ISMAIL MOHMAD & ANOR v. ISMAIL HUSIN & 4 ORS

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Land Law - Indefeasibility of title and interests - National Land Code, s. 340(2)

DALAM MAHKAMAH TINGGI MALAYA DI KUALA LUMPUR

BAHAGIAN SIVIL

GUAMAN SIVIL NO. S3-22-868-1999

ANTARA

ISMAIL BIN MOHMAD

SAADIAH BINTI ABDULLAH ... PLAINTIF-PLAINTIF

DAN

ISMAIL BIN HUSIN

ABDUL AZIZ BIN AHMAD

TETUAN SAJALI & AZIZ
(didakwa sebagai sebuah firma)

BANK KERJASAMA RAKYAT MALAYSIA BERHAD

VEST HONG ENTERPRISE SDN. BHD. ... DEFENDAN-DEFENDAN

ALASAN PENGHAKIMAN
(Lampiran 1)

17. The further plank of attack by the plaintiffs is that, the charge is defeasible under s 340(2) (b) on the ground that it was obtained by way of forged document. From the evidence before me, I am satisfied, on balance of probabilities, that the signatures of the plaintiffs both on the charge and the annexure to the charge were forgeries, therefore, I agree with the plaintiffs that the provision of s 340(2) (b) would on the face of it operate against 4^th defendant.

18. S 340(3) provides that where the title or interest of any person or body is defeasible by reason of the circumstances specified in subsection (2) it shall be liable to be set aside in the hands of any person or body to whom it may subsequently be transferred; and any interest subsequently granted thereout shall be liable to be set aside in the hands of any person or body in whom it is for the time being vested. The aforesaid provision is, however, subject to one important proviso that nothing in that subsection shall affect any title or interest acquired by any purchaser in good faith and for valuable consideration, or by any person or body claiming through or under such a purchaser.

19. Learned counsel for the 4^th defendant contended that the 4^th defendant had acquired the interest in the said lands in good faith and for valuable consideration, therefore, the proviso would apply to the facts in the present case. He contended the NLC confers upon purchasers such as the 4^th defendant immediate indefeasibiliy of title or interest. He said the old belief that under our Torrens system that registration does not confer immediate indefeasibility in circumstances falling under s 340 (2) of the NLC is no longer correct as was held by the Federal Court in the landmark case of Adorna Properties Sdn Bhd v Boonsom Boonyanit @ Sun Yok Eng [2001] 1MLJ 241. At pg. 244 the Federal Court stated the position as follows:

"The present National Land Code ("the NLC") was enacted by Parliament in 1965 to be applied to all the states in West Malaysia. In doing so, s 338 of the NLC repealed all earlier land enactments of the states, and those enactments repealed are enumerated in the 11^th Sch to the NLC.

We are aware that any sovereign country may adopt and apply the Torrens system, but in adopting the system, it may modify the system to suit its own needs. Our Parliament did not slavishly follow the wordings of ss 62, 182 and 183 of Land Transfer Act 1952 of New Zealand, nor the wordings of s 42 of the FMS Land Code. Therefore, to follow the arguments in earlier decisions not based on s 340 of the NLC would only lead to utter confusion. We would therefore proceed to interpret s 340 NLC as it stands, and find what the real intention of Parliament was when enacting it, for the object of interpretation is to discover the intention of Parliament, and the intention of Parliament must be deduced from the language used."

Further down at pg. 245 the Court said:

"Subsection (3) says that where that title is defeasible under any of the three circumstances enumerated under sub-s (2), the title of the registered proprietor to whom the land was subsequently transferred under the forged document, is liable to be set aside. Similarly, sub-s 3(b) says any interest under any lease, charge or easement subsequently "granted thereout", ie out of the forged document may be set aside.

However, sub-s (3) of s 340 NLC does not stop there. It contains a proviso.

It is a cardinal rule of interpretation that a proviso to a particular section or provision of a statute only embraces the field which is covered by the main provision. The object of a proviso is to qualify or limit something which has gone before it. Its proper function is to except and deal with a case which would otherwise fall within the general language of the main provision of the statute, and its effect is confined to that case. In other words, the object of a proviso is to carve out from the substantive section or clause of a statute, a class or category of persons or things to whom or to which the main section does not apply. The proviso cannot be divorced from the main clause to which it is attached. It must be considered together with the section or subsection of the statute to which it stands as a proviso.

The proviso to sub-s (3) of s 340 of the NLC deals with only one class or category of registered proprietors for the time being. It excludes from the main provision of sub-s (3) this category of registered proprietors so that these proprietors are not caught by the main provision of this subsection. Who are these proprietors? The proviso says that any purchaser in good faith and for valuable consideration or any person or body claiming through or under him are excluded from the application of the substantive provision of sub-s (3). For this category of registered proprietors, they obtained immediate indefeasibility notwithstanding that they acquired their titles under a forged document.

We therefore, agree with the High Court Judge that, on the facts of this case, even if the instrument of transfer was forged, the respondent nevertheless obtained an indefeasible title to the said lands."

20. The learned counsel for the plaintiffs contended that the decision of the Federal Court in so far as it relates to the interpretation of the proviso to sub-s (3) of s 340 of the NLC is not binding on this court for three reasons. Firstly it was a mere obiter, and secondly because the Court therein failed to consider earlier authorities on the same issue. Thirdly, it is contended that the reasoning of the Court runs counter to express words of the section.

21. On the first point he contended that the High Court did not decide the case on the basis that there was forgery but went on frolic to consider that even if forgery was proved, the defendant nevertheless obtained an indefeasible title to the land in dispute. He contended that forgery was not in issue before the learned High Court Judge, therefore, it was not necessary for the Court to decide on the issue. With respect, I am unable to agree with the learned counsel as I find from my reading of both the judgements of the High Court and the Court Of Appeal, forgery was clearly a point in issue. It was the plaintiff"s case that the defendant"s interest in the land in question is defeasible because it was acquired by way of forged instrument. Reliance was placed on s 340 (2) (b) of the NLC.

22. The learned High Court Judge, in his judgment which is reported in [1995] 2 MLJ 863, at pg 887 said-

"For the above reasons, I hold that even had I found that forgery had been proved beyond reasonable doubt, the defendant is nevertheless protected and has acquired indefeasible title over the said properties by virtue of the proviso in s 340(3) of the NLC. Thus, the law on forgery obtaining in other Torrens systems is also applicable in our Torrens system. It is true that registered landowners should be protected from being divested of their registered interest through fraud or forgery, yet it is also necessary, for the economic well-being of the nation to retain the confidence of prospective innocent purchasers of landed property."

23. On appeal to the Court of Appeal, the Court reversed the finding of the learned trial judge on the premise that the impugned instrument of transfer was a forgery. (See Boonsom Boonyanit v. Adorna Properties Sdn. Bhd. [1997] 2 MLJ 62) Based on that finding the court held that the respondent"s title is not indefeasible under s 340 (2) (b) of the NLC. Gopal Sri Ram JCA in delivering judgment of the court at page 87 observed as follows-

"The New Zealand provisions giving effect to the Torrens doctrine of indefeasibility are therefore fundamentally different from s 340 of the Code. It follows that cases decided under the New Zealand statute must not be treated as concluding the effect of indefeasibility under our law. We do not propose to enter upon a detailed analysis of the differences between the New Zealand provisions and those in the Code. Suffice to say that the sections of the Land Transfer Act 1952 reproduced above, when properly construed, create immediate idefeasibility in favour of an acquirer of land in New Zealand. On the other hand, s 340 of the Code makes defeasible the title of a registered proprietor tainted by one or more of the vitiating elements set out in its second subsection but creates an exception in favour of a bona fide purchaser who takes his title from such a registered proprietor. This bifurcation makes it clear that Parliament intended to confer deferred and not immediate indefeasibility.

That brings us to the rather controversial decision in Doshi v Yeoh Tiong Lay [1975] 1 MLJ 85 at p 88 where Gill CJ (Malaya) appears to have made the following pronouncement which appears to favour the doctrine of immediate indefeasibility under the Code:

I am also of the opinion that third parties can acquire rights where a contract is merely unenforceable and not illegal. Assuming that the loan agreement was illegal so that for that reason the transfer from Chooi Mun Sou to equitable nominees was void, and assuming that that transfer was also void because of the falsity of the attestation clause, registration of the transfer from equitable nominees to the respondent was effective to vest title in him as a registered proprietor notwithstanding that he acquired his interest under an instrument that was void (see Frazer v Walker [1967] 1 All ER 649). In Breskvar v Wall (1972) 46 ALJR 68 at p 70, Barwick CJ said:

"The Torrens system of registered title of which the Act is a form is not a system of registration of title but a system of title by registration. That which the certificate of title describes is not the title which the registered proprietor formerly had, or which but for registration would have had. The title it certifies is not historical or derivative. It is the title which registration itself has vested in the proprietor. Consequently, a registration which results from a void instrument is effective according to the terms of the registration. It matters not what the cause or reason for which the instrument is void. The affirmation by the Privy Council in Frazer v Walker(supra) of the decision of the Supreme Court of New Zealand in Boyd v Mayor of Wellington [1924] NZLR 1174 at p 1223, now places that conclusion beyond question."

It is plain that the learned Chief Justice of Malaya relied upon the decision in Frazer to arrive at his conclusion. As we have pointed out, the Privy Council in that case was considering statutory provisions that bear as much similarity to those in the Code as cheese does to chalk. The observations of Gill CJ (Malaya) in Doshi v Yeoh Tiong Lay above-quoted, made, as they were, without an analysis of s 340 of the Code and an appreciation of the material differences between the New Zealand statute and our written law must be regarded as per incuriam. It therefore comes as no surprise that authors of Malaysian texts upon the subject have unanimously rejected the views expressed by the learned Chief Justice of Malaya in the foregoing passage.

In our judgment, the following opinion expressed by Dr Visu Sinnadurai in his work entitled Sale and Purchase of Real Property in Malaysia accurately summarizes the position that obtains under the Code:

In Malaysia, it is submitted that under s 340 of the National Land Code, deferred indefeasibility applies. The registered proprietor who had acquired his title by registration of a void or voidable instrument does not acquire an indefeasible title under s 340(2)(b). The indefeasibility is postponed until the time when a subsequent purchaser acquires the title in good faith and for valuable consideration. In other words, a registered proprietor, the vendor, under a sale and purchase agreement, even though he himself does not possess an indefeasible title, may give an indefeasible title to a bona fide purchaser.

We would add that the following obiter dictum of Hashim Yeop A Sani J (as he then was) in Mohammad bin Buyong v Pemungut Hasil Tanah Gombak & Ors [1982] 2 MLJ 53 at p 54 reasonably supports the view held by such academic writers as Dr David Wong and Judith Sihombing in their respective works which is to the like effect as that expressed by Dr Visu Sinnadurai:

What the appellant is claiming is in fact the protection of s 340 of the National Land Code. The doctrine carried in s 340 is the doctrine of indefeasibility. What that section protects is that the title or interest of any person for the time being registered as proprietor of any land shall be indefeasible. Subsection (2) of the section provides for the exceptions in that the title or interest shall not be indefeasible in any case of fraud or misrepresentation or where registration was obtained by forgery or by means of an insufficient or void instrument or where the title or interest was unlawfully acquired. This provision deals with what is called "deferred indefeasibility" about which we are not presently concerned."

We express our agreement with the foregoing interpretation placed upon s 340 of the Code by this eminent judge."

24. The Court of Appeal held that the words "any purchaser" in s 340 of the NLC refers to a subsequent purchaser and not an immediate purchaser, hence creating what is often referred to as deferred indefeasibility which only benefits subsequent purchaser.

25. In Adorna Properties Sdn Bhd v Boonsom Boonyanit @ Sun Yok Eng (supra) the Federal Court reversed the decision of the Court of Appeal. It held that by virtue of the proviso to sub-s (3) of s 340 of the NLC, any purchaser for valuable consideration are excluded from the application of the substantive provision of sub-s (3). It said that for this category of registered proprietors, they obtained immediate indefeasible title to the lands. On the facts of the case the Federal Court held that even if the instrument of transfer was forged, the respondent therein nevertheless obtained an indefeasible title to the land. Eusoff Chin CJ at page 245 reasoned as follows-

" Subsection (2) of s 340 NLC uses the word "such". When the word "such" occurs in a section it must not be ignored, but must be read as referring back to the preceding provision — Ellis v Ellis [1962] 1 WLR 227.

Subsection (2) states that the title of any such person, ie any registered proprietor or co-proprietor for the time being, is defeasible if one of the three circumstances in sub-s (2)(a), (b) or (c) occurs. We are concerned here with sub-s (2)(b) where the registration had been obtained by forgery.

Subsection (3) says that where that title is defeasible under any of the three circumstances enumerated under sub-s (2), the title of the registered proprietor to whom the land was subsequently transferred under the forged document, is liable to be set aside. Similarly, sub-s 3(b) says any interest under any lease, charge or easement subsequently "granted thereout", ie out of the forged document may be set aside."

However, sub-s (3) of s 340 NLC does not stop there. It contains a proviso:

26. From the above it is clear that the crucial issue for the consideration of the court is whether the signature was forged. The High Court did not make a clear finding on this, but went on to hold that even if there had been a forgery, the defendant"s title is still indefeasible under the NLC. It is clear from the judgement of the Federal Court that in view of the proviso in sub-section (3) of s. 340 of the NLC any purchaser of land in good faith and for valuable consideration is excluded from the provision of sub-section (3) thereof. It necessarily follows that such a purchaser would obtain an immediate indefeasible title even if the instrument of transfer was forged. I am of the view that the above finding is not a mere obiter but the ratio decidendi in the said case. This is confirmed by the finding of the Federal Court in Adorna Properties Sdn Bhd v. Kobchai Sosothikul (2005) 1 CLJ 565, where an application was made pursuant to r 137 of the Rules of the Federal Court 1995, to set aside the order of the court pronounced on 22 December 2000. Therefore, on that premise I would dismiss the first ground relied upon by the learned counsel for the plaintiffs. Similarly I find no merit in the second and third grounds advanced herein. I am of the view that the decision of the Federal Court is binding on this court despite whatever criticism that may be levelled against it. To hold otherwise would be to go against the principle of stare decisis

27. The good faith of the 4^th defendant was questioned by the learned counsel for the plaintiffs for failing to make enquiry as to the financial standing of the plaintiffs to determine whether they had the capacity to fulfil their obligation under the charge. It is further contended that the 4^th defendant ought not to have accepted the valuation of the property by the valuer of the 5^th defendant without question. All these, he contended, point to the lack of good faith on the part of the 4^th defendant. On the first issue I think it would be going too far to require the 4^th defendant, a bank, to make such an enquiry. It is, in my view, a matter strictly within the discretion of the bank whether to do so or not. Failure to make such an enquiry could not be construed as pointing to the lack of good faith on the part of the 4^th defendant. Similarly, I think, it is for the 4^th defendant whether to accept the valuation done by the 5^th defendant or to have a further valuation done by their own valuer. Failure to do so, could not be treated as evident of lack of good faith on their part.

28. In the circumstances, I hold that the 4^th defendant, being the purchaser in good faith for valuable consideration, had acquired an indefeasible interest in the said lands notwithstanding that the signatures on the charge document and the annexure were forged.

29. Further on the facts I find that it was the 1^st, 2^nd and 5^th defendants who were the cause of the loss suffered by the plaintiffs and on that ground I hold that the 1^st and 2^nd defendants together with the 3^rd defendant, the firm of solicitors in which the 2^nd defendant is a partner, are jointly and severally liable to the plaintiffs for the loss. However, I made no order as against the 5^th defendant as the claim against it had earlier on been withdrawn.

30. On the basis of the foregoing I made the following orders –

prayer (a) of the statement of claim is hereby dismissed;
order in terms of prayers (d) and (e) as against 1^st, 2^nd and 3^rd defendants to be assessed by learned Senior Assistant Registrar with interest at the rate of 8% p.a. from the date of filing of summons to the date of realisation;
aggravated and exemplary damages against the 1^st, 2^nd and 3^rd defendants to be assessed by learned Senior Assistant Registrar;
by consent of the 4^th defendant the liability of the plaintiffs to the 4^th defendant shall be limited only to the said lands;
the 1^st, 2^nd and 3^rd defendants are further ordered to pay the plaintiffs costs and the costs of the 4^th defendant.

( DATO' ARIFIN BIN ZAKARIA )
Federal Court Judge,
Malaysia.

Dated: 25th June 2005

Counsel for Plaintiffs: Jerald Gomez, Jerald Gomez & Associates,

Counsel for 1st Defendant: M. Danish & Ahmad Badri Hj. Idris, Messrs. Ram Reza & Muhammad

Counsel for 2nd & 3rd Defendants: Azlan bin Khamis, Messrs. Nasira Aziz

Counsel for 4st Defendant: Mohd. Fuad Husaini, Messrs. Othman Hashim & Co.