31 August, 2018
That proviso provides that a subsequent bona fide purchaser for valuable consideration is clothed with the shield of indefeasibility and its charge may be enforced despite the fraudulent transfer. The question that arose for the Federal Court was whether the chargee bank could claim indefeasibility where its solicitors are said to have had knowledge of the disputed title on the land at the material time.
Held
Following the recent Federal Court case of CIMB Bank Bhd v AmBank (M) Bhd & Ors [2017] 9 CLJ 145, the Court held that the respondent bank (“Public Bank”), being a chargee bank, who acquires an interest in land, falls within the meaning of “purchaser” under the proviso.
With respect to the requirement of good faith, the burden of proof lies on the person asserting it, that is, Public Bank in the present case. The existence of good faith or otherwise is a question of fact subject to the Court’s determination based on the evidence place before it.
The Court went on to explain that the concept of “good faith” does not simply mean absence of fraud, deceit or dishonesty; it also requires acting honestly, reasonable and fairly. Thus, the concept of “good faith” includes due inquiry showing that ordinary prudence has been exercised according to the standards of a reasonable person. It precludes pretence or deceit and also negligence and recklessness.
Hence, good faith can be vitiated by a purchaser’s mere knowledge of the fact that the predecessor’s title or interest is tainted with fraud (see Datuk Jagindar Singh & Ors v Tara Rajaratnam [1983] 2 MLJ 196).
In determining the question of good faith on the part of Public Bank, the central issue is whether the solicitor’s knowledge in regards to the adverse claims on the title of the land could and should be imputed to Public Bank.
Doctrine of Imputed Knowledge –– Doshi v Yeoh Tiong Lay [1975] 1 MLJ 85 (FC) Overruled
In Doshi v Yeoh Tiong Lay, the Federal Court enunciated the principle that a solicitor’s knowledge of fraud cannot be imputed to the client generally, irrespective of whether the solicitor is complicit in the fraud or not.
This Court, in overruling Doshi (supra), stated in agreement with the Court of Appeal in Aik Ming (M) Sdn Bhd v Chang Ching Chuen & Ors and another appeal [1995] 3 CLJ 639, that the law will not allow a person to deny knowledge of facts that his agent knew, subject to only one exception, that is, where the agent (the solicitor in the present case) is complicit in the fraud.
This means that the law imputes to the principal knowledge of facts, which the agent knows, except where the agent has committed a prior fraud thus making it certain that the agent would conceal the knowledge. Hence, Public Bank’s argument that it has no knowledge of the adverse claims that the deceased have over the land is irrelevant since the parties did not allege fraud against the solicitor.
The second issue is whether the solicitor’s knowledge acquired in a previous or different transaction could be imputed to Public Bank.
In this regard, the Court quoted Bowstead & Reynolds on Agency and Hoffmann LJ in El Ajou v Dollar Land Holdings Ltd [1994] 2 ALL ER 685, and held that where an agent is authorised to enter into a transaction in which his own knowledge is material, knowledge which he acquired outside the scope of his authority may also be imputed to the principal.
In this case, the solicitor’s duty as an agent towards Public Bank is to prepare loan documentation, inquire about the title and inform Public Bank of any encumbrances that he was aware of in respect of the transaction.
The two connected transactions were separated from each other by a period of about three months. It is apparent that the two transactions were immediately consequent on one another and were very closely connected that matters in respect of the first transaction ought to have been present in the solicitor’s mind.
The Court further held that a third party could not know whether key information had in fact been passed by the solicitor to Public Bank and for reasons of third party protection, such key information is deemed to have passed. Hence, Public Bank’s status as a subsequent purchaser with good faith is vitiated by the solicitor’s material knowledge that there was a serious dispute on the proprietorship of the land.
The appeal was allowed.
For further information, please contact:
K Shanti Mogan, Partner, Shearn Delamore & Co
shanti@shearndelamore.com
