Does an indefeasible interest to land arising under a registered mortgage allow for a person to enforce the mortgage where fraud is involved?

Facts:

Mr David Ian Wassell and Ms Ya Jun Jiang Wassell (“the Plaintiffs”) sought judgement for possession of land in Thornton (“the Property”) that was currently registered in the name of Ken Carr Bobcat & Tipper Hire Pty Ltd (“the Defendant”) (“the Company”). The plaintiffs sought this judgment to enforce a mortgage that the Company purportedly granted to secure a repayment of a loan of $185,000 granted by the Plaintiffs.

The Company responded by filing a defence denying that any of the documents relied upon by the Plaintiffs were valid due to the fact they were executed fraudulently by a person external to the Company, namely Mr Anthony Lyons.

The Plaintiffs sought to rely on the Statutory Assumptions outlined within s 129 of the Corporations Act (“the Act”) due to the fact the loan, the mortgage and the general security agreement (“the Documents”) were executed in accordance with s 127 of the Act. The Company denied the Plaintiffs were entitled to the Statutory Assumptions in their defence.

As a result, the plaintiffs responded to the defence by filing an amended statement of claim alleging that if the Court found the loan, the mortgage and the general security agreement were not executed by the Company and were instead executed by Mr Lyons, then Mr Lyons was acting as an agent armed with apparent authority from the Company.

Issues:

As such, the important issues for determination by the Court included:

• Were the Documents forged by Mr Lyons?
• If yes, what is the effect on the mortgage?
• Can either the Plaintiff or Defendant received compensation from the Torrens Assurance Fund under s 129 of the Real Property Act?

Findings:

Were the Documents forged?

The Company contended that the Documents were forged by Mr Lyons and that the Company’s directors – Mr Kenneth Thomas Carr and Ms Cheryl Gai Fayers (“the Directors”) never signed any of the Documents and received no money from the Plaintiff.

His Honour found it was clear that the documents were forged by Mr Lyons after reviewing evidence presented by the Directors and the Plaintiffs. Specifically, his Honour found from the Plaintiff’s affidavits that Mr Lyons Solicitor, Ms Dawson, had aided securing the loan and endorsed the necessary documents, claiming she witnessed the Directors sign said documents. This was despite Ms Dawson accepting in her evidence that she had never seen or spoken with the Directors and had dealt solely with Mr Lyons. The endorsement from Ms Dawson was enough to satisfy the Plaintiff’s solicitors that everything regarding the Documents was satisfactory under the law.

Mr Lyons pleaded guilty to an appropriate criminal charge in relation to the forgery and was sentenced on 29 September 2020. As such his Honour concluded that the Documents are void and of no effect at Common Law unless some exception applied, as none of the Documents gave rise to a valid loan repayable by the Company.

The effect of the mortgage:

His Honour next considered whether s 42 of the Real Property Act would give the Plaintiffs an indefeasible interest to the Property and as such, allow the terms of the mortgage to be upheld. His Honour turned to the case of CEG Direct Securities Pty Ltd v Wang to consider whether the Plaintiff’s mortgage interest in the land was indefeasible or not. From this authority, his Honour highlighted that under the Torrens System, the registration of a forged mortgage confers an indefeasible estate on the mortgagee if there is an absence of fraud on the part of the mortgagee. Whilst this was found to be the case, his Honour stated that this does not mean registration of the mortgage validates all the terms and conditions of the instrument registered and did not secure any debt.

The Plaintiffs sought to validate the terms and conditions of the loan instruments by distinguishing this matter as compared to CEG Direct Securities Pty Ltd v Wang arguing that:

• the Company had engaged in “disentitling conduct” to the effect that the Company was estopped from denying the validity of the loan agreement; and
• as the mortgagor was a company, they were entitled to rely on the statutory assumptions outlined in s 129 of the Act and that the Company validly executed their documents in accordance with s 127 of the Act.
• Did the Company engage in “disentitling conduct”?

The Plaintiffs focused their argument on authorities that established that the conduct of the holder of a prior interest may lose priority to a later equitable interest by reason of engaging in ‘disentitling conduct’. The Plaintiffs submitted to the Court that the conduct of the Directors in ‘helping’ Mr Lyons obtain all the necessary documents required to secure the loan and mortgage was disentitling conduct and therefore the mortgage term and conditions should not be invalidated by fraud.

His Honour considered the evidence given by both the Plaintiffs and the Directors to establish a conclusion that there was no disentitling conduct perpetrated on behalf of the Company. Specifically, evidence from the Directors highlighted that Mr Lyons had manipulated the Directors into believing that by sending through necessary identification documents, the Directors would receive repayment for loans from a “Broker” for funds they had given to Mr Lyons to help him set up his business ventures. Mr Lyons did this by using his history of unpaid loan repayments and an arrest warrant against his name to manipulate the Directors into believing that the Broker needed huge amounts of identity to ensure release of the repayment funds were not being sent to a scam bank account.

The Plaintiff’s argued that an ordinary person should have suspected that unordinary requests for documents provided to Mr Lyons were actually being used to secure a loan in their name. His Honour found that the Directors were clearly inexperienced when it came to commercial matters that disenabled them to detect falsehood. As a result, it was ruled that even though the Directors conduct was careless and imprudent in the circumstances, it cannot be said that they conspired in the fraudulent conduct of Mr Lyons. Consequently, the Plaintiffs did not establish the Company lost its entitlement to priority of its interest in the land.

• Can the Plaintiffs rely on the Statutory Assumptions under s 129 of the Act?

The next argument the Plaintiffs adopted was that they could validly rely upon s 129(5) of the Corporations Act and assume that a document has been fully executed by a company if it appears signed in accordance with s 127(1). The Plaintiffs contended that because the documents appeared to be signed by the Directors in accordance with s 127(1), they could therefore assume the Documents had been fully executed by the Company.

His Honour denied this submission looking towards Australia and New Zealand Banking Group Ltd v Frenmast Pty Ltd as authority that the assumption can only be made where dealings with the Company were actual and real dealings absent of fraud.

Consequently, the Plaintiffs failed to establish that the Company is precluded from denying that it is bound by the loan agreement.

• Can either the Plaintiff or Defendant claim from the Torrens Assurance Fund?

His Honour noted that the second way the CEG Direct Securities Case was significant in these proceedings was to do with the application of s 129 of the Real Property Act which governs the circumstances in which compensation may be awarded from the Torrens Assurance Fund when a person suffers a loss or damage under the Real Property Act. The Plaintiffs contended that because they could not enforce their indefeasible title to the mortgage under s 42 of the Real Property Act they were therefore entitled to be paid compensation from the Torrens Assurance Fund. This was on the grounds of s 129(1)(e) that they suffered loss arsing from being deprived of land or their interest in the land as a consequence of fraud.

In response to this, the Register-General submitted that the Plaintiffs were not entitled to compensation from the Fund because the loss or damage they suffered arose from wording of the mortgage that was at the discretion of the Plaintiffs. The Plaintiffs paid the monies subject to the mortgage to Mr Lyons rather than to the Company’s bank account. As such the mortgages effect has nothing to do with the Real Property Act and the loss or damage was not as a result of its operation.

His Honour sided with the Register-General and found the loss suffered by the Plaintiffs resulted because they had paid the loan monies to Mr Lyon’s bank account rather than to the Company. As such the terms of the mortgage were not complied with as it stated the Company were to repay the loan.

As for the Company, his Honour found that they would have been entitled to compensation from the Torrens Assurance Fund if the issue arose. His Honour noted that if the Plaintiffs had succeeded, the Company would have been a person who suffered loss as a result of the operation of the Real Property Act in respect of the Property. That loss would have arisen as a result of the Company being deprived of the land as a consequence of fraud, within the meaning of s 129(1)(e) of the Real Property Act.