJ’s position: no registration, no charge. The Form 34 was wrong, premature and lodged in bad faith. KAJ applied to court to have it removed from the register entirely.
The court disagreed, dismissed KAJ’s application with costs and allowed Sinohydro’s counterclaim with costs.
The Law on Charge Creation
The central question was when a charge comes into existence for the purposes of section 352(1) of the Companies Act 2016.
KAJ argued that a charge over land is only created upon registration at the Land Registry. The court rejected this. Section 352(1) refers to “a company that creates a charge over its property” — the act of creation belongs to the landowner, not the Land Registry. Under section 2 of the Act, “charge” is defined to include any agreement to give or execute a charge. The moment KAJ executed the Security Agreement, Charge Form and Charge Annexure on 8 February 2018, a charge existed. The Land Registry’s subsequent rejection did not undo that.
KAJ relied on a line of older cases — Johore Para Rubber Company, Karuppiah Chettiar and Paramoo v Zeno Ltd — in support of its argument. The court distinguished all three. Each was decided under section 80(10)(c) of the Companies Ordinance 1940, which expressly deemed a charge over land to be created only upon registration under the NLC. There is no equivalent provision in the Companies Act 2016. Those cases had no application here.
The Equitable Charge That Nobody Planned For
The parties had intended a first party legal charge. That charge could not be perfected but the law does not leave a vacuum where an executed security arrangement exists.
Where a charge over land is not registered under the NLC for any reason, the law treats it as a valid equitable charge from the date of execution. The Security Agreement, the Charge Form and the Charge Annexure together — and the deposit of the issue documents of title with Sinohydro — all gave rise to an equitable charge by operation of law.
The statutory obligation to lodge a Statement of Particulars under section 352(1) read with section 353 of the Act is not limited to legal charges. It extends to equitable charges. The Form 34 was not only valid — it was required.
The court declared that a valid equitable charge over the charged lands existed in favour of Sinohydro with effect from 8 February 2018.
What the Form 34 Actually Reflects
KAJ’s second argument was that the Form 34 overstated its debt. Sinohydro had not paid the second 75% tranche of the performance security, so why did the register show RM724 million?
The court was direct. A Form 34 does not reflect the current indebtedness of a company as at the date of lodgement. It reflects the liability secured by the charge. Section 357(2)(b)(iii) of the Act refers to the amount secured — not the amount presently owing. The Security Agreement defined the “Secured Amount” to include all present and prospective liabilities up to RM724,586,444. KAJ had agreed to that definition when it signed. Whether or not the second tranche had been disbursed was entirely irrelevant.
The figure on the register is the ceiling of the secured obligation. It is set at the signing table, not recalculated as payments flow.
Contractual Remedy Clauses Do Not Cap Legal Rights
KAJ also argued that Sinohydro’s only remedies under the letter of award were to suspend works, terminate the contract or grant an extension of time. Lodging the Form 34 was outside the scope of the agreed remedies.
The court rejected this too. Clause 23 of the letter of award expressly provided that no contractual remedy was intended to be exclusive of any remedy available at law or in equity. The Security Agreement and Charge Annexure contained equivalent provisions preserving all legal and statutory rights upon default. An agreement to give or execute a charge is itself a registrable charge under the Act. Sinohydro was entitled to have the Form 34 lodged and maintained on the register independently of whatever the letter of award said about construction remedies.
What Was Rectified
Sinohydro’s counterclaim also sought rectification of the Form 34 under section 361 of the Act. The original description in the Statement of Particulars read “First Party First Legal Charge and Charge Annexure dated 8 February 2018” — an accurate description of the Charge Form but one that did not capture the Security Agreement as a creating instrument.
The court allowed the rectification, amending the description to “Security Agreement, Charge Form (Form 16A) and Charge Annexure all dated 8 February 2018.” The circumstances satisfied the “just and equitable” limb of section 361. The amendment clarified the position without prejudicing any party and accurately reflected the instruments that created the equitable charge.
What This Means for Developers and Borrowers
This case makes clear that executing charge documents is not a conditional or preparatory act. It is the act of creation. The obligation to notify CCM — through lodgement of a Form 34 within 30 days — is triggered by execution, not by Land Registry registration. Failure to lodge within that window is an offence under section 352(10) of the Act.
Once CCM issues a Certificate of Registration of Charge, that certificate constitutes conclusive evidence under section 357(3) of the Act that the registration requirements have been met. A developer cannot challenge it on the basis that the Land Registry never accepted the charge documents. The CCM registration stands independently.
A developer who signs charge documents without understanding this is not signing a conditional promise. It is creating a registrable security interest — one that the chargee can place on the public record within 30 days regardless of what happens at the Land Registry.
The secured amount on the Form 34 — agreed in the security documents — is the figure that will appear on the register. It reflects the ceiling of the obligation, not the current balance. That figure should be negotiated carefully before execution. It cannot be meaningfully contested after the Form 34 is lodged.
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