Introduction
The focus of this case is on the extent of protection afforded to a subsequent purchaser or chargee under the Torrens system and the National Land Code (‘NLC’). The dispute is on whether Malayan Banking Berhad (‘MBB’), as a chargee who relied on the land register, acquired an indefeasible interest in land despite defects in the underlying transaction between the earlier parties. The courts were required to determine whether a bank has a legal duty to investigate prior sale transactions before accepting a charge, and what constitutes ‘good faith’ under s 340(3) of the NLC. The case reflects the tension between commercial certainty in land dealings and the protection of unregistered interests.
Brief Facts
The plaintiffs were the administrators of the estate of the late Ahmad bin Buang (‘the deceased’). The estate claimed that the deceased had fully paid for the disputed parcels of land during his lifetime and that the first defendant (‘D1’), the original developer, held the land on constructive trust after failing to effect the transfer.
The second defendant (‘D2’) was a subsequent developer who later acquired the same lands from D1 and subsequently created charges over them in favour of the third defendant.
The third defendant (‘D3’), MBB had granted financing to D2 based on the security of the charged lands, relying on the fact that D2 was the registered proprietor. The appeal before the Federal Court concerned the legal position of MBB alone.
The deceased had entered into sale and purchase agreements with D1 decades earlier and had fully paid for the parcels of land. However, the said parcels remained registered in D1’s name and were never transferred to the deceased. Years later, D1 executed a sale and purchase agreement with D2 and transferred the lands. After becoming the registered proprietor, D2 charged the lands to MBB to secure a loan. The plaintiffs contended that D1 held the lands as a bare trustee for the deceased and had no right to transfer them to D2. They sought to nullify both the transfer to D2 and the subsequent charges to MBB on the basis that their beneficial interest, though unregistered, was superior.
High Court Finding
The High Court accepted the plaintiffs’ claim and held that the deceased had paid in full and taken possession, thereby establishing a constructive trust. As D1 had no beneficial ownership, it had no right to transfer the land to D2. The court further held that D2 was not a bona fide purchaser for value on the grounds of suspicious circumstances and absence of proof of consideration. Consequently, D2’s title was defeasible under s 340(2) of the NLC. The High Court ruled that MBB failed to prove it was a bona fide purchaser for value under s 340(3). The charge created in favour of MBB was therefore declared null and void.
Court of Appeal Findings
The Court of Appeal upheld the High Court ruling and held that D1’s failure to challenge the evidence amounted to acceptance that the lands were on constructive trust for the deceased’s estate. The Court of Appeal also held that D2 was an ‘immediate purchaser’, and therefore not entitled to deferred indefeasibility. Although the Court of Appeal accepted that MBB was a subsequent purchaser and ruled that MBB ought to have examined the underlying sale documentation between D1 and D2, including receipts and payment records.
The Court of Appeal applied the reasoning in Au Meng Nam v Ung Yak Chew [2007] 5 MLJ 136, finding that good faith requires a purchaser to critically investigate the legitimacy of prior dealings. MBB’s reliance solely on land searches was deemed not sufficient to establish good faith.
Federal Court Findings
The key issue before the Federal Court was on the due diligence required from a subsequent purchaser or chargee under s 340(3) of the NLC. Specifically, must a financier, such as MBB, investigate the validity of past sale transactions to which it was not privy? A related issue was which line of authority should guide the standard of good faith, the stricter approach in Au Meng Nam or the Torrens-centric approach as explained in the case of Bayangan Sepadu Sdn Bhd v Jabatan Pengairan dan Saliran Negeri Selangor & Ors [2022] 1 MLJ 701.
The Federal Court held that the Court of Appeal misdirected itself. MBB was entitled to rely on the conclusiveness of the land register under s 89 of the NLC and need not investigate behind the register unless fraud or notice of illegality exists. The Federal Court reaffirmed that a subsequent purchaser who conducts proper land searches and provides valuable consideration is protected by the proviso to s340(3). MBB therefore acquired an indefeasible interest, and the charges were valid.
Federal Court Analysis
The Federal Court began by reaffirming the foundational principle of the Torrens system, namely that the register is everything, a principle long recognised in Teh Bee v K Maruthamuthu [1977] 2 MLJ 7. Under s 89 of the NLC, the register is conclusive evidence of ownership, and anyone dealing with a registered proprietor is entitled to rely on it without investigating historical dealings. This aligns with the Privy Council’s classic articulation in Gibbs v Messer [1891] AC 248, which emphasised that the Torrens system aims to spare purchasers from the ‘trouble and expense’ of going behind the register.
The Federal Court noted that the plaintiffs’ interest was unregistered, and unregistered interests cannot defeat a registered title unless fraud under s 340(2) is established. This position is consistent with Puspaleela v Rajamani [2019] 2 MLJ 553, where the court held that the register defeats all prior and subsequent unregistered claims. The plaintiffs never alleged fraud by MBB, nor did they lodge any caveat. Thus, MBB had no notice of any adverse claim.
The Federal Court then considered whether MBB was a bona fide purchaser for value. It reaffirmed the principle from CIMB Bank v AmBank [2017] 5 MLJ 142 that a chargee is considered a ‘purchaser’ within section 340(3) and is entitled to protection upon establishing good faith and valuable consideration. Applying Midland Bank Trust v Green [1981] AC 513, the court confirmed that MBB gave valuable consideration by granting a term loan to D2; MBB did not need to prove payment from D2 to D1.
The Federal Court distinguished the Court of Appeal’s reliance on Au Meng Nam, explaining that the case was decided on highly unusual facts involving suspicious dealings. It cannot be used to impose a broad duty of investigation on financiers. Instead, the Federal Court favoured the reasoning in its more recent decision of Bayangan Sepadu Sdn Bhd v Jabatan Pengairan dan Saliran Negeri Selangor & Ors [2022] 1 MLJ 701, where it was held that a purchaser who conducts land searches and finds no encumbrances is acting reasonably and in good faith. Negligence, even if proven, does not amount to fraud and does not negate good faith.
Applying Bayangan Sepadu to the case at hand, from the facts, MBB conducted multiple land searches, confirmed D2’s registered ownership, and verified the absence of encumbrances. The sale transaction between D1 and D2 was completed long before, and MBB was not privy to the underlying documents. There was nothing to arouse suspicion. Imposing a requirement to investigate past transactions would, in the Federal Court’s words, create ‘a commercially unrealistic burden’ and undermine the efficiency of the Torrens system.
Conclusion
The Federal Court allowed the appeal and restored the indefeasibility of MBB’s charges. It held that MBB was a subsequent purchaser in good faith who provided valuable consideration and was therefore entitled to the protection of s 340(3) of the NLC. The Federal Court also rejected the Court of Appeal’s attempt to impose additional investigative duties on financial institutions, restating that the Torrens system is designed to create certainty, efficiency, and finality in land transactions. The plaintiff’s unregistered equitable interest could not override the statutory protection afforded to MBB.
