Introduction
The Court of Appeal in Nike Global Trading BV, Singapore Branch v Pemungut Duti Setem, Malaysia [2025] MLJU 2768 delivered a landmark decision that provides much-needed clarity on the application of stamp duty to novation agreements. The judgment distinguishes between a novation and an assignment, two concepts frequently encountered in corporate restructuring, refinancing, and inter-group transactions, and clarifies how each is treated differently under the Stamp Act 1949.
Case Background
In this case, Nike European Operations Netherlands (“NEON”) lent RM41,257,000.00 to Nike Sales (Malaysia) Sdn Bhd under a duly stamped loan agreement. After the loan was fully disbursed, NEON (the “Lender”) and Nike Malaysia (Borrower) entered into a Novation Agreement with Nike Global Trading BV, Singapore Branch (the “New Lender”), under which the Lender’s position was replaced by the New Lender.
The Collector of Stamp Duties treated the novation as a transfer conveyance of property (ie, being the loan receivables) and imposed RM1,716,004.00 in stamp duty under Section 16 and Item 32(a) of the First Schedule to the Stamp Act. The New Lender then filed for judicial review to challenge the assessment.
Main Issues Before the Court
- Whether the Novation Agreement was a “transfer or conveyance of property” that attracts ad valorem duty under Section 16(1) and Item 32(a) of the Stamp Act; or
- Whether it was merely a substitution of parties (novation) that should be chargeable under Item 4 of the First Schedule at a nominal duty of RM10.
Findings of the High Court
By applying Section 16(1) of the Stamp Act, the High Court treated the novation as chargeable with ad valorem duty and accordingly upheld the Collector’s assessment of RM1,716,004.00 in stamp duty. The High Court found that NEON had fully discharged its obligations under the Loan Agreement by disbursing the loan. Consequently, the purpose of the Novation Agreement was to transfer the Lender’s right of debt repayment to the New Lender.
Although the debt was transferred without monetary consideration, the court held that it nonetheless constituted a “transfer or conveyance of property” under Item 32(a) of the First Schedule.
Findings of the Court of Appeal
The Court of Appeal disagreed and allowed the New Lender’s appeal. It held that a novation does not involve the transfer of property at all, but instead extinguishes the original contract and replaces it with a new one with the consent of all parties.
When the New Lender assumed the Lender’s position, it did so under a fresh contract, not by assignment of rights (over the receivable). Therefore, there was no conveyance or transfer of property, and the novation should only attract nominal duty (i.e. RM10).
The Court of Appeal emphasized that the substance of a transaction must prevail over its form, what matters is the actual legal effect of the instrument, not the label or description used. The New Lender assumed ongoing obligations, not simply the right to receive repayments. Therefore, the novation was not merely an assignment of property (debt), but a full substitution of the parties and their continuing obligations in the contract.
The Court of Appeal also rejected the High Court’s view that the novation lacked consideration. It held that consideration in novation need not be monetary; instead, mutual promises to release the original Lender and assume duties by the New Lender suffice as consideration.
Key Legal Principles
- A novation extinguishes the rights and obligations under an existing contract and replaces it with a new contract involving a substituted party, whereas an assignment merely transfers the rights of one party to another but does not transfer the obligations or liabilities.
- Only instruments that effect a transfer of property or interests attract ad valorem duty under item 32(a). However, where there is a substitution of parties via a novation, especially where obligations are ongoing, the novation will attract only a nominal duty of RM10 as a general agreement.
Key Takeaway:
With Malaysia transitioning to a self-assessment system for stamping, this decision serves as an important reminder that accuracy in classification and clarity in drafting are critical to avoid costly mistakes.
When preparing or reviewing novation agreements, companies should ensure that:
- The agreement clearly reflects the extinguishment of the old contract and the creation of a new one with the consent of all relevant parties.
- There is no language suggesting an sale, an assignment or a transfer of rights or property, which could trigger ad valorem duty as a ‘conveyance on sale’.
- Adequate supporting documentation (such as board resolutions, correspondence, or legal opinions) is maintained to substantiate the classification of the instrument as a novation.
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This article was written by Jocelyn Lier (Associate) with assistance from Wendy Chan (Intern) from Donovan & Ho’s corporate practice.
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