THE UPDATE SCOOP (#14/2024)
Apex Court Set Aside Commercially Unrealistic Burden on Banks
By TAY & HELEN WONG – November 11, 2024
The extent of duty on a financial institution, as a subsequent purchaser under the proviso in s.340(3) of the National Land Code 1965 (NLC), to go behind the land register to investigate the validity of the underlying completed sale transaction came into focus again in Malayan Banking Berhad v Mohd Affandi bin Ahmad and Anor[i]. The plaintiffs in the case were the administrators of the estate of a deceased whilst the 1st defendant (D1) and the 2nd defendant (D2) were property developers. The 3rd defendant (D3) was a bank. The plaintiffs claimed that they were beneficial owners of the 2 lots of land (the Land), having inherited them from the deceased who claimed to have paid D1 the full purchase price back in 1967. However, although possession was given to the deceased, the Land was never registered in the deceased’s name and remained registered under D1’s name. D1 subsequently sold and transferred the Land (together with the other 106 plots of land) to D2 vide a sale and purchase agreement (SPA). D2 was subsequently registered as the owner and charged the same to D3 as security for banking facilities (Term Loan) granted by D3 to D2. At the time when D3 was asked to grant the facilities, the SPA between D1 and D2 was already completed and the title was already transferred to D2. There was also private caveat or encumbrance entered on the Land. It was however the plaintiffs’ case that D1 held the Land in trust for them and the transfer to D2 was null and void, likewise the charge by D2 in favour of D3.
D3 relied on the proviso in s.340(3) of NLC concerning the deferred indefeasibility which protects the title or interest acquired by a subsequent purchaser (of which D3 was one[ii]) in good faith and for valuable consideration. The Court of Appeal (COA) however held that it was incumbent upon D3 to examine the SPA even if there was no notice at all of the deceased’s unregistered interest on the face of the title. D3 was not a bona fide purchaser for value. The impact of the COA decision was that financial institutions were required to prove that it would have been “impossible” to discover any unlawfulness after carrying out critical examination of concluded transactional documents which the financier was not privy to, in order to qualify as a subsequent purchaser in good faith under the proviso. It was tantamount to imposing a commercially unrealistic burden on the financial institutions.
At the final appeal before the Federal Court, it was observed that D3 had no notice at all of the plaintiffs’ unregistered interest on the Land. D3 had disbursed the Term Loan to D2 and not D1, hence there was valuable consideration. The question then was to what extent of good faith and/or bona fide required of a subsequent purchaser in the light of the earlier two conflicting decisions from the apex court, Bayangan Sepadu Sdn Bhd v Jabatan Pengairan dan Saliran Negeri Selangor & Ors [iii] and Au Meng Nam & Anor v Ung Yak Chew & Ors [iv] .
Bayangan Sepadu and other cases before that upheld the conclusiveness of the register document of title (RDT) which did not require any person dealing with the land to go behind the RDT to investigate the validity of the title or the underlying transaction in order to qualify as purchaser in good faith. That would be in line with the 2 critical principles in the Torrens system of land registration upon which our NLC was premised, namely the “mirror principle” and the “curtain principle”. By the “mirror principle”, anyone who inspects the RDT for the status of the land will be able to rely on the integrity of the RDT, namely what is recorded in the RDT are the correct particulars concerning the land and what is not recorded cannot affect the land legally. By the “curtain principle”, it is the dispensation of the need to look beyond the RDT, as the RDT itself provides all relevant information reflecting the validity of the same.
On the other hand, Au Meng Nam was decided, in the mind of the apex court, premised on the peculiar facts of the case which appeared to decide that the element of carelessness and negligence could negate good faith under the proviso to s.340(3) of the NLC. Such interpretation ran against the Torrens system which was to provide certainty and security of titles and interests once acquired and registered. Further, it introduced the English equitable doctrine of notice/constructive notice (under the deed system) into the NLC (under the Torrens system).
Therefore, the apex court opted for Bayangan Sepadu as the prevailing decision. It follows that Question 1 posed to the court, i.e. where there is contractual representation that the chargor is the legal and beneficial owner of the property and there is no notice of any adverse claim to the property, whether it is incumbent on the bank (as the chargee) to investigate if there is any illegality attached to the underlying sale and purchase agreement, failing which the bank cannot qualify as a bona fide purchaser under the proviso to s.340(3) of the NLC, must be answered in the negative.
In reversing the COA decision, Federal Court also answered Question 2 in the negative, that is to say, in order to qualify as a subsequent purchaser in good faith under the proviso to s.340(3) of the NLC, the bank does not have to clearly show that it was impossible for the bank to have known of the unlawfulness of the sale and purchase transaction even after proper examination and verification of the sale and purchase agreement documents between the vendor and the chargor.
Likewise, Question 3 was answered in the negative, to wit, in order to qualify as a subsequent purchaser in good faith under the proviso to s.340(3) of the NLC, the bank does not have to critically look into the documentation, transactional documents (payments and receipts) leading up to the sale and purchase of the properties where the sale and purchase transaction has been completed and the title transferred and registered in the name of the chargor free from encumbrance prior to the creation of the charge with the consent of the vendor. On the facts, there was no allegation of any wrongdoing by D2 or D3. D2’s solicitors had represented to D3’s solicitors that the purchase price had been fully paid. Despite claiming that their deceased father had bought the Land from D1 in 1967, the Plaintiffs had not registered their interests or initiated any action against D1. The sale and purchase transaction between D1 and D2 had been completed and the title had been registered way before the Term Loan was disbursed by D3. Such facts prompted the apex court to answer Question 3 in the negative.
There was valuable consideration between D2 and the subsequent purchaser, D3. However, the COA ruled that D3 must also demonstrate that valuable consideration passed from D2 to the vendor, D1. The apex court rejected such ruling as it imposed a burden beyond what s.340(3) of the NLC required. Thus, the answer to Question 5, i.e. whether the burden of proving valuable consideration of a subsequent purchaser under the proviso to s.340(3) of the NLC extends to proving that valuable consideration has passed between the immediate purchaser and the vendor, has to be in the negative.
The upshot of the decision was the decision of both the COA and High Court were set aside with costs.
[i] Federal Court Civil Appeal No.: 02(f)-5-03/2024(J), published on 9 Oct 2024
[ii] A charge having acquired an interest in the land is a purchase within the meaning of the proviso of s.340(3) of the NLC: see CIMB Bank Berhad v AmBank Bhd & 2 Ors [2017] 9 CLJ 145.
[iii] [2022] 1 MLJ 701, FC
[iv] [2007] 5 MLJ 136, FC
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Tags: [land law] [deferred defeasibility of title] [good faith and valuable consideration] [proviso s.340 National Land Code] [burden on banks]