Ippin Textiles: when will a fraudulently procured mortgage secure a debt?
Mar 2021 | InsuranceThe New South Wales Court of Appeal recently considered the circumstances in which a mortgage procured by fraud will secure the debt it purports to secure.1 It provides a timely reminder to mortgagees and their solicitors of the difficulties associated with seeking to rely on fraudulently procured mortgages.
Background
The company, 183 Eastwood Pty Ltd (183 Eastwood) owned three parcels of land in New South Wales. In 2018, a fraudster:
- procured ASIC to record him as the sole director and secretary of 183 Eastwood;
- opened a bank account in 183 Eastwood’s name, which the fraudster controlled;
- caused the NSW Land Registry Services to issue him with replacement certificates of title for the properties;
- entered 183 Eastwood into a loan agreement with certain financiers (the mortgagees) for the advancement of loan funds;
- executed, purportedly on behalf of 183 Eastwood but without its authority, mortgages over the properties in favour of the mortgagees as security for a loan of $4 million.
The mortgagees paid the available loan amount into the fraudster’s bank account against the security of three identical registered mortgages over the properties. The fraudster dissipated the funds.
In the absence of any repayments, the mortgagees served a Notice of Default and sold the properties. The proceeds of sale were subsequently paid into court pending the outcome of proceedings commenced by the mortgagees against 183 Eastwood and the Registrar of Titles in which they asserted an entitlement to the proceeds of sale.
The parties agreed that the Supreme Court of New South Wales should answer a separate question: whether the registered mortgages secured anything in their favour against the properties and the proceeds of sale. At first instance, the Supreme Court found in 183 Eastwood’s favour, finding that the mortgages did not secure anything against the properties and that the proceeds of sale should consequently be paid to 183 Eastwood. The mortgagees appealed.
The Court of Appeal’s decision
The mortgage was indefeasible
Australian jurisdictions use the Torrens title system, which is a system of title by registration. Under the Torrens system, a registered proprietor’s rights derive from the registration of their interest on a property’s title.
Even the registration of a forged mortgage confers an indefeasible title on the mortgagee, provided that the mortgagee has not been party to the fraud or unless some other exception to indefeasibility applies.2 In the circumstances, it was held that the mortgage conferred on the mortgagees an indefeasible title by way of security, notwithstanding that execution and registration of the mortgage was brought about by fraud and without the knowledge or consent of 183 Eastwood.
However, notwithstanding that the registration of the fraudulent mortgage conferred indefeasibility of title on the mortgagees, the question remained: ‘indefeasibility for what?’. That is, the Court of Appeal was required to consider whether the mortgage secured anything in favour of the mortgagees against the properties.
Indefeasibility for what?
Whether a fraudulently procured registered mortgage secures the debt is a question of fact depending on a consideration of the terms of the mortgage. The question is whether the debt is identified as secured by the mortgage, which in turn has indefeasibility.
The mortgagees submitted that the cases have distinguished a traditional mortgage, which stated that it secured a specified sum, from an ‘all monies’ mortgage which defined the amount secured by reference to obligations outside the mortgage (e.g. a loan agreement).
In cases of forgery, all monies mortgages generally secure nothing because the mortgagor, having not been a party to the loan agreement, will not owe any monies to the mortgagee which could be caught by an all monies clause. However, a ‘traditional’ mortgage can nonetheless secure an entitlement to be repaid from the proceeds of sale of the land because the secured funds are identified as secured on the face of the mortgage. The mortgagees argued that the mortgage in question was a hybrid of the two forms.
The consideration of whether any debt is secured by a mortgage turns on the construction of the mortgage. In this case, relevantly, the mortgage secured payment of the ‘Secured Money’, which included the ‘Principal Amount’. The ‘Principal Amount’ was defined to include the amount advanced by the mortgagee to the mortgagor.
At first instance, the trial judge found that in circumstances where 183 Eastwood did not receive the funds contended to have been paid by the mortgagees, there was never any advance by the mortgagees to 183 Eastwood. Similarly, there had not been any advance to the fraudster as he stole the money rather than received it as a loan or advance.
On appeal, the mortgagees contended that various terms of the mortgage constituted acknowledgements of the receipt of the advance intended to be secured by the mortgage. The Court of Appeal was prepared to accept that the mortgage identified the amount intended to be secured and that its terms at least implicitly acknowledged receipt of the advance by 183 Eastwood.
However, the Court of Appeal found that such terms constituted only prima facie evidence of an acknowledgement of receipt of the money advanced. It held that an ‘advance’, in the present context, meant ‘a voluntary act causing payment to be made to the intended recipient or at its direction’.
If, as the primary judge concluded, no payment was actually made to 183 Eastwood or at its direction (because it was obtained and stolen by the fraudster), the prima facie evidence on the face of the registered mortgage that the money was advanced must yield to the proven facts. The fact that the mortgagees believed that they were advancing money to 183 Eastwood or that the funds were transferred into a bank account in the name of 183 Eastwood was immaterial.
As such, the Court of Appeal upheld the decision at first instance, finding that there had been no advance to 183 Eastwood, meaning that although the mortgage was indefeasible, it secured no debt.
Conclusion
Whether a registered mortgage secures the debt is a question of fact depending on a consideration of the terms of the mortgage. Earlier cases are only a guide, although they demonstrate that differing results can ensue depending on the precise words used in the mortgages.
However, while the appeal turned on its own facts and the specific construction of the mortgage in question, the Court of Appeal’s comments that the terms of the mortgage relating to receipt must yield to the true facts are worth noting. If a mortgage refers to monies having been advanced and requires those amounts to be repaid by the mortgagor, the mortgagee might have no entitlement to recover those sums from an innocent mortgagor in the event of fraud.
The case also provides a timely reminder for mortgagees and their solicitors that there are difficulties associated with seeking to rely on mortgages that have been procured by a third party’s fraud as securing a debt to the mortgagee. In our experience, it is uncommon for a mortgage to specifically identify the amount of the debt. The mortgagor’s repayment obligations are generally reflected in a separate loan agreement between the mortgagee and mortgagor. Unless the mortgage and the associated loan agreement are very carefully worded, there is a risk the mortgage will not secure any debt.
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1 Ippin Textiles Pty Ltd v Winau Aust Pty Ltd [2021] NSWCA 9.
2 Section 42 of the Real Property Act 1900 (NSW).
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The material contained in this publication is in the nature of general comment only, and neither purports nor is intended to be advice on any particular matter. No reader should act on the basis of any matter contained in this publication without considering, and if necessary, taking appropriate professional advice upon their own particular circumstances.
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