January 3, 2025

Reinforcing Trust in the Torrens System: Federal Court’s Clarification on Bona Fide Purchaser Doctrine

Introduction

In Malayan Banking Bhd v Mohd Affandi bin Ahmad & Anor [2024] MLJU 2624, the Federal Court of Malaysia reinforced key principles underpinning the Torrens system, particularly in the context of indefeasibility of title and the doctrine of bona fide purchaser. The case addressed the obligations of financial institutions under proviso to Section 340(3) of the National Land Code (NLC), clarifying the scope of due diligence required for banks to qualify as bona fide purchaser in good faith.

Background of Case

The plaintiffs, administrators of the estate of Ahmad bin Buang (the Deceased), claimed beneficial ownership of four lots of land, including Lot 97 and Lot 716 (hereafter referred to as “the 2 lots”), which are the focus of this appeal. D1 and D2 were property developers, while D3 was Maybank, the appellant in the present appeal. The deceased had entered into sale and purchase agreements (SPAs) for these lots, paying the full purchase price to D1 but the lots were never registered in his name.

In 2018, D1 entered into a second SPA with D2, transferring 108 plots of land, including the 2 lots, to D2. D2 subsequently became the registered owner and charged the 2 lots to D3 as security for term loan facilities. The facilities provided by D3 were reimbursement-based, with the loan disbursed directly to D2 after the title to the 2 lots was registered in D2’s name and free of encumbrances.

The plaintiffs argued that D1 held the 2 lots in trust for the deceased’s estate and that both the transfer of the lots to D2 and the subsequent charges in favor of D3 were invalid. They sought declarations of ownership and nullification of the transactions.

D1, which was wound up in 2020, did not defend the claim, and the plaintiffs’ evidence against it remained uncontested. Meanwhile, D2 and D3 defended their positions, with D2 counterclaiming for damages and D3 asserting its rights as a bona fide purchaser under Section 340(3) of the National Land Code. The plaintiffs contended that D3 had failed to conduct adequate due diligence and therefore could not qualify as a bona fide purchaser.

The High Court ruled in favor of the plaintiffs, declaring the transfer and charges null and void, a decision that was upheld by the Court of Appeal. Hence, the appeal to the Federal Court.

High Court’s Decision

After a full trial, the High Court ruled in favor of the plaintiffs, declaring their ownership of the land against D1, as the evidence presented by the plaintiffs remained unchallenged by D1. The Court held that D1 held the land on constructive trust for the deceased’s estate and lacked the legal authority to transfer it. Consequently, the subsequent transactions involving D2 and D3 were deemed invalid.

The court deemed the transfer from D1 to D2 suspicious and dubious, concluding that D2 could not qualify as a bona fide purchaser under proviso to Section 340(3) of the National Land Code (NLC). Consequently, D2’s title to the land was set aside.

Regarding D3, the court found that the Bank had failed to act in good faith. It had relied solely on representations from D2’s solicitors without conducting sufficient due diligence, such as inspecting transactional documents or visiting the site, which would have revealed occupants and structures on the land. As D2’s title was invalid, the charge registered in favour of D3 was also nullified.

Court of Appeal’s Decision

Both D2 and D3 appealed the High Court’s decision, but the Court of Appeal dismissed their appeals and affirmed the High Court’s findings.

The Court of Appeal agreed that D1, the original owner, held the land under constructive trust for the plaintiffs, as the sale and purchase agreement between the deceased and D1 was unchallenged during the trial. It found that D2 was not a subsequent purchaser but an immediate purchaser, holding only a right in personam against D1, whereas the deceased’s estate already held a rights in rem over the land. As a result, D2 could not claim the protection of deferred indefeasibility under the proviso to Section 340(3) of the National Land Code (NLC).

Similarly, D3 could not benefit from deferred indefeasibility. The court held that D3 could not assume the legitimacy of the transaction between D1 and D2, even in the absence of adverse notice on the land register. The Court of Appeal emphasized that D3 had a duty to investigate the underlying transaction and its failure to do so disqualified it from claiming bona fide purchaser status.

Federal Court’s Decision

The Federal Court overturned the decisions of the High Court and Court of Appeal, addressing five (5) questions of law. The questions of law in respect of which leave to appeal was granted were answered by the Federal Court as follows:

The Federal Court answered this in the negative. The apex court held that when D3 has no notice of irregularities in the transfer of property and relies on contractual representations from the D2, it is not required to investigate the legality of the underlying sale and purchase agreement. The absence of adverse notice on the register relieves D3 from any obligation to examine further.

The Federal Court answered this in negative. The apex court rejected the idea that D3 must prove it was “impossible” to detect any illegality in a transaction to qualify as a bona fide purchaser. Such a threshold was deemed unreasonably high and contrary to the Torrens system’s purpose of ensuring certainty in land dealings.

Federal Court answered this in negative. The apex court ruled that D3 is not obligated to critically analyse transactional documents or investigate the completed underlying sale between D1 and D2 as the title is transferred and registered in the D2’s name without encumbrances prior to disbursement of loan by D3. This aligns with the Torrens system’s principle that registered titles are conclusive.

The Federal Court resolved the conflict between Bayangan Sepadu Sdn Bhd v Jabatan Pengairan dan Saliran Negeri Selangor & Ors [2022] 1 MLJ 701 and Au Meng Nam v Ung Yak Chew [2007] 5 MLJ 136. It upheld the reasoning in Bayangan Sepadu, which affirms the conclusiveness of the register, wherein any dealings or transactions involving land by a party with unregistered interests cannot override the title of the registered proprietor, provided there is no indication of fraud or dishonesty. The Federal Court distinguished Au Meng Nam which was decided based on its own set of facts, involving an immediate purchaser who was part of or privy to a fraudulent transaction where reasonable suspicion of irregularity was present. As opposed to Au Meng Nam, court clarified that negligence, or carelessness does not automatically negate good faith under Section 340(3). The Federal Court further clarified that the English equitable doctrine of notice which would require purchasers to investigate unregistered claims over the land, does not apply under the NLC.

Federal Court answered this in negative. Section 340(3) of the NLC only requires the D3 to show that valuable consideration had passed from D2 to the D3. The Federal Court held that D3 is not required to prove that valuable consideration passed between the immediate purchaser (D2) and the vendor (D1), beyond confirmation from D2’s solicitors. Requiring additional documentation, such as payment records or receipts, places an unnecessary burden on a bona fide subsequent purchaser, especially since D2 is already registered as the proprietor on the title. Since D3 acquired the charge in good faith and for valuable consideration, they are entitled to the protection provided under the proviso to Section 340(3) of the NLC.

Conclusion

The Federal Court’s decision offers significant clarification on the application of Section 340(3) of the National Land Code (NLC), explicitly rejecting the English equitable doctrine of notice. From the decision in Bayangan Sepadu, any land transaction involving an unregistered interest cannot undermine the title of the registered proprietor. The Court reaffirmed the core principles of the Torrens system, underscoring that a registered document of title is conclusive evidence of ownership and provides protection to subsequent purchasers acting in good faith. This decision overturned previous rulings and reestablished a crucial balance between safeguarding registered titles and promoting fairness in land transactions.

Article By

AINUN NUR ATIKAH BINTI IBARAHIM

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