Loan recovery through debentures the Malaysian banking experience

Abstract

The debenture is one of the standard securities accepted by banks in its lending activities. The debenture can only be provided by a company registered at the Registrar of Companies. Individuals, partnerships and cooperatives have no power to create debentures. A bank will normally require the corporate borrower to provide a debenture as a collateral apart from landed properties, cash deposit, assignment, pledge of shares or other forms of security. The main benefit of having a debenture is, the recovery process is effectively faster, without having to go through the normal legal process. The banks can appoint a receiver to sell the charged asset including the landed property on a private treaty without going through the judicial sale. The creation of debenture is also accepted in Islamic Banking. Nevertheless, for purposes of Islamic Banking, the content of debenture shall be free from Riba, Gharar, Maysir and Jahl. However, the right of debenture holders (banks) has been vitiated by recent developments such as new case laws, rules and regulations of the country. The court decision in the Kimlin case has taken away the power of the debenture holder to sell landed properties by private treaty. The court decided that the sale of charged lands which belong to defaulting corporate borrowers must strictly follow the requirements as section 257 of the National Land Code 1965. The court decision in the Kimlin case has to some extent defeated the purpose of the bank having a debenture. Apart from the case, during the 1997 financial crisis, many companies sought and received relief and protection pursuant to section 176 of the Companies Act. Under section 176, the court can issue summary orders to temporarily restrain creditors from proceeding to liquidate the company. Once the court issues such Restraining Orders, the bank, as a debenture holder cannot exercise its right. The formation of Danaharta by the Government has also to some extent affected the legal remedies of debenture holders. Once the charged asset is disposed to Danaharta, the debenture holders (banks) have no right to claim the shortfall of the loan outstanding from the borrowers. This position in reality gives the negative benefit to the debenture holders. Under the Danaharta Act 1998, Danaharta is empowered to appoint special administrators to take over the asset and management of company without the consent of the lenders. Once a special administrator is appointed all rights of the debenture holders is lost. The creation of Corporate Debt Restructuring Committee (CDRC) has also to some extent affected the debenture holder`s right. Unlike Danaharta, which has legal power to exercise its right, CDRC uses moral suasion of Bank Negara to the lenders to accept any scheme of arrangements introduced by them. The debenture holders once again cannot use its right once they accept the scheme of arrangement of CDR C. The main objective of this study is basically to ascertain whether the present law and regulations on debentures provide sufficient remedies for the financial institutions to recover its loans. The second objective is to examine whether the content of debenture documents used by the Islamic financial institution is in line with Syariah. The third objective is to study whether the present practice of loan recovery through enforcement of the right of debenture holder is in line with the Syariah principles. The dissertation begins with an introduction that incorporates remarks pertaining the new developments. which has affects the right of debenture holder. This chapter also contains the background of the study, the statement of problem, research methodology and scope and limitation of the study. Chapter two dwells on the topic type of securities taken by the financial institutions other than debenture such as land charges, guaranteed indemnity, letters of pledge, hypothecation, lien, assignment promissory note and mortgage of ship. Chapter three explain in debentures on details. It covers the definition of debenture, type of debenture, type of charges under the debenture, documentation of debentures, the rights of debenture holders and the debenture from Syariah perspective. Chapter four focuses on the recent developments, which have vitiated the right of debenture holders. This includes the implications of the Federal Court decision in Kimlin`s the impact of section 176 of the Companies Act 1965, the establishment of Danaharta and the formation of (CDRC). In this chapter, the operation of Danaharta and CDRC will be reviewed and to ascertain whether the practice is in line with the Syariah principles. Chapter five is the conclusion and recommendation chapter. In this chapter the discussion is on whether the right of debenture of holder is protected with the recent developments. Some findings are made on this issue. Besides some comments, recommendations are given in view of improving the right of debenture holder. Finally, it is hoped that this study can be used as additional reference on the subject of debenture. It is also hoped that the finding of the study can help the authority to do the necessary changes to improve the right of debenture holders.