A case note by Datin Jeyanthini Kannaperan and Koo Yin Soon.

The Legal Backdrop

Indefeasibility of title is the immunity obtained by a registered proprietor or interest holder in property. This concept is encoded in Section 340 of the National Land Code 1965 (“Section 340”) which sets out both how such immunity operates and the exceptions to the immunity.

Previous debate on whether the proviso in Section 340 (“Proviso”) applied to immediate purchasers (giving rise to an “immediate indefeasibility”) or subsequent purchasers (“deferred indefeasibility”) ended with the Federal Court in Tan Yin Hong v Tan Sian San² unanimously holding that a correct reading of Section 340 only allowed subsequent purchasers to rely on the Proviso.

The current position is best summarised as follows:

The extent of deferred indefeasibility was best mirrored in the case of CIMB Bank Berhad v AmBank Berhad³ (“CIMB”)where the immediate purchaser (fraudster) obtained registered title to property (from CIMB Bank Berhad) and charged the same to AmBank Berhad. The Federal Court maintained that AmBank Berhad, who could demonstrate its charge was created in good faith and for valuable consideration, had a valid charge over the property.

However, the dissenting judgement of Justice Jeffrey Tan FCJ applying Wright v Lawrence⁴ proposed that the immediate purchaser from whom the subsequent purchaser obtains title must also be a bona fide purchaser on the reasoning “that transactions cannot be contrived by fraudsters and accomplices”.

He-Con Sdn Bhd v Bulyah Ishak⁵ (“HeCon”)

Facts

In 1997, En Nor Zainir (“Buyer”) purchased Lot 31 from He-Con who, in exchange for the full purchase price, executed a Power of Attorney in favour of the Buyer. The Buyer in turn executed a Power of Attorney in favour of En Bulyah Ishak and passed away shortly thereafter. Although En Bulyah was appointed joint-executor of the Buyer’s estate (together with the Buyer’s widow Puan Noraini binti Abdullah), due to He-Con Sdn Bhd refusing to effect a direct transfer and En Bulyah not being able to afford sufficient stamp duty at the time, Lot 31 remained in the name of He-Con.

He-Con subsequently charged one Lot 31 to a licensed financial institution (“FI”) and upon HeCon’s default on payment FI commenced foreclosure proceedings.

Decisions of the High Court⁶ , Court of Appeal⁷ and Federal Court

The joint executors (“Plaintiffs”) challenged the foreclosure proceedings but the High Court, while recognizing that He-Con was a bare trustee for the deceased (“First Finding”), held that the FI was a bona fide purchaser under section 340 and could proceed with foreclosure proceedings (“Second Finding”). The Plaintiffs appealed against the Second Finding.

The Court of Appeal allowed the Plaintiffs’ appeal on the Second Finding holding that the FI was an “immediate purchaser” (having obtained its charge directly from He-Con) who could not rely on the Proviso and therefore did not have indefeasible title.

The Federal Court dismissed the FI’s appeal to the Federal Court, holding that the transaction between the He-Con and the FI was a “direct and immediate purchase” and liable to be vitiated by the exceptions in Section 340 (in this case “insufficient and/or void instrument”).

The “Extension”

The Federal Court did not stop there and in paragraph 92 of the judgment, discussing a variation of the facts where the FI had obtained its interest from an immediate purchaser (Mr A) stated:

“[92] It would have been different if the fourth defendant (FI) had entered into the charge agreement with a person, say Mr A, who had bought the said property from the first defendant (He-Con) and that Mr A then charged the said property to the fourth defendant.There is however a caveat to be made here, namely, that when Mr A bought the said property from the first defendant, Mr A must have bought the said property in good faith. In the scheme of things, that Mr A would stand in a position of an immediate purchaser. As such, although he is a bona fide purchaser, his title over the said property, although registered, is defeasible by virtue of s. 340(2) of NLC. As an immediate purchaser, Mr A cannot pass a good and an indefeasible title to whoever were to purchase the said property from him.” (emphasis added)

And at paragraph 102 stated that:

“[102] The immediacy of the purchase relates to the vitiating vendor, not how far removed it is in the tally among the purchasers. To be a subsequent purchaser, it must have purchased the interest in the property that is being used as a security from a purchaser who is one that is bona fide for value. Any direct dealing with a rogue will necessarily vitiate the transaction rendering it defeasible, although it is duly registered.”

This was an express departure from the way the majority decision in CIMB where the dissenting reasoning was quoted and expressly applied.

Conclusion

It is expected that more cases premised on this concept of “double bona fides” will come before the courts in the coming months and with that provide more clarity on the application of this new concept as opposed to the traditional position of indefeasibility of title.

DATIN JEYANHINI KANNAPERAN

KOO YIN SOON DISPUTE

RESOLUTION PRACTICE GROUP

^{1 [2020] 7 CLJ 271 presided over by a five-member panel of the Federal Court.}

^{2 [2010] 2 CLJ 269.}

^{3 [2017] 5 MLJ 142.}

^{4 [2007] 278 DLR 698.}

^{5 [2020] 7 CLJ 271.}

^{6 Shah Alam Civil Suit No. 22NCVC-307-04-2013.}

^{7 Court of Appeal Civil Appeal No. B-02(NCVC)(W)-803-04- 2016.}

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