Does Section 433B of the National Land Code apply to a Constructive Trust?

Chan Yee Chong provides the answer

 


 

 

In Takako Sakao v Ng Pek Yuen & Anor [2010] 1 CLJ 381 the Federal Court was called upon to determine whether Section 433B(1)(c) of the National Land Code ("Code") applies to a constructive trust.

 

Section 433B(1)(c) inter alia requires a non-citizen to obtain the prior approval of the State Authority before any trust can be created over alienated land or a share or interest therein in favour of that non-citizen. Failure to obtain such approval renders a disposal or dealing null and void.

 

 

BRIEF FACTS

 

The appellant, a Japanese citizen and the first respondent were partners in the business of a restaurant. They decided to acquire the building in which they operated their restaurant business. Both the appellant and the first respondent were to contribute towards the purchase price.

 

The appellant claimed that there was a mutual understanding between her and the first respondent that the building, when acquired, was to be registered in the joint names of herself and the first respondent in equal shares. The appellant subsequently provided a sum of RM194,610 towards the purchase. However, the first respondent purchased the property for RM950,000 and registered it solely in her name. The first respondent subsequently sold the property to the second respondent, a private limited company, by her own husband.

 

The appellant lodged a caveat to protect her interest in the property and commenced proceedings to enforce a trust she claimed had arisen in her favour. The appellant claimed that she and the first respondent were co-owners and the latter held the appellant’s share under a trust.

 

The first respondent did not attend court. Neither did she give evidence or take any part in the case. She merely put forward arguments on why the appellant’s caveat ought to be removed. The first respondent instead commenced proceedings to remove the appellant’s caveat.

 

 

FINDINGS OF THE HIGH COURT AND COURT OF APPEAL

Both actions were tried together by the High Court which found against the appellant. It dismissed the appellant’s action and directed that the appellant's caveat be removed. It also ordered the first respondent to refund the sum of RM65,450, instead of RM194,610, with interest to the appellant. The appellant appealed to the Court of Appeal which affirmed the High Court’s orders.

 

As the requisite approval under Section 433B of the Code was not obtained, both the High Court and the Court of Appeal held that the appellant was precluded by that provision from enforcing any trust that could have arisen in her favour by reason of her contribution towards the purchase price.

 

The appellant obtained leave to appeal to the Federal Court.

 

 

DECISION OF THE FEDERAL COURT

The Federal Court, by a unanimous decision, allowed the appellant’s appeal. His Lordship, Gopal Sri Ram FCJ who delivered the judgment of the Federal Court, dealt with the four main issues as follows:

 

(1) Whether the High Court’s evaluation of the appellant’s evidence was correct, in particular as to the amount of her contribution to the purchase price

The Court answered this question in the negative. Gopal Sri Ram FCJ observed that two consequences inevitably followed from the wilful failure by the first respondent to give evidence at the trial.

 

Firstly, the evidence given by the appellant ought to have been presumed to be true. Secondly, the courts below ought to have drawn an adverse inference against the first respondent on the amount of the appellant’s contribution to the purchase price as well as the existence and the terms of the mutual understanding.

 

The Federal Court held that the failure of the courts below to apply the true principle of law applicable to the fact pattern of this case had occasioned a miscarriage of justice.

 

 

(2) What rights did the appellant acquire under the terms of the mutual understanding between her and the first respondent?

The Court held that the appellant and the first respondent were partners in a business venture and therefore each party owed the other a duty to act with utmost good faith towards the other.

 

The first respondent had breached her fiduciary duty to the appellant by registering the property in her sole name and selling it to the second respondent without accounting to the appellant for one half of the proceeds of sale. By so doing, the first respondent was guilty of equitable fraud in relation to appellant’s interest in the property in question. This fact pattern gave rise to a constructive trust. Accordingly, the appellant’s claim against the first respondent is as a beneficiary under a constructive trust. It is therefore a proprietary claim and not merely a monetary claim.

 

 

(3) Whether the appellant could enforce her rights under the trust against the second respondent

The Federal Court answered this question in the affirmative for two reasons.

 

Firstly, the second respondent was not a bona fide purchaser for value. The Federal Court upheld the findings of the trial judge that the second respondent was in substance an alter ego of the first respondent's husband and that the knowledge of the first respondent could be attributed to her husband and thence to the second respondent.

 

The Federal Court was satisfied that where fraud (including equitable fraud) exists, the doctrine of corporate personality will not insulate the shareholders or directors from being assailed directly.

 

The Court added that where, as in the present case, a company is used as a device or a sham to enable persons to avoid recognition by equity, the Court will grant an equitable remedy directly against the company.

 

The second reason relied upon by the Court to enable the appellant to enforce her rights under the trust against the second respondent is founded on Section 26(b) of the Specific Relief Act, 1950 which provides:-

 

"Except as otherwise provided by this Chapter, specific performance of a contract may be enforced against:-

 

(a) either party thereto;

 

(b) any other person claiming under a party to the contract by a title arising subsequently to the contract, except a transferee for value who has paid his money in good faith and without notice of the original contract."

 

The Court held that the second respondent could not rely on the saving provision in Section 26(b) to preclude an order of specific performance from being granted against it as it had not acquired the trust property in good faith.

 

The Federal Court further held that it is settled law that trusts are an exception to the common law rule of privity of contract.

 

 

(4) Whether Section 433B of the Code applied to the facts in the instant case?

The Federal Court answered this question in the negative.

 

Gopal Sri Ram, FCJ held that the courts below had erred by assuming incorrectly that the case was one of a resulting trust. According to his Lordship, the trust in the present case was a constructive trust.

 

His Lordship held that Section 433B(1)(c) of the Code which applies to trusts “created in favour of any person or body as ‘trustee’” refers to an express trust which is registered in accordance with Section 344 of the Code and does not apply to a constructive trust that arises by operation of law, such as that imposed on the first respondent in the present case.

 

The Federal Court also held that Section 433B(1)(a) of the Code did not apply on the ground that the appellant did not acquire land by way of a disposal under Division II of the Code. Instead, the constructive trust had been imposed by law on the first respondent as a consequence of her unlawful actions.

 

 

CONCLUSION

 

The decision of the Federal Court in Takako Sakao v Ng Pek Yuen & Anor is significant as it establishes that Section 433B of the Code does not apply to a constructive trust.

 

 

CHAN YEE CHONG ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it )

 

 
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