Legal Insights Issue 4/2017, December 2017 – “DEFERRED INDEFEASIBILITY“

DEFERRED INDEFEASIBILITY

Claudia Cheah and Wong Juen Vei discuss a significant land law case


In the recent decision of CIMB Bank Berhad v AmBank Berhad & 2 Ors [2017] 9 CLJ 145, the apex court of Malaysia held that a chargee, whose charge on a land was registered subsequent to a forged discharge of an existing charge, is a “purchaser” entitled to the protection of deferred indefeasibility under the proviso to section 340(3) of the National Land Code (“NLC”).

The relevant parts of section 340 of the NLC read as follows:

“(1) The title or interest of any person or body for the time being registered as proprietor of any land, or in whose name, any lease, charge or easement is for the time being registered, shall, subject to the following provisions of this section, be indefeasible.

(2) The title or interest of any such person or body shall not be indefeasible:

(a) in any case of fraud or misrepresentation to which the person or body, or any agent of the person or body, was a party or privy;

(b) where the registration was obtained by forgery, or by means of an insufficient or void instrument; or

(c) where the title or interest was unlawfully acquired by the person or body in the purported exercise of any power or authority conferred by any written law.

(3) Where the title or interest of any person or body is defeasible by reason of any of the circumstances specified in subsection 2:

(a) it shall be liable to be set aside in the hands of any person or body to whom it may subsequently be transferred; and

(b) any interest subsequently granted thereout shall be liable to be set aside in the hands of any person or body in whom it is for the time being vested:

Provided that nothing in this subsection shall effect any title or interest acquired by any purchaser in good faith and for valuable consideration, or by any person or body claiming through or under such a purchaser.”

BACKGROUND FACTS

Chin Ting Seng and Chin Chong Lup (the “Chins”) were the owners of a piece of land in Klang, Selangor (“Property”). The Chins executed a charge on the Property ("Original Charge") in favour of Southern Bank Berhad which was later vested in CIMB Bank Berhad (“CIMB”).

An individual, Wong Chee Keong (“Wong”), applied for a loan from AmBank Berhad (“AmBank”) on 4 November 2008 to finance the purchase of the Property. Wong created a charge over the Property in favour of AmBank as security for the loan (“AmBank Charge”). AmBank appointed KK Lim & Associates (“KKL”) as their solicitors whilst Ku Abdul Rahman & Associates (“KAR”) acted for Wong.

KKL received from KAR the issue document title to the Property, the stamped memorandum of transfer (“MOT”) and the discharge of charge of the Original Charge (“Discharge of Original Charge”) on 10 March 2009, and the duplicate of the Original Charge on 17 March 2009. The Discharge of Original Charge, the MOT and the AmBank Charge were presented for registration at the Land Office by KKL on 19 March 2009.

The Land Office effected the discharge of the Original Charge and registered Wong as the registered proprietor of the Property on 25 November 2009. Thereupon, AmBank was registered as the chargee of the Property under the AmBank Charge.

Subsequently, it was discovered that there were two titles over the Property and the Discharge of Original Charge was forged by Wong. The claims by CIMB and AmBank as chargees over the Property became the core of the dispute.

DECISION OF THE HIGH COURT

After a full trial, the High Court found that the Discharge of Original Charge was forged. The court held that AmBank was an immediate purchaser and its interest was not protected by the principle of deferred indefeasibility under the proviso to section 340(3) of the NLC. Thus, the AmBank Charge was set aside. Dissatisfied with the decision, AmBank filed an appeal to the Court of Appeal.

DECISION OF THE COURT OF APPEAL

The Court of Appeal allowed AmBank's appeal and held that AmBank was a subsequent purchaser whose interest was protected by the proviso to section 340(3) of the NLC in accordance with the deferred indefeasibility principle.

CIMB obtained leave to appeal to the Federal Court on the following question of law:

“Whether a chargee comes within the meaning of ‘purchaser’ under the proviso to section 340(3) of the National Land Code?”

DECISION OF THE FEDERAL COURT

CIMB's appeal was dismissed by a majority of 4 to 1. Md Raus Sharif CJ in delivering the majority decision, agreed with the Court of Appeal that AmBank was a subsequent purchaser whose interest was protected by the deferred indefeasibility principle in the proviso to section 340(3) of the NLC.

The dissenting judge, Jeffrey Tan FCJ, disagreed with the Court of Appeal and held that AmBank, being the chargee, was an immediate purchaser rather than a subsequent purchaser and fell outside the proviso to section 340(3).

Is a chargee a “purchaser”?

Both the majority and minority judges agreed that a chargee having acquired an interest in the land, is a “purchaser” within the meaning of the proviso to section 340(3) of the NLC. The judges relied on several cases, including T Damordaran v Choe Kuan Him [1972] MLJ 267 (Privy Council) and Tan Ying Hong v Tan Sian San & Ors [2010] 2 MLJ 1 (Federal Court), to support this conclusion. The majority judges also relied on the definition of a “purchaser” in section 5 of the NLC.

The concept of indefeasibility

The majority held that the concept of indefeasibility was settled when the Federal Court in Tan Ying Hong overruled its earlier decision in Adorna Properties Sdn Bhd v Boonsom Boonyanit [2001] 2 CLJ 133. The court in Adorna Properties had misconstrued section 340 of the NLC and arrived at an erroneous conclusion that the proviso in subsection (3) of section 340 applied equally to subsection (2). Arifin Zakaria CJ in Tan Ying Hong held that even though subsections (3)(a) and (3)(b) referred to the circumstances specified in subsection (2), they are restricted to subsequent transfer or interest subsequently granted thereout and could not apply to the immediate transferee of any title or interest. Arifin Zakaria CJ further explained that by applying subsection (3) to subsection (2) of section 340 of the NLC, Adorna Properties gave recognition to the concept of immediate indefeasibility which is contrary to section 340 of the NLC.

The majority judges also referred to a subsequent Federal Court decision in Kamarulzaman Omar & Ors v Yakub Husin & Ors [2014] 1 CLJ 987 which further explained the principle of indefeasibility in the following terms:

“If the title or interest is registered in the name of an immediate purchaser, the bona fide of the immediate purchaser will not offer a shield of indefeasibility. The title or interest of an immediate purchaser is still liable to be set aside if any of the vitiating elements as set out in s 340(2) had been made out. If the title or interest is registered in the name of a subsequent purchaser, then the vitiating elements in s 340(2) would not affect the title or interest of a bona fide subsequent purchaser. The title or interest of a subsequent purchaser is only liable to be set aside if the subsequent purchaser is not a bona fide subsequent purchaser. The title or interest acquired by a subsequent purchaser in good faith for a valuable consideration, or by any person or body claiming through or under such a subsequent purchaser, is indefeasible.”

Was AmBank a subsequent purchaser?

The Majority Judgment

The majority judges agreed with the Court of Appeal that AmBank was a subsequent purchaser in good faith and for valuable consideration. The majority judges agreed that there were two stages before the AmBank Charge could be created. First, the Original Charge has to be discharged and second, the Property transferred from the Chins to Wong.

CIMB's interest in the Property had been extinguished by the forged discharge resulting in Wong becoming the immediate purchaser. Thus, AmBank derived its interest in the Property from the charge executed by Wong and not from CIMB. AmBank was thus a subsequent purchaser entitled to the protection of deferred indefeasibility.

The Minority Judgment

Jeffrey Tan FCJ took the view that a party would only be considered as a subsequent purchaser if his title or interest is derived from an immediate purchaser in good faith and for valuable consideration. In short, for the title or interest of a subsequent purchaser to be indefeasible, both the immediate and subsequent purchasers must be purchasers in good faith and for valuable consideration.

On the facts, Wong did not acquire any good title in order to create the AmBank Charge. As the AmBank Charge could not subsist without a valid title, it did not enjoy the protection of deferred indefeasibility.

The learned judge also opined that AmBank was not a bona fide purchaser as the registration of the AmBank Charge was obtained through forged documents and AmBank had failed to properly investigate all matters that pertained to the sale and creation of the charge. His Lordship referred to the Federal Court decision in Pekan Nenas Industries Sdn Bhd v Chang Ching Chuen [1998] 1 MLJ 465, wherein the basic element of good faith was described as “the absence of fraud, deceit or dishonesty and the knowledge or means of knowledge of such at the time of entry into a transaction.”

Jeffrey Tan FCJ further held that even if the MOT was not forged, the transfer to Wong and the AmBank Charge could not and would not have been registered but for the Discharge of Original Charge which was a forged instrument. Wong, who authored the forgery, could not have acted in good faith and it would “rub salt to the wound” if the court held that Wong was a purchaser in good faith. The judge went on to say that it would be “the cruellest cut of all wound” if Wong, a forger, would have the right to redeem the Property if the AmBank Charge was indefeasible.

Based on the foregoing, Jeffrey Tan FCJ held that Wong was not the immediate purchaser in good faith and for valuable consideration. As there was no immediate purchaser, AmBank could not be the subsequent purchaser. AmBank was an immediate purchaser and its interest was therefore defeasible.

COMMENTS

The Federal Court’s decision settles the issue as to whether a chargee is a "purchaser" within the meaning of the proviso to section 340(3) of the NLC.

The law remains that a forger or fraudster cannot obtain an immediate indefeasible title or interest in the land. The majority judgment is to be lauded as it affirms the principle of deferred indefeasibility whereby a forger or fraudster may pass good title to a subsequent purchaser who acts in good faith and for valuable consideration. Similarly, a forger or fraudster may create a valid charge over the land in favour of a chargee who acts in good faith for valuable consideration. Indeed, as the law accords the protection of deferred indefeasibility to a subsequent purchaser, there is no reason to deprive a chargee of the same protection if the chargee has acted in good faith and provided valuable consideration for the creation of an interest in the land.

On the other hand, Jeffrey Tan FCJ has set a high bar for the application of the principle of deferred indefeasibility by requiring both the immediate and subsequent purchasers to be purchasers in good faith and for valuable consideration in order to fall within the meaning of “purchaser” in the proviso to Section 340(3) of the NLC. It should be noted that the opening part of section 340(3) refers to “any person or body” whose title is defeasible and not to a “purchaser”. As such, there does not seem to be a requirement under section 340(3) for a subsequent purchaser to derive his title or interest from a “purchaser” (an expression which brings into play the elements of good faith and valuable consideration) to obtain the benefit of deferred indefeasibility under the proviso.

It is also noteworthy that both the majority and minority judges in the Federal Court recognised the importance of deferred indefeasibility in the Torrens system. To quote the concluding paragraph of Jeffrey Tan FCJ’s judgment:

“Immediate indefeasibility gives certainty. But unless a security system is statutorily in place to prevent fraud and forgery, such as, but not limited to, the attendance of parties before the registering authority, as well as an indemnity scheme to compensate proprietors for the errors of the registering authority, deferred indefeasibility should remain, to protect innocent proprietors against fraud and forgery."


Writers’ e-mail: This e-mail address is being protected from spambots. You need JavaScript enabled to view it & This e-mail address is being protected from spambots. You need JavaScript enabled to view it

 

SUBJECT MATTER: CASE COMMENTARY


WRITERS’ NAMES: CLAUDIA CHEAH PEK YEE (L) & WONG JUEN VEI (R)


WRITERS’ PROFILES:

Claudia is a Partner in the Dispute Resolution Division of SKRINE. Her practice areas include banking litigation, land disputes and defamation.

Juen Vei is an Associate in the Dispute Resolution Division of SKRINE. He graduated from Cardiff University in 2014.

 

 
ACCOLADES & AWARDS

Benchmark Litigation Asia-Pacific 2018

alb-mla-2018-winner

We are pleased to announce that our firm is recognised as a Top Tier Firm in the inaugural Benchmark Litigation Asia-Pacific 2018. Some of our partners were also listed in the rankings.

>> READ MORE

Who’s Who Legal Awards 2018

alb-mla-2018-winner

We are pleased to announce that Skrine has once again been named Malaysia Law Firm of the Year. The award was conferred at the Who’s Who Legal Awards 2018 on 8th May 2018 in London, United Kingdom.

>> READ MORE

Asian Legal Business Malaysia Law Awards 2018

alb-mla-2018-winner

Skrine has been ranked as Arbitration Law Firm of the Year and Maritime Law Firm of the Year.

>> READ MORE

The Chambers Asia Pacific 2018 Rankings

Skrine has been ranked as Leading Firm for Dispute Resolution, Intellectual Property and Projects, Infrastructure & Energy.

>> READ MORE

PDPA NOTICE

English | Bahasa Malaysia