Deferred Indefeasibility is here to stay. But what is its meaning now? Commentary on CIMB v AmBankMay 2019
Deferred Indefeasibility is here to stay. But what is its meaning now?
Commentary on CIMB v AmBank.[i]
By: Abdullah Abdul Rahman[ii]
- The Federal Court in CIMB Bank Berhad v Ambank (M) Bhd 9 CLJ 145 held that a ‘chargee’ comes within the meaning of ‘purchaser’ under the proviso to section 340(3) of the National Land Code (NLC). This is the answer to the leave question. But it was not the real controversy in the appeal.
- The court went on to hold, by a majority opinion, that a charge created in favour of a chargee (‘New Chargee’), who had acted in good faith, was indefeasible as against the earlier chargee (‘Previous Chargee’). This was notwithstanding that the new charge had been created by a borrower who had forged the discharge of the previous charge and who had furnished a forged title of the land for the purpose of registration in the land office.
- Such was the inevitable conclusion when the majority of the Federal Court, after deciding as at  above, held that the rogue borrower was the ‘immediate purchaser’ and the New Chargee the ‘subsequent purchaser’ as envisaged under section 340(3) of the NLC.
- Thus, the Federal Court, by a majority judgment, decided that the New Chargee’s charge created by the rogue borrower was indefeasible and dismissed the appeal of the Previous Chargee.
The background principles
- Under section 340(3), a purchaser (including a chargee), in good faith and for valuable consideration, who derives title or interest (including a charge) in land as a result of a fraud or forgery of another party, is known as the immediate purchaser. A purchaser (including a chargee) who in turn derives title or interest (including a charge) in the land from the immediate purchaser is known as the subsequent purchaser.
- Under section 340(3), the title or interest of an immediate purchaser is defeasible in any event notwithstanding good faith and valuable consideration.
- The title or interest of the subsequent purchaser is also defeasible unless the subsequent purchaser acted in good faith and paid valuable consideration. Under that exception, the subsequent purchaser obtains indefeasible title or interest. In other words, a subsequent purchaser, who acted in good faith and paid valuable consideration, has greater protection than an immediate purchaser.
- The principle set out at  and  above is known as deferred indefeasibility. The contrary principle is known as immediate indefeasibility. This is where the immediate purchaser obtains indefeasibility if he acted in good faith and for valuable consideration notwithstanding that the acquisition was the result of a fraud or forgery.
The dissenting judgment
- The minority dissenting opinion of the Federal Court held that pursuant to section 5 of the NLC, a purchaser (including a chargee) could only be accepted as a purchaser if he had acted in good faith and for valuable consideration. Section 340(3) also requires the immediate purchaser to have acted in good faith and paid valuable consideration in order for the next purchaser to claim indefeasibility. As the rogue borrower lacked good faith, he was not a purchaser at all and in any event, was not the immediate purchaser referred to in section 340(3). That being the case, the New Chargee, according to the minority dissenting judge, was the immediate purchase, not the subsequent purchaser and its title was defeasible.
The rationale of the majority
- The majority of the Federal Court in this case decided that the New Chargee was the subsequent purchaser under section 340(3) because it had lodged the charge created by the rogue borrower only after two earlier steps had been taken, namely, the lodgment of discharge of the Previous Chargee’s charge and the lodgment of the transfer of the proprietorship of the land from the previous owners to the rogue borrower. This was notwithstanding that all three steps were taken on the same day.
- In the circumstances, the majority decided that the Previous Chargee’s interest was extinguished by the forged discharge resulting in the rogue borrower becoming the immediate purchaser. Consequently, the New Chargee was the subsequent purchaser as it derived the new charge from the rogue borrower (held as the immediate purchaser). As the New Chargee was a subsequent purchaser in good faith and for valuable consideration, the new charge was held to be indefeasible.
- Both the majority and the minority judgments were given on the professed basis that section 340(3) of the NLC provides for deferred indefeasibility of title as held in Tan Ying Hong v Tan Sian San & Ors 2 CLJ 269 which overruled the earlier Federal Court decision in Adorna Properties Sdn Bhd v Boonsom Boonyanit 2 CLJ 133 which had held in favour of immediate indefeasibility. On that basis, it is expected that any future arguments that section 340(3) provides for immediate indefeasibility will still be a difficult proposition.
- However, it will be interesting to watch how deferred indefeasibility will be interpreted from now on, particularly in cases involving charges.
[i] This commentary was first published under a different title in LinkedIn on 27 October 2017.