Knowledge Highlights 18 September 2025
Court of Appeal rules novation does not constitute a transfer or conveyance of property attracting ad valorem stamp duty
The Court of Appeal in Nike Global Trading B.V., Singapore Branch v Pemungut Duti Setem, Malaysia (Civil Appeal No. W-01(A)-623-11/2023) overturned the High Court decision, holding that the novation of a debt pursuant to a novation agreement does not constitute a transfer or conveyance of property subject to ad valorem 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 of Appeal’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. The High Court ruled in favour of the Collector and the Taxpayer appealed. For more on the High Court decision, please read our article “Novation agreement subject to ad valorem stamp duty”.
Judgment
The Court of Appeal overturned the High Court’s decision, finding that the Novation Agreement was a true novation and not an assignment, conveyance, or transfer of property. The novation therefore did not fall under either section 16(1) or Item 32 of the First Schedule of the Stamp Act.
Further, the Court of Appeal disagreed with the High Court’s reasoning that the Novation Agreement lacked monetary consideration and should therefore be deemed a conveyance or transfer operating as a voluntary disposition between the living. The Court of Appeal held that consideration for a novation need not be monetary; it can validly be the parties’ mutual promise, such as the agreement to release one party from a prior obligation, and the mutual agreement to release the original Lender and substitute the Taxpayer was therefore a valid consideration.
In addition to these findings, the Court of Appeal set out the following observations on the concept of novation, distinguishing between its general features and those specific to the present case.
General principles governing novation
To ascertain if stamp duty is chargeable, the court must determine whether the novation extinguished the original obligations (that is, a novation) or transferred a debt (that is, an assignment). The real and true meaning of the instrument must be ascertained, regardless of the parties’ description.
The court also noted that a novation does not transfer property, as stated in section 63 of the Contracts Act 1950, and is distinct from a transfer and an assignment.
A novation agreement extinguishes the rights and obligations under the parties’ previous contract and replaces them with those under the novation agreement. The consent of all parties involved is necessary for a novation.
In the context of loans, a novation is a contract between the debtor, creditor, and a new third party to the debt arrangement.
Application of novation principles to the present case
Under the Novation Agreement, all parties intended for the Taxpayer to assume all rights, obligations, duties, and liabilities of the Lender, as if the Taxpayer were a party to the original Loan Agreement.
The Court of Appeal noted that the simultaneous substitution of rights and obligations amounted to a novation and the use of the term “transfer” in isolation did not change the substantive legal character of the Novation Agreement as a novation.
In addition, the Borrower’s obligation to repay the Loan to the Taxpayer, instead of the Lender, did not imply a transfer or conveyance of property; rather, it reflects the establishment of a fresh contractual relationship in which the Taxpayer undertakes all the rights and responsibilities of the Lender.
Comment
The Court of Appeal clarified the legal principle of novation, affirming that a novation agreement extinguishes the rights and obligations under the original contract and replaces them with those set out in the novation agreement. The consideration for the novation lies in the mutual consent of all parties to substitute the original party with a new one, thereby forming a fresh contractual relationship. A true novation is therefore not a transfer or an assignment of property.
It is worth noting that this decision should not be read as suggesting that a novation agreement cannot be construed as a transfer or an assignment of property, as the court will ascertain the true nature of an instrument, rather than relying on the description given to it.
At the time of writing, it is not yet known whether the Collector will pursue an appeal to the Federal Court.
