Bona fide purchaser principle

When the concept of the trust was being developed by equity, one of the problems that had to be addressed was what the rights of the beneficiary were if the trustee transferred trust property to a third party in breach of trust. The solution that equity imposed is not surprising when it is recalled that the courts proceeded on the basis of principles of conscience. If the trustee transferred the trust property to a purchaser who was acting in good faith, who gave value for the property and who had no notice of the equitable interests existing in the property, equity saw no reason why the purchaser should be treated as having acted with unconscionable conduct and so there was no reason why equity should allow the claim of the beneficiary to prevail. It can be said that the claims of the beneficiary and of the third party are equally valid and that in such a case the equitable maxim ‘where there is equal equity, the law prevails’ is applicable to protect the third party. In other words, the purchaser’s legal estate is allowed to prevail over the equitable interest of the beneficiary.An example of the bona fide purchaser rule in action is to be found in MCC Proceeds Inc v Lehman Brothers International (Europe) [1998] 4 All ER 675. Macmillan Incorporated (M) was a company taken over and controlled by Robert Maxwell and members of his family. The company placed shares in Berlitz International Inc, a wholly owned subsidiary, together with the share certificates in the name of Bishopsgate Investment Trust plc (a nominee company controlled by Robert Maxwell). An agreement declared that Bishopsgate held the legal title to the shares as nominees for M, who retained the beneficial ownership in the shares. The agreement stated that Bishopsgate Investment Trust plc would immediately transfer the shares to M on M’s written demand. Bishopsgate then, in breach of trust, pledged the certificates with the defendants as collateral under a stock-lending scheme. M knew nothing of this. The defendants were unaware of the interest of M. The shares were later sold by the defendants. The Court of Appeal said that, as the defendants were bona fide purchasers of the legal interest in the shares and had no notice of the claim of M or of the breach of trust by Bishopsgate, the interest of M was overreached and the defendants took free of any interest of M.

The bona fide principle is obviously important but it is limited. It does not apply if the trust property is acquired by a volunteer or by a purchaser of an interest other than the legal interest. In this context the consideration provided can either be money or money’s worth or marriage consideration, which is recognised by equity, but not the common law, as being consideration. In these cases the claim of the beneficiary prevails and he is able to assert his rights against the third party. These situations are resolved by applying the maxim ‘when the equities are equal the first in time prevails’.The bona fide principle only applies if the purchaser has no notice of the equitable interests. Notice can include actual and constructive notice. A person has constructive notice of matters of which he would have known had he made those inquiries which a reasonable man would have made. A purchaser will also be fixed with notice of facts known to his agents (e.g. his solicitor). This is called imputed notice.

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Maxim: Where the equities are equal, the law prevails

The related maxim is concerned with priorities of competing interests, that is to say which of various interests prevails in the events of a conflict, may be dealt with together. To understand this maxim, a distinction and understanding of the concept of “legal interest or estate” and “equitable interest” is necessary.
A legal interest or estate is an interest in the property required by a purchaser for valuable consideration either by cash or marriage consideration. It also includes mortgagee and lessee.


An equitable interest is any interest which recognised from the Chancery court. An example would be in the case of trust; although the trustee’s name would be registered as the holder of the property, the beneficiaries acquire an equitable interest over the trustee’s property. They have a right to sue the trustee for breach of trust.

Under general rule, the interest takes effect in order of their creation. For instance, whose rights are created first will receive priority in the court of equity. However, an equitable interest might be defeated by a legal interest, even though it has been created prior to the legal interest. For example, if the purchaser of a legal interest is bona fide and without notice of any equitable interest, then the equities are equal and legal interest prevails.

In the case of Langan v Lee Cheng Keat, the lands situated in Penang were held on trust as marriage settlement. However, the trust was never registered and the tittle deeds remained in the name of the owner. On the death of the owner, his administratix sold and conveyed the land to the Defendant and delivered to him the title deeds but without referring to the trust accidentally came across the marriage settlement. They filed a suit for possession of the property from the defendant.
The court held that defendant was in possession of the land and the title deeds as a bona fide purchaser without notice of trust. His equity should prevail over that of beneficiary.

In the case of Cave v Cave, the legal mortgage created without notice of the prior beneficial interest, applying the maxim above, the court held that the legal mortgage took priority over the equitable interest having been created bona fide for value without notice.


Others material

When two parties want the same thing and the court cannot in good conscience say that one has a better right to the item than the other, the court will leave it where it is. For example, a company that had been collecting sales tax and turning it over to the state government found that it had overtaxed and overpaid by 2 percent. It applied for a refund, but the state refused. The court upheld the state on the ground that the money really belonged to the customers of the company. Since the company had no better right to the money than the state, the court left the money with the state.

Where equities are equal , the first in time shall prevail – In the absence of a legal estate in the matter and the contest is among the equitable estate only, the rule is that the person whose equity attached to the property first will be entitled to priority over other or others e.g., if A enters into a contract for the sale of his house with B and then with C, the interest of B and C both being equitable, B will have priority over C because his attached to the property first.

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Equitable asignment

For equitable assignment, no particular form is required. Intention is importance. The words must show that the assignee is to have benefit of the chose in action. The assignment must be address to the assignee (Halsbury's Law of England). Once there is a clear intention on the part of assignee that the assignee should get the benefit of the debtor by conveyancing such intention to assignee, an equitable assignment is created. The debtor is liable to pay the assignee although it has already paid to the assignor. (case: Malaysian International Merchant Bankers Bhd v Malaysian Airlines System Bhd).

Notice is not required.
The assignment is validly created as between the assignor & assignee the moment it is made. This is not affected by the fact that no notice had at that point been given to the debtor altough the debtor may only be bound upon receipt of the notice. In the case MIMB Bhd v MAS Bhd, as between the assignor & the assignee, an equitable assignment, whether voluntarily of for value, is absolute & complete without notice been given to the debtor. But, a debtor or a fund holder who has receive notice of an equitable assignment must withhold all further payments to the assignor unless made with the consent of the assignee, for if he pays to the assignor without consent, he will have to pay over again to the assignee. After notice, debtor or fund holder became trustee for the assignee...:>

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Assignment (Statutory assignment)

Assignment is the principal method of transferring the benefits of a contract to a third party. for example: A (the assignor or creditor) transfers the benefit to a third party, C (the assignee), the consequence of which C would be able to sue B (the debtor) being the person liable under the contract. The expression choses in action refers to all personal rights of property but enforceable not by talking physical possession but on by by action.

Assignment under Civil Law Act 1956
Section 4(3) of Civil Law Act provides:
"Any absolute assignment, by writing, under the hand of
the assignor, not purporting to be by way of charge only, of any
debt or other legal chose in action, of which express notice in
writing has been given to the debtor, trustee or other person from
whom the assignor would have been entitled to receive or claim
the debt or chose in action, shall be, and be deemed to have been,
effectual in law, subject to all equities which would have been
entitled to priority over the right of the assignee under the law as
it existed in the State before the date of the coming into force of
this Act, to pass and transfer the legal right to the debt or chose in
action, from the date of the notice, and all legal and other
remedies for the same, and the power to give a good discharge for
the same, without the concurrence of the assignor." For the reference & interpretation of the act, we can refer it in English position in s.136 (1) of the Law of Property Act 1925 which provides:

" Any absolute assignment , by writing, under the hand of the assignor (not purporting to be by the way of charge only) of any debt or other legal thing in action, of which express notice in writing has been given to the debtor, trustee or other person from whom the assignor would have been entitled to claim such debt or thing in action, is effectual in law (subject to equities having priority over the right of the assignee) to pass and transfer from the date of such notice-
(a) the legal right to such debt or thing in action
(b) all legal & other remedies for the same; &
(c) the power to give the good discharge for the same without concurrence of the assignor. "

When the conditions in s 4(3) is fulfill and the parties agreed with the conditions the effects of it is the the assignor would be the holder of legal title to the right assigned & enabling him to sue, without the need to join the assignor as a party.

Case: Cator v Crydon Coral Co
-an assignee may sue in his own name against the debtor
Case: MBF Factors Sdn Bhd v Tay Hing Ju
- Jefrey Tan J explain : " wheres s 4(3) CLA applies, the assignee is allowed to sue the debtor in his own name instead of having to sue in the name of assignor & perhaps having to go to a court to compel his joinder in the action. Thus, the position is the same in England..."

Condition in statutory assignment that must be fulfill:
(1) the assignment must be absolute, it will not absolute if the assignment have the condition (but still can be accept as equitable assignment, but the sue action cannot be taken on the own name)
(2) the assignment must be in writing & signed by the assignor
(3) notice must be given to the debtor from whom the assignor would have been able to claim (assignee must give notice to the debtor)
Case: In Dearle v Hall, the court held that an assignee must give notice to the debtor in order to secure his title against other assignee.
(4) not purporting by the way of charge

END.
To be continue with the equitable assignment...:>

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