INTRODUCTION
Malaysia’s land law is governed by the Torrens System, which establishes registration as the cornerstone of land ownership. Malaysia adheres to a system of deferred indefeasibility, where those holding registered titles have paramount authority, reinforcing the notion that “registered title is king”.
However, exceptions to this principle exist. Section 340(2) of the National Land Code (NLC) states that a registered title may not be indefeasible in cases of fraud, misrepresentation, forgery, or if the title was acquired unlawfully or through a void instrument.
The recent Federal Court decision in Setiakon Engineering Sdn Bhd v Mak Yan Tai & Anor [2024] MLJU 1853 highlighted these exceptions. The case involved a land dispute in Mukim Batu, where the land, originally owned by the respondents’ late mother, was fraudulently transferred, leading to a legal battle over the indefeasibility of the title held by subsequent purchasers
CASE FACTS
The land in question was initially registered in Wong Soo’s name as security for a loan to Lim Moy, which may have been repaid in full (given the documentary evidence before the Court). In 2014, an application to the High Court (HC) via an originating summons, was made by Lim Moy through her attorney, for a declaration that Lim Moy was the rightful owner of the land, and that the land ought to be transferred back from Wong Soo to Lim Moy, as the loan was repaid in full. A judgment in default (JID) was granted in favour of Lim Moy, leading to the land being registered under Chia Moy on behalf of Lim Moy.
A month thereafter, Lim Moy sold the land to Paragon Capacity Sdn Bhd (“Paragon”) for RM15 million. In January 2015, the land was registered in the name of Paragon. In March or April 2015, Setiakon Engineering Sdn Bhd (“Setiakon”) (the appellant in this case), bought the land from Paragon and the land was subsequently registered in Setiakon’s name. In July 2017, Mak Yan Tai and Mak Kum Phoi (the respondents in this case) applied to the HC to set aside the JID obtained by Lim Moy on 2014. In November 2017, the HC allowed the setting aside of the JID obtained by Lim Moy, as neither Lim Moy nor Chia Moy were present to contest when the JID was set aside.
In May 2019, Mak Yan Tai and Mak Kum Phoi commenced a fresh suit against Lim Moy, Paragon, and Setiakon in the HC (only Setiakon defended the suit). The HC initially ruled in favour of Setiakon as a subsequent purchaser under section 340(3) of the NLC. However, the Court of Appeal (COA) overturned the HC’s decision on the following grounds:
- the effect of the order setting aside the judgment as of 2017, had the effect of rending all dealings in the land from 2014 until that date null and void ab initio; and
- while the COA agreed with the HC that Setiakon was a subsequent purchaser, the COA ruled that Setiakon failed to discharge its onus of establishing that it was a bona fide purchaser for value without notice, as Setiakon ought to have taken further steps to investigate the sale and purchase transaction between Lim Moy and Paragon for RM15 million, suggesting that a deeper inquiry could have revealed potential problems with the title.
Dissatisfied with the COA’s decision, Setiakon filed for leave to appeal to the Federal Court (FC) and leave was granted, however, the appeal was dismissed, and the decision of the COA was affirmed.
In its majority decision, the FC uncovered a fraudulent scheme involving Chia Moy, Lim Moy, and Paragon, who used falsified documents to secure a JID, which JID was then exploited to transfer the land first to Paragon and then to Setiakon. The FC also highlighted several indicators of fraud, including Paragon’s low pre-tax profit despite a RM15 million cash payment, the youth of its directors, and its incorporation just before the JID was obtained. Consequently, the FC held that Wong Soo remained the rightful owner of the land, declaring the transactions involving Paragon and Setiakon void from the outset (void ab initio).
Regarding Setiakon’s position as a subsequent purchaser, the FC found it did not qualify as a bona fide purchaser for value without notice. Despite Setiakon’s due diligence claims, the FC concluded that Setiakon failed to establish that it was unaware of the fraudulent nature of the prior transactions given the clear fact there was no evidence indicating that Paragon had actually paid the RM15 million purchase price to Lim Moy, and the fact that Paragon did not actually have RM15 million in cash to purchase the land. This meant that the purported purchase of the land by Paragon was not only lacking in good faith but also lacking in valuable consideration. Therefore, Setiakon’s title was deemed defeasible under section 340(2) and (3) of the NLC, reflecting that even subsequent purchasers must meet strict standards to claim indefeasibility.
CONCLUSION
The FC’s decision emphasizes that, although registration under the Torrens System is fundamental, it does not offer absolute protection against claims rooted in fraud or other unlawful actions. The key takeaway is the crucial necessity for subsequent purchasers to undertake thorough due diligence when acquiring land, regardless of how bona fide the purchase may appear.
Even a seemingly genuine purchase does not absolve buyers of the responsibility to thoroughly investigate the property’s history and ownership to safeguard against potential fraud or disputes.
This article is authored by Tan Wei Yong.
It contains general information only. The contents are not intended to constitute legal advice on any specific matter nor is it an expression of a legal opinion and should not be relied upon as such.