NBS Bank Limited v Mafunga (22 of 2012) [2016] MWSC 139 (25 May 2016);

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MALAWI JUDICIARY

IN THE MALAWI SUPREME COURT OF APPEAL

SITTING AT BLANTYRE

MSCA CIVIL APPEAL NO. 22 OF 2012

(Being High Court Commercial Cause No. 2 of 2012, Blantyre Registry)

 

BETWEEN

NBS BANK LIMITED ............................................................................. APPELLANT

AND

DYLAN MAFUNGA

(For and on Behalf of FANNY CHIUNDA KANDOJE) ......................... RESPONDENT

 

CORAM: HONOURABLE JUSTICE L.G. MUNLO SC, CHIEF JUSTICE

                HONOURABLE JUSTICE DR. J.M. ANSAH SC, JA

                HONOURABLE JUSTICE R.R. MZIKAMANDA SC, JA

                Mpaka …………………………………….. for the Appellant

                Malijani ………………........................ for the Respondent

                Minikwa ......................................... Recording Officer

 

Hon. Justice Twea SC, JA: This is a unanimous judgment of this Court comprising Honourable Justice Munlo SC, Chief Justice( now retired), Honourable Justice Dr. Ansah SC, JA and Honourable Justice Mzikamanda SC. JA. I am sitting in only to for the purpose of fulfilling the coram for the purpose of delivering the judgment in place of the retired Chief Justice. The judgment will be read by Justice Mzikamanda SC.

JUDGMENT

Mzikamanda Sc JA

On 3rd August, 2012, Katsala J ordered the rectification of the Land Register by directing that the registration of a charge in favour of the appellant Bank be cancelled on the ground that the said registration had been obtained by fraud. The learned Judge proceeded to make various declarations in favour of the respondent with respect to the concerned land, property Title Number Chilomoni 5/89. The appellant was dissatisfied and it appealed to this Court against the entire judgment.

There are two grounds of appeal. The main ground of appeal is that the Judge in the Court below erred in fact and in law when he held that the registered surety charge in question was ineffective on account of invalidity under the general law for forgery of the preceding powers of attorney used in creating the charge, notwithstanding the want of pleading or proof of the statutory prerequisite to the rectification of a land register against the appellant as proprietor of a registered charge.

The second ground of appeal is of a general nature, namely, that the decision of the Court below was against the logic and total weight of the evidence generally. The appellant seeks an order reversing the decision of the Court below in its entirety in so far as it effectively removes the appellant as proprietor of the registered charge.

The respondent commenced the present action in a representative capacity. The facts of the case are largely not disputed. They are that in January 2003 the mother of the respondent, Fanny Kandoje Chiunda, obtained a title deed to a piece of land known as Plot Number CSS/15/9, being Title Number Chilomoni 5/89, in the City of Blantyre. On November 15, 2003, Fanny Kandoje Chiunda left Malawi for the United States of America to work and has remained there ever since.

The respondent got a rude awakening on 26th January, 2012, when the Bank published an advertisement in the Daily Times newspaper of its intention to sell the property Title Number Chilomoni 5/89 by tender. Upon inquiry, it transpired that a Pastor Robby Wales Kaombe of the Living Waters Church, who became the 1st defendant in the action in the Court below, borrowed money from the Bank and pledged the property as security. All this happened without the knowledge of the respondent or the owner of the property.

It also transpired that on 3rd January, 2005, Pastor Robby Wales Kaombe, or someone acting on his behalf, caused to be executed a power of attorney purportedly signed by Fanny Kandoje Chiunda, executed in the presence of a Notary Public in Malawi, authorizing the said Pastor Robby Wales Kaombe to use the property as collateral for borrowing money not exceeding K1,000,000 from the Bank. Using this power of attorney he borrowed the sum of K 1,000,000 from the Bank and executed a surety charge in the name of Fanny Kandoje Chiunda.

Again, on or about November 4, 2008, he, or someone acting on his behalf, caused to be executed a second power of attorney before a Notary Public in Malawi purportedly by Fanny Kandoje Chiunda, authorizing him to use the property as collateral for borrowings of unlimited amounts. The Bank advanced further sums on him on the authority of the second power of attorney but no further surety charge was executed. The Pastor defaulted on the loans and the Bank proceeded to take steps towards the realization of the security through the advertisement of January, 2012. As it turned out, at no point since 2003 was Fanny Kandoje Chiunda in Malawi to be able to appear before any Notary Public in this country. The Court below abhorred the conduct of the Notary Public in this matter while noting that the said conduct was subject of police investigations.

The case for the Bank was that Pastor Robby Wales Kaombe presented to it the two powers of attorney together with the original title deed for the property when he applied for the Bank loans. Upon examination of the documents the Bank had no reason to doubt their authenticity and they acted upon them. Charge number 2207/2008 was duly registered with Blantyre Land Registry in the name of Fanny Kandoje Chiunda. The Pastor defaulted and as of February 2012 sums in excess of K6,000,000 remained outstanding.

At the hearing of this action Pastor Robby Wales Kaombe opted not to contest the matter. Neither him, nor his legal representative, attended the hearing nor did he file any affidavits in opposition. More particularly, he did not challenge the allegation that the powers of attorney were fraudulent and that the charge was obtained fraudulently. The Court below found that the alleged forgeries on the powers of attorney and on the surety charge executed by Pastor Robby Wales Kaombe in this case were established without contention. The question before the Court below therefore was what effect the admitted forgeries had on the surety charge. The Bank argued that any issues on the property as alleged by the respondent were between the said respondent and Pastor Robby Wales Kaombe but that they did not invalidate the surety charge duly executed and registered at the Blantyre Land Registry. It relied on section 25 of the Registered Land Act in arguing the indefeasibility of the charge.

It is clear from the record that the charge, the subject matter of this appeal, was created on the basis of fraudulently prepared powers of attorney. As both counsel agree, this appeal turns on the correct interpretation and application of sections 25 and 139 of the Registered Land Act, hereinafter referred to as the Act. The relevant part of section 25 of the Act provides that:

"The rights of a proprietor, whether acquired on first registration or whether acquired subsequently for valuable consideration or by an order of court, shall be rights not liable to be defeated except as provided in this Act and the Land Act and shall be held by the proprietor, free from all other interests and claims whatsoever, but subject-

(a) to the leases, charges and other encumbrances, if any, shown in the register; .... "

Section 139 of the Registered Land Act provides that:

"(1) Subject to subsection (2), the court may order rectification of the register by directing that any registration be cancelled or amended where it is satisfied that any registration including a first registration has been obtained, made or omitted by fraud or mistake.

(2)The register shall not be rectified so as to affect the title of a proprietor who is in possession or is in receipt of the rents or profits and acquired the land, lease or charge for valuable consideration, unless such proprietor had knowledge of the omission, fraud or mistake in consequence of which the rectification is sought or caused such omission, fraud or mistake or substantially contributed to it by his act, neglect or default. "

In arguing the appeal, counsel for the appellant stated that on the authority of section 25 of the Registered Land Act, the appellant has an indefeasible charge whose supremacy and indefeasibility is symbolized by section 29B of the said Act providing for the production of land certificate. The appellant conclusively became chargee over title number Chilomoni 5/89. We hasten to say that we are unable to see the relevance of section 29B to the issues we must deal with here.

It was further argued that the statutory reason for defeating any registration as contained in section 139 of the said Act is subject only to fraud or mistake. In this connection, counsel conceded that there can be no doubt that a property owner whose title deeds got into wrong hands would be entitled to have the charge removed under section 25 of the Registered Land Act. He asked this Court to find that on the true construction of section 139 of the Registered Land Act, the appellant could only lose its otherwise indefeasible rights under section 25 of the said Act if it was alleged and proved that at the time it became chargee, the Bank had knowledge of or had caused or substantially contributed to the fraud by Pastor Robby Wales Kaombe. It was not an issue at all whether the Bank had knowledge or had caused or had substantially contributed to Pastor Kaombe's fraud. In view of the fact that the Bank expressly indicated that with a power of attorney and the original title deeds in his hands it had no knowledge of or reason to suspect fraud on the part of the borrower. The Court below could not and did not go into discussion whether the Bank was guilty of causing or substantially contributing or knowledge of the Pastor's fraud. The Court below committed an error of law in ordering the cancellation of the Bank as charge without any finding of knowledge of or causing or substantially contributing to the borrower's fraud. The prayer is that the whole of the judgment of the Court below be overturned.

Counsel for the respondent argued that a forged document is a nullity at law and, technically, is non-existent. No person can obtain proprietorship or indefeasible rights or interests under a forged document, notwithstanding subsequent registration under any law. It cannot lose its nullity and become authentic upon it being registered under any law. He argued that the use of the word proprietor under section 25 of the Act does not extend to a chargee, notwithstanding the definition of "proprietor" under section 2 of the Act. Interests of a lessee or a chargee are treated as an encumbrance under section 25 of the Act. He drew the attention of the Court to the use of proprietor in section 60(1) of the Act and also section 60(4) of the Act to buttress his point. Since a charge does not operate as a transfer of title, but only has effect as security, title to land does not pass to a chargee. The charge is only registered as an encumbrance to secure a debt. A chargee does not obtain title to land.

As to the proper construction of section 139 of the Registered Land Act, it is not any registration that the court is precluded from making a rectification based on knowledge, causing or substantial contribution to the fraud of the borrower. It is only where the rectification affects the title of a proprietor that the court would then fall into scrutiny of whether that proprietor had knowledge of, caused or substantially contributed to the fraud or mistake. Thus the Court below rightly and lawfully ordered the cancellation of the charge without any finding that the chargee had knowledge of, caused or substantially contributed to the borrower's fraud, so counsel argued.

Both counsel for the appellant and for the respondent have invited this court to attach some interpretation to the two provisions of the Registered Land Act in so far as such interpretations suit their case. We have no intention of attaching any meaning to the provisions other than that which is the plain, ordinary and natural on the true construction of those provisions. Neither are we prepared to be restrictive in our interpretation of the provision where such restrictive interpretation would lead to absurdity. It is clear to us that the Court below ordered the cancellation of the charge pursuant to section 139(1) of the Act. Such cancellation is not of the type that would affect title to the property in so far as the owner is concerned. Accordingly section 139(2) of the Act is not relevant for the purposes of this matter. We will discuss section 139(1) of the Act latter in this judgement. For what it is worth, we will also consider the issue of knowledge of the fraudulent power of attorney on the part of the appellant and how that affected the charge.

Section 25 of the Act provides for the indefeasibility of the rights of the proprietor except as provided for in the Act and the Land Act. Those rights shall be held by the proprietor free from all other interests and claims, but subject to third party rights shown on the register. These third party rights are classified as encumbrances. In Nkuluzado v Malawi Housing Corporation [1999] MLR 302 Kumitsonyo J discussed the meaning of encumbrances at page 305 as would refer to a defect in the title of the property. He went on to say:

"It is said that a good title is one which is free from encumbrances and a bad title is one which has defects in title. The term encumbrances covers all subsisting third party rights."

According to District Bank Ltd v Webb [1958] l WLR 148, the meaning of "encumbrances" could vary with circumstances.

The meaning of proprietor for the purposes of the Act appears in section 2 of the Act thus: "the person registered under this Act as the owner of land or a lease or a charge." The section also defines a chargor as "the proprietor of charged land or a charged lease or charge" and a chargee as "the proprietor of a charge". A lessor is defined as "the proprietor of leased land" while a lessee is 'the holder of a lease". Clearly the term proprietor under the Act is used in different senses depending on the context such as whether reference is made to title to the land or rights which may include third party rights. In Indefund and Another v Sululu and Others [2004] MLR 84 at 87 Chombo J took the dictionary meaning of proprietor as "owner, especially of a business, firm, hotel or patent". In short, proprietorship tends to be equated to ownership.

Section 25 of the Act makes reference to rights of the proprietor which are indefeasible and subject only to the third party rights as indicated in section 25 (a) of the Act. Indefeasibility of title means that the register forms the definitive record of all land interests and that the registered proprietor is immune to claims contrary to the register. The principle of indefeasibility of rights under section 25 of the Act is central in our system of land registration. It is a convenient description of the immunity a proprietor's rights in the event of an attack by any adverse claim that may be raised after the registration. There will be exceptions to the principle in limited circumstances as prescribed by the Act and the Land Act. Proprietor of rights as used in section 25 of the Registered Land Act must refer to the owner of the title to the land.

The benefits of indefeasibility under section 25 of the Act must accrue to the proprietor in the sense of title holder. A charge is no more than an encumbrance on the land (see section 60(3) of the Act and section 25(a) of the Act). There is a separate and comprehensive regime dealing with charges under Division 3 of the Act, meant to protect the rights of a chargee or chargees. To one piece or parcel of land there can be registered a first, second or subsequent charge which would then be prioritized (see section 61 of the Act). We do not think that section 25 of the Act is providing for the indefeasibility of third party rights, also referred to as encumbrances on the rights of the proprietor first mentioned in the section. The protection of third party rights is provided for elsewhere in the Act such as Division 2 for leases and Division 3 for charges.

We agree that a chargee does not acquire title to land merely by virtue of the charge on that land (see section 60(4) of the Act).The rights of the proprietor shall be absolute and not liable to be defeated except as provided in the Act and the Land Act. The proprietor shall also hold title free from other or third party interests and claims, with specified exceptions. We also agree lenders who use land as surety for loans require protection from fraudulent borrowers. We think that the law adequately addresses this elsewhere than in section 25 of the Act. We also think that there can be instances where a charge may be found to be defective such as where it is tainted with fraud (see Indefund and another v Sululu and others [2004] MLR 84).

Turning to section 139(1) of the Act, it is provided that a court may order rectification of a land register by directing that any registration be cancelled or amended where it is satisfied that the registration was obtained, made or omitted by fraud or mistake. Even a first registration may be so cancelled or amended. This cancellation refers to any registration which has been obtained, made or omitted by fraud. Thus, fraud is viewed as a serious matter although the Act does not define it. The registration in the present case was obtained by fraud as found by the Court below. It was therefore liable to be cancelled without further inquiry. It is only when the cancellation is one likely to affect title to land that there would be further inquiry of knowledge of the fraud as stipulated in section 139(2) of the Act.

Under section 139(2) of the Act, a rectification shall not be made where it affects the title of a proprietor who acquired for valuable consideration unless such proprietor had knowledge of the omission, fraud or mistake in consequence of which the rectification is sought. The same would be the case if the proprietor caused the omission, fraud or mistake or substantially contributed to it by his act, neglect or default. The Act does not define terms such as mistake, knowledge or substantially contributing to the fraud or mistake. The definitions of these can only be found in the general law or general interpretation of the words.

We agree that at common law the mere deposit of title deeds of freehold or leasehold property made by one party to another by way of security creates a mortgage or a charge in equity. This is what Peter Gibson LJ referred to as prima facie evidence of a contract to mortgage in the case of United Bank of Kuwait v Sahib and Others, [1996] 3 All ER 215 at 220-221.

Counsel for the appellants invited us to determine the relationship between statutory provisions and judge-made law or common law in the present matter. Counsel's view is that the judgment of the Court below turns on clear statutory provision on land transactions. We do not think so. Neither do we consider this case as being about a choice between statutory law and common law, otherwise referred to as judge-made law. On the contrary, what is being said to be judge-made law is really court's interpretation of statutory provisions.

The Court below correctly observed that the 1st defendant created a charge on behalf of the respondent in favour of the Bank when he deposited the title deeds. Yet such a charge was created fraudulently by the first defendant. There was overwhelming and uncontroverted evidence that the power of attorney was forged and that the charge was created fraudulently. Now, a charge that would otherwise be protected under section 25 of the Registered Land Act can be overturned under section 139(1) of the said Registered Land Act if such a charge was obtained or made by fraud or mistake. Pausing here, it will be clear that a fraud can defeat the interests of a charge in any charged property where the same is obtained or made by fraud or mistake.

The appellant's position is that the Bank had no knowledge of the fraud in this case. Neither did it cause nor did it substantially contribute to the fraud. That argument would have been relevant if the present case fell within the provisions of section 139(2) of the Act. We are of the view that the Court below did not deal with the issue of knowledge, causal or contributory behavior on the part of the appellants because the cancellation of the entry was not such as would affect title to land.

For what it is worth we will say something in relation to section 139(2) of the Act. We observe that dealings in land matters must at all times be given serious attention. The Statute of Frauds Act of 1677 was partly in recognition of this point. In our examination of the exhibits in this case we observe some serious anomalies, which the Bank must have been able to discover. These anomalies are such that alarm bells should have been raised. The impression to be gotten here is that the Bank looked the other way when faced with those anomalies. There is ample evidence on record, on the basis of which knowledge of the fraud would be imputed on the Bank, if the same were required to be established in this case.

To begin with, the fact that the original title deeds were being deposited with the Bank by someone else other than the title holder should have put the Bank on reasonable inquiry(see Indefund and Another v Sululu and Others [2004] MLR 84). The Bank should have been put on reasonable inquiry as to the genuineness of the power of attorney presented to it as well as what its limitations were. The so called first power of attorney executed on 3rd January 2005 was made under the Registered Land Act but was not registered in terms of section 111 of the Registered Land Act. The Bank should have been put on inquiry on this but it did nothing.

A power of attorney creates an agency relationship between the principal and the person appointed to act on behalf of that principal. A power of attorney is not an instrument of transfer in regards to any right, title or interest in land. Unfortunately, powers of attorney are susceptible to perpetrating fraud in land transactions. In the present case forged powers of attorney were used to fraudulently create a charge on the respondent's property. We are of the view that a forged power of attorney is a nullity and would have no effect by itself or in subsequent transaction. The common law position is that deposit of title deeds must be made by the owner of the property, such that even in the case of joint ownership the deposit must be made by the owners and not just one of them. Where, therefore, it is sought to deal in the land through powers of attorney, that must call for greater vigilance to establish the authenticity of the power of attorney and not merely take it at face value as appear to be the case in this matter. Such diligence will prevent any one, including unscrupulous land owners, from conducting fraudulent dealings in the land. The chargee should employ the best efforts to ensure that in dealing with a power of attorney, he or she is not assisting in dishonesty, fraud, crime on some other illegality. Accepting a power of attorney without making reasonable inquiry about its authenticity cannot be excused at law. The use of power of attorney in land matters should be the exception rather than the rule. We do not think that a chargee would have lien over title deed where the charge itself is a nullity. We do not think that an encumbrance arising out of a forgery is an encumbrance that can defeat the proprietor's rights within section 25 of the Act.

Again on 4th September, 2007 the appellants acted on a charge which had Robby W. Kalilombe as borrower of K1,000,000 and Fanny Kandoje Chiunda as chargor. At the time of execution of this surety charge, the question would have been whether the appellants were dealing with Fanny Kandoje Chiunda or Robby W Kaombe or Robby W. Kalilombe. The appellants chose not to ask questions that would have revealed the fraud perpetrated by the 1st defendant.

Then the appellants received and, without question, acted on a 2nd Power of Attorney of 4th November, 2008 which was in substantially the same language as the first. There appeared to have been no explanation for the second Power of Attorney and whether the same was registered under section 111 of the Registered Land Act. While section 3 of the Authentication of Documents Act provided that signing is prima facie proof, it does not mean that a party acting on the strength of the document need not verify the contents. We are of the view that to deliberately avoid making an inquiry that would reveal a fraud would lead to the conclusion that the party avoiding to make the inquiry must be imputed with knowledge of the attendant fraud. For these reasons, knowledge of the fraud may be imputed on the part of the appellants. On that ground, this appeal must fail.

The appeal would also fail on the ground of nullity of the charge on account of forgery as discussed by the learned Judge in the Court below. We agree that section 139(2) of the Registered Land Act was never intended to validate a null and void charge. Neither would a null and void charge be protected by section 25 of the Registered Land Act. We have considered the Australian and the New South Wales cases cited in support of the appellants' argument on the effect of an invalidity afflicting the mortgage under general law. In particular, our attention was drawn to a holding in Provident Capital Ltd v Printy [2008] NSWCA131 (5th June, 2008) being a case decided in the Supreme Court of New South Wales that upon registration of a mortgage over land, the land becomes charged as security for the debt secured by the mortgage, regardless of any form of invalidity which may afflict the mortgage under general law. We would like to agree with the Court below that this case, and the other foreign cases cited on this point, were interpreting provisions that are not in pari materia with our provisions, notwithstanding any limited similarity that may be detected. The wording of the relevant provisions differs materially from our provisions on the point. Indeed, these foreign cases show that the law they interpreted provide for special fund under the custody of the Registrar General that compensate proprietors of land who have been defrauded. That is not the case under our laws.

To conclude we want to be clear that we have examined the entire record, including the exhibits, with great care. We have scrutinized the skeleton arguments by both counsel and we have read the various case authorities cited by counsel in support of their positions where we were able to find a full report. We have paid due attention to the analysis of the evidence and the findings made by the learned Judge in the judgment His Lordship pronounced. We think that the learned Judge dealt with the issues in an erudite manner.

We find that this appeal is without merit and we dismiss it with costs.

Pronounce in open Court this 26th day of May, 2016 at Blantyre.

……………………………………………………………………….

HONOURABLE JUSTICE L.G. MUNLO SC, CHIEF JUSTICE

……………………………………………………………………….

HONOURABLE JUSTICE DR J.M. ANSAH SC, JA

…………………………………………………………………………

HONOURABLE JUSTICE R.R. MZIKAMNDA SC, JA