The doctrine of indefeasibility of title is embodied in Section 340(1) of the National Land Code (NLC), which provides that the title or interest of any person for the time being registered as proprietor of any land shall be indefeasible.
Indefeasibility, nevertheless, is not absolute or unqualified. Section 340(2) of the NLC specifies the circumstances where a registered title or interest may be set aside:
(i) in any cause of fraud or misrepresentation to which the person or any agent of the person is a party or privy;
(ii) where registration was obtained by forgery, or by means of an insufficient or void instrument; or
(iii) where the title or interest was unlawfully acquired by the person in the purported exercise of any power or authority conferred by any written law.
However, the proviso to Section 340(3) of the NLC states that nothing shall affect any title or interest acquired by any purchaser in good faith and for valuable consideration, or any person or body claiming through or under such a purchaser.
This alert examines the recent case of Setiakon Engineering Sdn Bhd v Mak Yan Tai & Anor [2024] 5 MLJ 460, where the Federal Court deliberated on whether a purchaser would qualify as a bona fide purchaser for value without notice pursuant to the proviso to 340(3).
Background
The respondents (Mak Yan Tai and another) discovered on 4 August 2014 that an originating summons (OS) was filed by Chia Moy King (Chia) purportedly as attorney of one ‘Lim Moy’, for a declaration that Lim Moy was the rightful owner of the land (Land) owned by the first respondent’s mother, Wong Soo. In her application, Chia averred amongst others that Lim Moy wanted to use the Land as collateral for a RM 30,000 loan that was granted to her by Wong Soo to part finance her purchase of the Land from one Yeap Bok Seng. The loan amount was settled in full in May 1981. However, Lim Moy had ‘forgotten’ to re-register the Land in her name.
Wong Soo did not file an appearance in response to the OS, resulting in Lim Moy obtaining a judgment of default (JID). With the JID, Chia obtained the cancellation of Wong Soo’s land title and issuance of a replacement title in the name of Chia on behalf of Lim Moy under a new title number during the period of September to October 2014.
On 27 October 2014, a sale and purchase agreement was entered into between Lim Moy and Paragon Capacity Sdn Bhd (Paragon) for the sale of the Land at a purchase price of RM 15 million. In January 2015, the Land was registered in the name of Paragon. In May 2015, Paragon sold the Land to the appellant (Setiakon Engineering Sdn Bhd) for RM17 million vide a sale and purchase agreement. In August 2015, the
Land was registered in Setiakon’s name and a charge was registered on the Land title in favour of UOB as security for the loan.
In July 2017, the respondents applied to set aside the JID obtained by Lim Moy on 30 September 2014. In their affidavit in support of their application, the respondents averred inter alia that Wong Soo had not been served with Lim Moy’s OS applying for a transfer of the Land to her and that that the Land was never used as collateral by Lim Moy for the alleged RM 30,000 loan but was in fact bought by Wong Soo from Yeap Bok Seng. In November 2017, the High Court allowed the respondents’ application and ordered to set aside the JID obtained by Lim Moy (Setting Aside Order).
At The High Court
On 31 May 2019, the respondents commenced the present suit against Lim Moy, Paragon and Setiakon. Neither Lim Moy nor Paragon entered appearance to defend the suit, only Setiakon did. The High Court dismissed the respondents’ claim finding that Setiakon was a subsequent purchaser under S 340(3) of the NLC.
At The Court of Appeal
Aggrieved, the respondents appealed to the Court of Appeal against the decision of the High Court. The Court of Appeal reversed the decision of the High Court, ruling that:
(a) The Setting Aside Order in respect of the JID had the effect of rendering all dealings in the Land from 2014 until that date null and void ab initio; and
(b) Setiakon did not discharge the onus of establishing that it was a bona fide purchaser for value without notice, as it ought to have taken further steps to investigate the sale and purchase transaction between Lim Moy and Paragon for RM 15 million.
At The Federal Court
Dissatisfied, Setiakon appealed against the decision of the Court of Appeal and leave was granted for the determination of several questions of law, on which the majority of the Federal Court ruled as follows:
(a) The legal position under Section 89 of the NLC is that registration is conclusive evidence of ownership unless defeasible pursuant to Section 340. In this regard, the court highlighted that to confer ownership of title upon that person or body is not to confer indefeasibility of title upon them. Indefeasibility of title is conferred by Section 340(1) and not by Section 89, which deals with registration of title. Here, the court remarked that the Setiakon had taken advantage of the ‘conclusiveness’ of title under Section 89 and using it as a convenient excuse to turn a blind eye on the suspicious circumstances surrounding the status of the Land. The indefeasibility of the title must in all cases be decided based on the facts and circumstances of each case and not by registration alone;
(b) It was for Setiakon as the subsequent purchaser to prove in the affirmative that it had purchased the Land in good faith and for valuable consideration under s 340(3) and it cannot be done just by looking at the register document of title as
suggested by them. The purchaser must not only show the absence of fraud, deceit or dishonesty but also that it had taken the ordinary precautions that a reasonably prudent purchaser would have taken in the circumstances; and
(c) The knock-on effect of the Setting Aside Order was to nullify and wipe out all transactions and dealings in the Land, beginning with the fraudulent transfer of the Land to Lim Moy, which rendered her replacement title void ab initio. It must therefore be taken as a matter of fact and law that the Wong Soo’s title was never cancelled and replaced with the replacement title in Lim Moy’s name without the need or any additional court order cancelling the replacement title. By parity of reasoning, the defeasible title of Lim Moy was set aside by the Setting Aside Order and the defeasible title of Paragon which was acquired from Lim Moy’s defeasible title was swept aside along with that of Lim Moy. Therefore, there was no title that Paragon could pass to the Setiakon.
On the other hand, the minority judgment of the Federal Court opined that the appeal should be allowed on amongst others, the following grounds:
(a) The evidence led was insufficient to establish fraud or forgery, which was not pleaded. In the absence of evidence of forgery, fraud or a void instrument under Section 340, it was not tenable to conclude that the effect of the Setting Aside Order was to render all subsequent transfers of the property during the pendency of the 30 September 2014 order invalid; and
(b) Prior to entering into the agreement to purchase the Land from Paragon, Setiakon had requested a copy of the sale and purchase agreement for the said Land and conducted an official land search which confirmed that Paragon was the registered proprietor of the Land which was free from all other encumbrances. The steps undertaken by Setiakon were more than sufficient to enable it to fall within the ambit of a bona fide purchaser for valuable consideration within the purview of the proviso to Section 340(3).
Conclusion
This Federal Court decision underscores the critical importance of thorough due diligence in acquisition of properties which extend beyond registry records, in view that the latent defeasibility of the title would only be clothed with the shield of indefeasibility by Section 340(3) if a subsequent purchaser can prove that it had purchased the land in good faith and for valuable consideration.
12 November 2024