ILLEGAL MONEY LENDING – SPA AND MOT AS SECURITY FOR THE LOAN

I took a loan from Mr. X (who is not a licensed money lender). Mr. X asked me to execute a Sale and Purchase Agreement (“SPA”) and Memorandum of Transfer (“MOT”) of my property to him as security for repayment of the loan. Later, I discovered that my property was transferred to Mr. Y. Can I recover back my property and have it re-registered in my name?
Yes.

• The SPA and MOT which was executed to facilitate for the property to be used as security for a loan is illegal.
• SPA and MOT cannot be used as façade to a money lending transaction.
• SPA and MOT as security to a jual janji transaction is not recognized by the National Land Code 1965 (“NLC 1965”).
• It is sham agreement to cloak the true intention of the parties which is illegal. Therefore, the entire transaction in the SPA and MOT is void.

But the property has been transferred to Mr. Y who is not the money lender. Does he have a good title?
Depends.

• Section 340(2)(c) of the NLC 1965 provides that the title or interest of a registered proprietor is indefeasible when it is “unlawfully acquired”. As such, the title to Mr. X is defeated.
• If the property is transferred from Mr. X to Mr. Y, Mr. Y has to prove that he is a bona fide purchaser for valuable consideration. If he can do that, his title cannot be set aside. This is provided in Section 340(3) of the NLC 1965.
• Remember, the burden of proof that he is a “bona fide purchaser with valuable consideration” is on Mr. Y.

What is a bona fide purchaser for valuable consideration?

• Bona fide implies good faith, upright mental attitude and clear conscience of a person. It requires Mr. Y to show that he has exercise ordinary prudence of a reasonable man when acquiring the property. Good faith contemplates “honest effort” to ascertain the property he acquires is not tainted with an illegality, fraud or fraudulent design.
• If the court is not satisfied with Mr. Y’s honest effort, it cannot be said he is a “bona fide purchaser”.
• “Valuable consideration” requires proof of payment of the purchase price of the property. Bank record of payment is crucial to establish valuable consideration. Cash payments would raise doubt especially on the elements of good faith.

Case in point: Pannir Selvam a/l Sinnaiyah & Anor v Tan Chia Foo & Ors [2021] 7 MLJ 384. High Court (Johor Bahru) – Civil Suit no: JA-22NCvC-273-12 of 2017