Background
The dispute arose from a novation of an intercompany loan between related parties. The borrower drew down the facility in full, and the loan agreement was duly stamped. As part of a group restructuring, the parties later executed a tripartite Novation Agreement, substituting a new lender (the Appellant) for the original lender. The novation recorded that the borrower released the original lender from all obligations, the incoming lender assumed all rights, duties and liabilities of the lender, and the borrower agreed to perform its obligations in favor of the incoming lender.
The Collector of Stamp Duty ("Collector") assessed the Novation Agreement to ad valorem stamp duty of RM 1,634,280, treating it as a transfer of property. The Appellant challenged the assessment, but the High Court dismissed the challenge, holding that the Novation Agreement operated as a transfer of the right to repayment (i.e., "property") and was akin to an assignment. On that footing, the High Court applied Section 16(1) and Item 32(a) of the First Schedule of the Stamp Act, that is, the Novation Agreement transferred property and the loan amount should be subject to ad valorem stamp duty at 1%-4% of the loan amount.
Key arguments
The arguments advanced by parties are as follows:
The Collector's main contention
The Collector argued that the Novation Agreement constitutes a conveyance and transfer of debt. The Collector maintained that as the loan had already been fully disbursed at the point of novation, the original lender no longer possessed any ongoing liabilities and obligations, and the Novation Agreement merely transferred the rights and benefits to receive loan repayments to the Appellant.
Under the Stamp Act, "property" includes debt, making the Novation Agreement an instrument for the transfer of property. The absence of monetary consideration in the Novation Agreement rendered the arrangement a voluntary disposition attracting the application of Section 16(1) and Item 32(a) of the First Schedule.
The Appellant's main contention
Under Section 63 of the Contracts Act 1950, a novation extinguishes the old debt and it is not a transfer of property. Stamp duty is charged on the instrument itself, not the underlying transaction, and the clauses here show a complete substitution where the incoming lender steps in and the original lender is fully discharged.
Obligations cannot simply be transferred under law; they were assumed through novation with the consent of all parties which is distinct from an assignment. Consideration in a novation contract does not have to be monetary as mutual releases and the assumption of liabilities are sufficient. As there was no conveyance or transfer, Section 16(1) and Item 32(a) do not apply, and the correct duty is the nominal RM10 under Item 4 of the First Schedule.
Court of Appeal's decision
The Court of Appeal found that the Novation Agreement was not a transfer or an assignment. The clauses in the agreement show a substitution of rights and obligations, not a direct transfer of debt. The incoming lender's active assumption of obligations is the hallmark of novation under Section 63 of the Contracts Act, which provides that the old contract is extinguished rather than transferred. The Court also confirmed that consideration in a novation need not be monetary; mutual releases and the assumption of obligations are sufficient. Concluding that the agreement was a true novation, the Court of Appeal directed that it be stamped under Item 4(1) of the First Schedule to the Stamp Act.
Conclusion
This ruling delivers welcomed certainty for commercial transactions, especially given recent Stamp Office practice of treating novation agreements as instruments of transfers attracting ad valorem stamp duty.
It confirms that where documentation clearly records a true novation with the extinguishment of the old contract and substitution of a new party with full assumption of rights and obligations, Item 32(a) is not applicable and Item 4 (which provides for RM10 stamp duty) applies. The careful distinction between what amounts to a novation and an assignment is clearly reiterated and reinforced with this decision.
Companies should ensure that novation agreements are drafted carefully, so as to reflect parties intention to enter into a novation agreement, to minimize the risk of significant stamp duty exposure.
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Anlynn Ng, Senior Associate, and Tan Wen Ying, Legal Assistant, assisted with the appeal and this alert.
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