Knowledge Highlights 10 March 2025
Novation agreement subject to ad valorem stamp duty
The High Court in Nike Global Trading B.V., Singapore Branch v Pemungut Duti Setem, Malaysia [2024] MLJU 2087 recently held that the novation of a debt pursuant to a novation agreement constitutes a transfer or conveyance of property subject to ad valorem stamp duty (“stamp duty”) under Item 32(a) of the First Schedule to the Stamp Act 1949 (“Stamp Act”).
This article provides an overview of the court’s decision.
Snapshot
The matter originated from a loan (“Loan”) provided by Nike European Operations Netherlands (“Lender”) to Nike Sales (Malaysia) Sdn. Bhd. (“Borrower”). Stamp duty was paid on the principal instrument for the loan transaction (“Loan Agreement”) and the Loan disbursed.
The parties subsequently entered into a novation agreement (“Novation Agreement”) with Nike Global Trading B.V., Singapore Branch (“Taxpayer”), under which the Lender novated the debt arising from the Loan to the Taxpayer.
The Collector of Stamp Duties (“Collector”) imposed ad valorem stamp duty on the Novation Agreement pursuant to section 16 of the Stamp Act and Item 32(a) of the First Schedule to the Stamp Act
(“Item 32(a)”). Section 16(1) provides that any conveyance or transfer operating as a voluntary disposition inter vivos (that is, between the living) is subject to stamp duty as if it were a conveyance or transfer on sale. Item 32(a) prescribes stamp duty for various transfers including conveyances and assignments calculated based on the value of the consideration or market value of the property.
The Taxpayer objected to the Novation Agreement being charged with ad valorem stamp duty. The Collector dismissed the objection and the Taxpayer appealed to the High Court.
Judgment
The High Court held that the Novation Agreement was chargeable with ad valorem stamp duty under section 16(1) of the Stamp Act read together with Item 32(a), and noted that:
- the “true nature” of an instrument must be ascertained in order to determine the appropriate stamp duty chargeable and any name or title given to such instrument by the parties thereto is not conclusive;
- the definition of “property” as set out in section 2 of the Stamp Act expressly includes “debt”; and
- the transfer of the debt arising from the Loan under the Novation Agreement was made without monetary consideration and is thus deemed to be a conveyance or transfer operating as a voluntary disposition between the living.
Based on these considerations, the High Court affirmed the Collector’s assessment and held that the transfer of the debt arising from the Loan to the Taxpayer pursuant to the Novation Agreement was effectively a transfer or conveyance of property and therefore was chargeable with stamp duty under section 16(1) of the Stamp Act read together with Item 32(a).
Comment
While the High Court’s decision emphasises the “substance over form” approach adopted by the Malaysian courts when examining the nature and construction of an instrument to determine the stamp duty chargeable, the characterisation of the “novation” as a “transfer” may signal a re-evaluation of the nature of a novation.
The Supreme Court of Malaya explained “novation” in Lyl Hooker Sdn Bhd v Tevanaigam Savisthri & Anor [1987] 2 MLJ 52 as being a “new contract” that extinguishes rights and obligations under the old contract for which the new contract is made and, as a new contract, there must be consent by all parties and consideration.
Applying this reasoning, where an existing creditor novates a debt in favour of a new creditor, the rights and obligations of the existing creditor vis-à-vis the novated debt are extinguished and not transferred.
Perhaps the distinguishing factor in Nike Global Trading B.V., Singapore Branch v Pemungut Duti Setem, Malaysia is that the Novation Agreement was executed without any consideration. A novation being a new contract requires, among other things, consideration in order to be valid.
It remains to be seen whether the Taxpayer will appeal the court’s decision. In the interim, it would be prudent to take note of potential implications arising from this decision on stamp duty chargeable on novation agreements.
Further information
This article was prepared with the assistance of Associate Matthew Wong Eu Ca.
