In Setiakon Engineering Sdn Bhd v Mak Yan Tai & Anor (Civil Appeal No. 02(f)-55-09/2023(W)), the Federal Court considered again the issue of indefeasibility of a land title that had been transferred to a subsequent purchaser under section 340(3) of the National Land Code (the “NLC”) and vested in that subsequent purchaser through section 89 of the NLC.
 
The dispute in Setiakon revolved around land in Mukim Batu (the “subject land”) which had originally been owned by the Respondents’ late mother (the “deceased”) since February 1975. The facts of the case are, inter alia, as follows.
 
Upon discovering a change in the mailing address for assessment of the subject land and subsequent investigations, the Respondents found that a change of address form had, unbeknownst to the deceased, been submitted by an unknown person and with a forged signature of the deceased. Some months after submitting a police report and after an unsuccessful application to lodge a private caveat on the land, the Respondents discovered that an originating summons (‘OS’) had been filed against the deceased by one Chia Moy King, acting as attorney of one Lim Moy, to deprive the deceased of her title to the subject land. In the OS, it was claimed by Chia Moy King that the subject land was used as collateral by Lim Moy in respect of a loan that had been granted to her by the deceased to part finance her purchase of the subject land. Chia Moy alleged that the loan had been repaid in full to the deceased, and Lim Moy had forgotten to re-register the land in her name.
 
As the deceased did not file an appearance in response to the OS, a judgment in default (‘JID’) was obtained, granting, among others, a declaration that Lim Moy was the lawful and beneficial owner of the subject land. With the JID, Chia Moy then obtained a cancellation of the deceased’s title and the issuance of a replacement title in Lim Moy’s name as the original owner of the subject land.
 
Less than a month after the JID was obtained, Chia Moy, acting as Lim Moy’s attorney, entered into a sale and purchase agreement with one Paragon Capacity Sdn Bhd (‘Paragon’), whereby it was agreed that the subject land would be sold to Paragon for RM15 million, in cash. Less than three months later, the subject land was transferred to Paragon by Lim Moy. Just over three months after, Paragon then entered into a sale and purchase agreement with the Appellant for the sale of the subject land for RM17 million. The subject land was thereafter registered in the Appellant’s name around three months thereafter.
 
Approximately two years after the registration of the subject land in the Appellant’s name, the Respondents successfully applied to set aside the JID obtained by Chia as Lim Moy’s attorney, and a full hearing for the OS was ordered by the High Court. As stated in paragraph [29] of the majority judgment, “the effect of the setting aside order was to nullify the court order declaring Lim Moy to be the lawful and beneficial owner of the land” and “destroyed the whole substratum of the basis for the cancellation of the deceased’s title and the issuance of a replacement title in Lim Moy’s name, as it was based on the JID…”.
 
As Chia Moy did not appear for the hearing of the OS, it was dismissed, the result of which was, as stated in paragraph [32] of the majority judgment, that Chia Moy’s claim that Lim Moy was the lawful and beneficial owner of the subject land and that the subject land had been used as collateral for the loan remained as “bare allegations totally bereft of evidence”.
 
The Respondents’ Suit against Chia Moy, Paragon and the Appellant
 
In May 2019, the Respondents filed a suit against Chia Moy, Paragon and the Appellant. As set out in paragraph [36] of the majority judgment, the Federal Court found that the Respondents’ suit was founded on the following causes of action.  Although the Appellant had entered appearance in the suit, both Chia Moy and Paragon failed to do so. As a result, and as stated by the Federal Court in paragraph [37], “fraud had therefore been proven against Chia Moy, thus rendering Lim Moy’s title to the land defeasible under section 340(2) and liable to be set aside in the hands of any subsequent purchaser under section 340(3) if the land was not purchased in good faith and for valuable consideration by the subsequent purchaser.”
 
That said, the High Court accepted the Appellant’s defence that it was a bona fide purchaser for value and therefore acquired indefeasible title to the land pursuant to the proviso to section 340(3) of the NLC, and thus dismissed the Respondents’ claim.
 
The Respondents successfully appealed the High Court’s decision in the Court of Appeal, where the Court of Appeal held, among other things, that the setting aside of the JID rendered Lim Moy’s replacement title void ab initio, the titles held by Chia Moy, Paragon and the Appellant were defeasible and ought to be set aside, and the Appellant failed to prove that it was a bona fide purchaser for value.
 
Majority Judgment by YAA Tan Sri Dato’ Abdul Rahman bin Sebli
 
Order 42 Rule 7(2) of the Rules of Court 2012 (“ROC 2012”)
 
The Appellant obtained leave to appeal to the Federal Court based on four questions of law, the last of which the Appellant had submitted was “the central basis for the respondents to impeach the Appellant’s title to the land” (see paragraph [43] of the majority judgment], and was as follows:
 
“Where a judgment in default is set aside but the successful party fails to apply for or obtain an order under Order 42 Rule 7 (2) of the Rules of Court 2012 that the order should take effect from an earlier date, whether it is justifiable to treat all steps taken during the intervening period (being 3 years in this case) in reliance on the default judgment as null and void or void ab initio.”
 
Order 42 rule 7 ROC 2012 provides that a judgment or order of the Court takes effect from the day of its date, and that such judgment or order shall be dated as of the day on which it is pronounced, given or made, unless the Court orders it to be dated as of some other earlier or later day, in which case it shall be dated as of that other day.
 
The Federal Court, in the majority judgment, found that there was no requirement under Order 42 rule 7 ROC 2012 for special leave of the court to be obtained for a judgment to be antedated or postdated (see paragraph [48] of the judgment). At paragraph [51] of the majority judgment, the Federal Court referred to its decision in Sardar Mohd Roshan Khan v Perwira Affin Bank Bhd [2010] 4 MLJ 285, where it was held that the annulment of a bankruptcy had the effect of “[putting] the bankrupt in the same position as if he was never a bankrupt”, despite there being no antedating order. Similarly, the Federal Court found that the effect of the setting aside order obtained by the Respondents “was to wipe out the JID altogether and put the deceased in the same position as if her title to the land was never cancelled and registered in Lim Moy’s name although no antedating order was made by the court”, and therefore it was held that the order did operate retrospectively. This resulted in a “knock-on effect” (see paragraph [68]) of “nullify[ing] and [wiping] out all transactions and dealings in the land, beginning with the fraudulent transfer of the land to Lim Moy”. As a result, the Federal Court cited the tenet nemo dat quod non habet (“no one can give what they do not have”) in holding that “since Paragon could not derive any right or benefit from the void replacement title, it follows that it could not pass the same non-existent right or benefit to the appellant”.
 
At this juncture, it bears noting that the Appellant contended that “it was manifestly unfair for the setting aside order to automatically operate retrospectively as the appellant’s interest in the land was sought to be nullified without being heard” (see paragraph [56] of the majority judgment). The majority judgment dealt with this contention in paragraphs [57] to [61]. Briefly, the Federal Court stated that the issue of a breach of natural justice did not fall within the scope of the leave questions and was not an issue before the High Court and the Court of Appeal, and that the Court’s discretion to allow the raising of new issues outside the scope of the leave questions ought to be exercised sparingly. Nevertheless, it was stated in the majority judgment that the setting aside application “had nothing to do with the validity of the appellant's title to the land which at the time the setting aside application was made was already vested in the appellant by virtue of section 89 of the Land Code” and “the question of the validity and indefeasibility of the appellant's title as a subsequent purchaser was a separate matter which was to be decided at the hearing of the suit filed by the respondents against Chia Moy, Paragon and the appellant.”
 
The Proviso to Section 340(3) of the NLC
 
The Federal Court then considered the remaining three questions of law, all of which revolved around the scope of a subsequent purchaser’s duty to prove that it had acquired its title in good faith and for valuable consideration, as was contended by the Appellant in its defence, such that the proviso in section 340(3), which as summarised in paragraph [77] of the majority judgment “recognises and validates the transfer of a void and defeasible title provided it is acquired in good faith and for valuable consideration by the subsequent purchaser”, would be engaged.
 
The Appellant’s contention was that it had discharged this burden, as all that was required of them under the law was to conduct a land search to ensure that Paragon was the registered proprietor of the subject land and that the subject land was free from encumbrances. The starting point for this contention was section 89(a) of the National Land Code, which provides that “every register document of title duly registered…shall be conclusive evidence that title to the land described therein is vested in the person or body for the time being named therein as proprietor”.
 
The Federal Court, in the majority judgment, ultimately did not accept the contention that the “conclusive evidence” declaration contained within section 89 of the NLC dispenses with the need to carry out due diligence or proper investigation beyond the register document of title. It was stated that such a proposition would be “at odds with the doctrine of deferred indefeasibility”.
 
As seen in, inter alia paragraphs [81] of the judgment, it was held that while section 89 of the NLC confers ownership of title upon a person, it does not confer indefeasibility of title upon them, which is instead conferred by section 340(1) of the NLC (see paragraph [96] of the majority judgment). The Federal Court went on to state, at paragraph [97] of the majority judgment, that “section 340(1) however caveats that the indefeasibility of the title registered under section 89 is subject to the provisions of subsections (2) and (3). What this means is that the title loses its indefeasibility and becomes defeasible if it is vitiated by any of the circumstances specified in subsection (2) but the indefeasibility of the title will be restored under subsection (3) if the land is purchased in good faith and for valuable consideration by a subsequent purchaser but not otherwise.” (emphasis added)  
 
Ultimately, the Federal Court did not disturb the Court of Appeals’ finding that the Appellant had failed to prove its defence that it was a bona fide purchaser for value. In considering the question of whether the Appellant had discharged its burden – a question which the Federal Court did expressly state that there can be “no hard and fast rule” on and which must depend on the facts and circumstances of each case – the Federal Court at paragraph [118] took into account a number of factors in affirming the Court of Appeal’s finding, including, among others, “the haste in which the transfers of title were carried out from the time the title was registered in Lim Moy’s name to the time the land was sold by Lim Moy to Paragon which the appellant had every reason to suspect Paragon had no financial capacity to pay the RM15 million cash to Lim Moy”. The Federal Court found that it was “obvious that the appellant had taken advantage of the “conclusiveness” of title under section 89” and that the Appellant used this “as a convenient excuse to turn a blind eye on the suspicious circumstances surrounding the status of the land”, and cited the Federal Court’s decisions in T Sivam Tharamalingam v Public Bank Bhd [2018] 6 MLJ 1, where it was held that the element of carelessness and negligence negates good faith, and Limputan Simfoni Sdn Bhd v Pembangunan Orkid Desa Sdn Bhd [2019] 1 CLJ 183, where it was held that a 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.”
 
Purported Failure to Plead Fraud
 
The Federal Court also dealt with the question of whether the Respondents had properly pleaded fraud against the Appellant. At paragraph [113] of the majority judgment, it was held that “although the word “fraud” was not used and not pleaded against the appellant…all particulars of the fraudulent and deceitful acts were properly pleaded and disclosed in the respondents’ Statement of Claim in their suit against Chia Moy, Paragon and the Appellant”. In any case, it was held that “there was no necessity for the respondents to plead fraud against the appellant as they were not alleging fraud against it. Their allegation of fraud was against Chia Moy which on the evidence had been proved…”
 
The Federal Court found the sale to Paragon to be a “scam conjured up by Chia Moy…to pave the way for a purchaser like the appellant to purchase the land as “subsequent purchaser” with only one objective in mind, and that was to cleanse the title of the stain that had rendered it defeasible under section 340(2). Once registered in the so-called subsequent purchaser’s name, Chia Moy knew or so he thought that the tainted title would be wiped clean as a whistle, thus clearing the path for him to laugh his way to the bank.” In no uncertain terms, the Federal Court went on to state that “this, it appears, has become the standard operating procedure or modus operandi by fraudsters to deprive unsuspecting landowners of their land as can be seen from the numerous cases that come before this court. It has made a total mockery of the law”.
 
Accordingly, the Federal Court dismissed the appeal with costs, and affirmed the decision of the Court of Appeal.
 
Dissenting Judgment by YA Tan Sri Datuk Nallini Pathmanathan
 
In the minority judgment, it was concluded that the rights of Paragon and Setiakon, were indefeasible “save and unless fraud, forgery, or a void instrument as envisaged under the [NLC] in section 340(2) are established and done so in their presence”.
 
Their Lordships were of the view that construing the order setting aside the JID in a way that “has the effect of rendering Paragon and Setiakon’s titles null and void ab initio” would amount to a breach of natural justice, as Paragon and Setiakon were not included as parties to the application, which would enable the decision to be set aside. Their Lordships cited, among others, the case of Ang Game Hong & Anor v Tee Kim Ti [2019] 6 MLRA 477, where the Federal Court found that the judgment in default and consent order which had deprived the aggrieved party of its registered interest in the subject land had been made in breach of natural justice and therefore could be set aside. Similarly, the minority judgment concludes that “any order rendering the titles of Paragon or Setiakon defeasible in their absence, without according them an opportunity of defending the same, would amount to a breach of natural justice rendering any such order irregular, null and void”. As such, the minority judgment concludes that “the titles of Paragon and Setiakon remained intact until the present suit was initiated with a view to vitiating both Paragon and Setiakon’s title to the land.”
 
It is pertinent to note that the minority judgment was also of the view that as the order setting aside was not specified or ordered by the Court to take effect retrospectively, it did not operate as such.
 
Accordingly, the minority judgment also stated, at paragraph [63] (c), that “as the instrument of transfer from Lim Moy to Paragon and then to [the Appellant] was valid as of the time of transfer to [the Appellant]…it follows that the transfer to [the Appellant] was valid” and that “it would require a plea of fraud, forgery or the use of a void instrument to warrant invoking section 340(2), (3) and the proviso to section 340(3) in aid of invalidating the transfer to [the Appellant]”.
 
In this regard, the minority judgment noted that the statement of claim contained a “clear and express plea premised solely on the effect of the [setting aside] order, namely that it operates retrospectively to nullify all succeeding transfers”, and therefore, in the absence of a plea of fraud, forgery or the use of a void instrument, there would be insufficient basis to set aside the Appellant’s transfer under section 340 or to invoke section 340 of the NLC (see paragraph [63] (d) of the minority judgment).
 
It is noted at paragraph [85] of the minority judgment that while the words ‘fraud’ or ‘forgery’ do not need to be expressly used in the pleading in question, “there must be sufficient material facts set out to justify a plea of fraud or forgery being inferred”. In this regard, the minority judgment pointed to documentary evidence that had been produced by Lim Moy in the initial OS which in its view, cast “doubt on the veracity of the statement that [the deceased] was the registered owner of the land”, including the “possibility that [the deceased]’s title was obtained as security for a loan which was possibly repaid”.
 
As such, the minority judgment took the view that in totality, “the chronology of events may be said to give rise to suspicion, at best. But it is not tenable to maintain that fraud or forgery were established on a balance of probabilities”.
 
Further, the minority judgment’s view on the scope of a subsequent purchaser’s duty to prove that it had acquired its title in good faith and for valuable consideration differed from that of the majority judgment, as described above. At paragraph [111] of the minority judgment, it is stated as follows: “The system…allows for a prospective purchaser such as Setiakon to rely on the register document of title to conclude that the person whose name is registered there has good and indefeasible title to the land. That is the cornerstone of the Torrens system. Any attempt to encroach onto that principle by adding on requirements should be discouraged as this undermines the very basis of the Torrens system.” In any case, the minority judgment took cognisance of the following factors, which it stated at paragraph [116] “should be more than sufficient to address the need for [the Appellant] to act bona fide, so as to fall within the purview of the proviso”: The minority judgment rejected any suggestion that the Appellant is under a duty to ask for proof of payment and other details from Paragon, stating that that would extend the ambit of the duty imposed on prospective purchasers to an unacceptably high burden in derogation from the purpose of the Torrens System, which as the minority judgment puts it, “is meant to move away from a system of investigation of title which requires the prospective purchaser to undertake an intensive and comprehensive review of the entirety of the dealings between the previous purchaser and vendor.”
 
Accordingly, the minority judgment concluded that the appeal should be allowed.
 
 
Case Note by Arif Umar Faruq bin Faiz (Associate) of the Dispute Resolution Practice of Skrine.
 
This article was originally published in the Malaysian Bar Council’s Circular No. 243/2024 and is republished with the kind permission of the Malaysian Bar Publications Committee.