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Case Update: Federal Court clarifies Banks Not Obligated to go beyond Land Register

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30 October 2024

LAND LAW
Torrens System - Indefeasibility of Title - Bona Fide Purchaser - Valuable Consideration - National Land Code 1965

Malayan Banking Berhad v Mohd Affandi Bin Ahmad & Anor
Civil Appeal No. 02(f)-5-03/2024(J) | Federal Court
- see the grounds of judgment here

Facts Mohd Affandi Bin Ahmad and Aminah Binti Ahmad (the ‘Respondents’) are the co-administrators of the estate of Ahmad bin Buang (the deceased). The dispute revolves around four lots of land, but only Lots 97 and 716 (referred to as “the two lots”) are the subject matter of this appeal. The deceased had entered into sale and purchase agreements (SPAs) for these lots, paying the full purchase price but the lots were never registered in his name. The deceased claimed to have taken possession of the lots and built structures on them. The original owner and property developer later sold and transferred the two lots to another purchaser (D2) who then became the registered owner and subsequently charged the lots to Malayan Banking Berhad (the ‘Appellant’) to secure a loan. The Respondents argued that the original owner held the lots in trust for the deceased and that the transfers and charge were invalid. At the High Court, the learned Judge found in favour of the Respondents, holding that the original owner was a trustee for the deceased’s estate and had no right to sell the lots. Since the subsequent purchaser was not a bona fide purchaser, and as a result, the charge in favour of the Appellant was invalid. The Court of Appeal upheld the High Court’s decision. Hence this appeal to the Federal Court.

Issues 1. Whether financial institutions, which is a subsequent purchaser like the Appellant, are obligated to go behind the land register to investigate the validity or the lawfulness of the underlying documents of completed sale transactions?
2. Whether the Appellant, in order to qualify as a subsequent purchaser in good faith, had to show that it was impossible for it to have known of the unlawfulness of the sale and purchase transaction even after proper examination of the documents.

Held In allowing the appeal, YA Dato’ Zabariah binti Mohd Yusuf, in delivering the judgement of the Federal Court held that the Appellant, as a chargee, was a subsequent purchaser and was entitled to rely on the land register, which showed D2 as the registered owner of the two lots. There was no requirement for the bank to go beyond the land register and investigate the underlying sale and purchase transactions. The Federal Court emphasized that the Torrens system under the National Land Code guarantees the conclusiveness of the register of titles, and the Appellant was entitled to rely on this principle when granting the loan. Further, the Federal Court held that there was no fraud involved, and the Appellant was a bona fide purchaser for valuable consideration. Therefore, the charge was valid and the Appellant was not required to prove that it was impossible to know of any illegality in the prior transactions. The charge created in favour of the Appellant over the two lots was upheld, and the orders of the High Court and the Court of Appeal were reversed.

Zul Rafique & Partners
{30 October 2024}

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