Immediate Proprietor/Interest Holder vs Subsequent Proprietor/Interest Holder

Puthan Perumal presents a legal commentary section 340(3) of the National Land Code 1965.

Introduction

The Federal Court in Tan Ying Hong v Tan Sian San & Ors (2010) 2 MLJ 1 expressly overruled its earlier decision of Adorna Properties Sdn Bhd v Boonsom Bonyanit @ Sun Yok Eng (2001) 1 MLJ 241, and re-stated the current position in law in that the proviso appearing in sub-s (3) of s340 of the NLC does not apply to sub-s (2) of s 340 of the NLC.

In essence, what the Federal Court said was this: An immediate proprietor/interest holder (by virtue of s340(1) NLC) does not enjoy immediate indefeasibility but deferred indefeasibility in that that immediate title/interest can be defeated (by virtue of s340(2) NLC). It further held that subsequent transfer of title is liable to be set aside (by virtue of s340 (3)(a) NLC)  and any interest subsequently granted thereout is liable to be set aside (by virtue of s340(3)(b) NLC). The protection provided by Parliament (by virtue of the proviso s 340(3) NLC) is only for subsequent purchasers who acquire title or interest in good faith and for valuable consideration.

However, there was a remark by the Federal Court in Tan Ying Hong at page 13 para 26 which requires further clarification. That remark was made in reference to a Court of Appeal case of OCBC Bank (M) Bhd v Pendaftar Hakmilik, Negeri Johor Darul Takzim (1999) 2 MLJ 511. It is to be noted that the Federal Court in Tan Ying Hong did not overrule the case of OCBC. The Federal Court said this:

“[26] NH Chan JCA in delivering the judgment of the Court of Appeal was of the opinion that the proviso to s340(3) of the NLC applies exclusively to those situations which are covered by sub-s(3). The court then went on to hold that the charge granted by Ng See Chow to the appellant was liable to be set aside by the true owner since the title was obtained by forgery. On the facts of that case, we agree that the title of Ng See Chow is defeasible under s340(2) of the NLC as he obtained his title through a forged instrument. However, we are of the opinion that the appellant bank, being the holder of subsequent interest in the land is protected by the proviso to S340(3) of the NLC. For that reason we are of the view that the finding of the Court of Appeal in that case is to that extent flawed.”

This article is focused on a discussion as to in what circumstances does one become an immediate proprietor/interest holder and likewise, a subsequent proprietor/interest holder. For the purposes of this discussion, the interest hereafter referred to is a charge.

THE OCBC’s case (1999) — Court of Appeal

1. The facts of  the OCBC case is fairly simple. The true proprietor of the land in question was one Mr. Ng Kim Hwa. Somehow, one Ng See Chow, by means of forgery of the instrument of transfer, obtained title of the said land in his name. The said Ng See Chow thereafter had created a charge in favour of OCBC Bank (M) Bhd. In setting aside both the transfer in favour of Ng See Chow and the charge created by Ng See Chow in favour of OCBC, NC Chan JCA held at page 521 para C:

“So that, since a forged instrument (such as a forged transfer) is a nullity, it does not confer any right or title to the land. A person who has no right or title to the land has no right to charge it because the land is not his, in the first place, for him to grant any interest (like a charge or a lease) in the land to someone else (such as a charge or a lessee).

2. The important words appearing in the above judgment of NH Chan JCA that calls for consideration is “grant any interest”.

3. In the OBCB case, the immediate proprietor whose title was sought to be defeated was Ng See Chow. Now, Ng See Chow created a charge, or to put it in another way, granted an interest to OCBC. What then was the position of OCBC? Were they an immediate interest holder, as was the finding of NH Chan JCA, or a subsequent interest holder, as was the opinion of the Federal Court in Tan Ying Hong?

4. To answer this important question, we shall have to look at Section 340(3) of the NLC. It says:

“(3)   Where the title or interest of any person or body is defeasible by reason of any of the circumstances specified in subsection (2) -

(a) it shall be liable to be set aside in the hands of any person or body to whom it may subsequently be transferred; and

(b) 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:

Provided that nothing in this 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.

5. NH Chan JCA in the OCBC case gives his interpretation of S340(3) of the NLC at page 522-523 para H-I:

“What it means is this: Where a registered title or interest is rendered defeasible of any of the circumstances specified in s 340(2), the title (in the hands of any person) to whom it is subsequently transferred may still be liable to be set aside under s 340(3)(a) and any interest (for example, any charge or lease) subsequently granted thereout by the subsequent proprietor or holder in s 34003)(a) is also liable to be set aside under s 340(3)(b).This is because the grantee in such a case is a person in whom the interest is for the time being vested (see s 340(3)(b). However, if the subsequent proprietor or holder in s 340(3)(a) is a purchaser in good faith and for value his title or interest will be indefeasible because the proviso to s340(3) will then apply to him.”

6. NC Chan JCA then quotes Teo Keang Sood and Khaw Lake Tee at page 524 :

“…By way of illustration, take for instance a case where B fraudulently transferred to himself a piece of land which belonged to A. By virtue of s 340(2)(b), B’s title is liable to be set aside at the instance of A on the ground of fraud[forgery]. Assuming that B transfers the same piece of land to C, C’s title is also liable to be set aside by A [under s 340(3)(a)] and so is any interest, for example any charge or lease, granted by C [under s340(3)(b)] unless C is a purchaser in good faith and for value [see the proviso to s 340(3)] in which case his title or interest will be indefeasible.”

7. Therefore, what can be gathered from the Court of Appeal’s judgment is this: An immediate proprietor can only grant out an immediate interest (charge). A subsequent proprietor can only grant out a subsequent interest (charge). An immediate proprietor/immediate charge holder does not enjoy the protection given by the proviso appearing in s 340(3) simply because that protection is only for a subsequent proprietor/subsequent charge holder.

The TAN YING HONG case 2010 — Federal Court

1. So why then did the Federal Court in Tan Ying Hong comment: “…However, we are of the opinion that the appellant bank, being the holder of subsequent interest in the land is protected by the proviso to s 340(3) of the NLC.”?

2. One explanation that comes to mind is perhaps the oversight on the part of the Federal Court in Tan Ying Hong of the word “it” appearing at the beginning of s 340(3)(a) and the word  “and” appearing and the end of s 340(3)(a) of the NLC.

3. At para 50 of the Tan Ying Hong case, the Federal Court said:

“As we see it, sub-s(3) merely provides that any title or interest of any person or body which is defeasible by reason of any of the circumstances specified in sub-s (2) shall continue to be liable to be set aside in the hands of subsequent holder of such title or interest. This subsection, however, is subject to the proviso….”.

4. And at para 52, the Federal Court said:

“Furthermore, even though sub-s(3)(a) and (b) refer to the circumstances specified in sub-s(2) they are restricted to subsequent transfer or to interest in the land subsequently granted thereout. So it could not apply to the immediate transferee of any title or interest in any land.”

5. The word “it” appearing at the beginning of s 340(3)(a) refers to a title or interest which is defeasible under 340(2). So it can be read in two ways.

6. Firstly, where the title of any person (immediate proprietor) is defeasible by reason of any of the circumstances specified in subsection (2), it (the immediate title) shall be liable to be set aside in the hands of any person or body to whom it (the immediate title) may subsequently be transferred (to a subsequent proprietor) AND any interest subsequently granted thereout (by the subsequent proprietor) shall be liable to be set aside in the hands of any person or body in whom it (the subsequent interest) is for the time being vested (in the subsequent interest holder). The subsequent proprietor and the subsequent interest holder enjoy the protection of the proviso.

7. Secondly, where the interest of any person (immediate interest holder) is defeasible by reason of any of the circumstances specified in subsection (2), it (the immediate interest) shall be liable to be set aside in the hands of any person or body to whom it (the immediate interest) may subsequently be transferred ( to the first subsequent interest holder) AND any interest subsequently granted thereout (by the first subsequent interest holder) shall be liable to be set aside in the hands of any person or body in whom it (the second subsequent interest) is for the time being vested (in the second subsequent interest holder). The first subsequent interest holder and the second subsequent interest holder enjoy the protection of the proviso.

8. Therefore, from the facts of the OCBB case, Ng See Chow (fraudster) was the immediate proprietor. He never transferred his immediate title to any person or body. So there was no issue of a subsequent proprietor, and so it follows that there was no issue of subsequent interest granted by a subsequent proprietor. His immediate title was defeasible under s 340(2) NLC. There was no issue of s 340(3) NLC or any protection under the proviso to s 340(3) NLC.

9. However, Ng See Chow also granted charge in favour of OCBC. This charge is an immediate interest. OCBC was an immediate interest holder. OCBC never transferred their immediate interest to any person or body , so it follows that there was no issue of subsequent interest being granted by OCBC. This immediate interest of OCBC was defeasible under s340(2). There was no issue of s340(3) NLC or any protection under the proviso to S340(3) NLC.

10. Similarly, the facts of Tan Ying Hong are as follows and is also fairly simple. The true owner of the land in question was one Tan Ying Hong. One Tan Sian San, purporting to act under a power of attorney, which the true owner did not sign, executed two charges in favour of UMBC to secure two loans.

11. The Federal Court held at page 21 para 50 as follows:

[55]   Reverting to the facts of this case, it is not in dispute that the two charges in favour of the third respondent (UMBC) were based on void instruments as the relevant Form 16A were not executed by the appellant. They were executed by the first respondent pursuant to a forged PA. Thus, the charge instruments (Form 16A) used in the present case were indisputably void instruments. It follows, therefore, that the two charges in this case are liable to be set aside under s 340(2)(b) since they are based on void instruments.

[56]   The third respondent (UMBC) is an immediate holder of these charges. That being the position, the third respondent could not take advantage of the proviso to sub-s (3) of s 340.”

12. It is important, at this juncture, to recapture the comments of the Federal Court in Tan Ying Hong on the OCBC case:

“[26]  ……On the facts of that case, we agree that the title of Ng See Chow is defeasible under s 340(2) of the NLC as he obtained his title through a forged instrument. However, we are of the opinion that the appellant bank, being the holder of subsequent interest in the land is protected by the proviso to S340(3) of the NLC. For that reason we are of the view that the finding of the Court of Appeal in that case is to that extent flawed.”

13. The question that arises is this: Why then did the Federal Court in Tan Ying Hong’s case comment that OCBC was a holder of a subsequent interest in land in the OCBC case, but strangely found on Tan Ying Hong’s facts that UMBC was an immediate holder a charge, when both the charges in the OCBC case and in the Tan Ying Hong case were executed by someone other than the true owner of the land?

14. Whatever the reasons may be, the principles of statutory interpretation dictate that a construction of a statute must be such that it should not lead to the defeat in the purpose of the statute, and should not cause injustice or hardship or absurdity.

15. The very purpose of Section 340 of the NLC is to protect registered proprietors of land by affording them certainty of titles. This would inevitably mean title free of encumbrances, just as it was prior to any fraudulent or unwanted dealing.

16. The Court of Appeal in Au Meng Nam & Anor v Ung Yak Chew & Ors (2007) 4 CLJ 562 held:

“When a court interprets a statute, particularly one which confers rights upon or grants protection to persons generally or a class, its duty is to derive a meaning that is fair, or in accordance with the purpose of the particular Act of Parliament. Put differently, an interpretation should not be placed which will produce an unsatisfactory or unfair result.”

17. The Federal Court in Tan Ying Hong , by its comment on the OCBC case, seem to suggest that a transfer instruments executed by certain rogue for an alleged transfer of property, can be set aside by the true owner; however, the charge instruments, executed by that very same rogue, cannot be set aside by the true owner. This cannot possibly be what Parliament had intended in drafting section 340 of the NLC in protecting registered proprietors.

18. Reference is made to Principles of Statutory Interpretation by Guru Prasanna Singh 9^th Ed 2004:

“The words of a statute, when there is doubt about their meaning, are to be understood in the sense in which they best harmonise with the subject of the enactment and the object which the Legislature has in view….The courts have declined ‘to be bound by the letter, when it frustrates the patent purpose of the statute’.

“A construction that results in hardship, serious inconvenience, injustice, absurdity or anomaly or which leads to inconsistency or uncertainty and friction in the system which the statute purports to regulate has to be rejected and preference should be given to that construction which avoids such results.’

“If the grammatical construction leads to some absurdity or some repugnance or inconsistency with the rest of the instrument, it may be departed from so as to avoid that absurdity and inconsistency. Similarly, a construction giving rise to anomalies should be avoided. As approved by Venkatarama Aiyar J, ‘where the language of a statute, in its ordinary meaning and grammatical construction, leads to a manifest contradiction of the apparent purpose of the enactment, or to some inconvenience or absurdity, hardship or injustice, presumably not intended, a construction may be put upon it which modifies the meaning of the words, and even the structure of the sentence.”

“It has already been seen that a statute must be read as a whole and one provision of the Act should be construed with reference to other provisions in the same Act so as to make a consistent enactment of the whole statute. Such a construction has the merit of avoiding or repugnancy either within a section or between a section and other parts of the statute. It is the duty of the courts to avoid ‘a head on clash’ between two sections of the same Act and ‘whenever it is possible to do so, to construe provisions which appear to conflict so that they harmonise’. It should not be lightly assumed that Parliament had given with one hand what it took away with the other…. The same rule applies in regards to subsections of a section. In the words of Gajendragadkar J: The subsections must be read as parts of an integral whole and as being interdependent; an attempt should be made in construing them to reconcile them if it is reasonably possible to do so, and to avoid repugnancy.”

CONCLUSION

1. It therefore remains unclear whether charge instruments executed by a person who comes onto a title by illegal means specified in s 340(2) NLC can be set aside or not by the true owner. What is clear is that the transfer documents executed by that person can be set aside by the true owner. This leaves the true owner with the nightmare of having a charge on his or her title, due to no fault of his or hers.

2. It is the author’s humble view that the comment or remark by the Federal Court in the Tan Ying Hong case on the OCBC case is merely obiter.

3. It also remains unclear whether the chargee bank, which is granted an interest by an immediate proprietor who is not the true owner, is, in law, an immediate interest holder or a subsequent interest holder. Consequently, one cannot be sure as to whether the proviso to s 340(3) NLC applies to chargee banks. The Court of Appeal in Abu Bakar Ismail & Anor v Ismail Husin & Ors & Other Appeal (2007) 3 CLJ 97 had this to say at page 113 para 14:

“…No question arises on this part of the case as to whether the fourth defendant (chargee bank) is a bona fide purchaser who is protected by the proviso to s 340(3) of the Code and I therefore find it unnecessary to consider the effect, if any, of the proviso. In any event, even if the proviso is applicable to the fourth defendant (which I do not think to be the case), the fourth defendant is not a bona fide purchaser because it is bound by the acts of its agents.”

4. In this regard, until there is a decision from the apex court of clarifying this position, or a possible amendment to s340 NLC, this uncertainty will continue.

- Loyarburok