Solak not followed in Victorian fraud case

  • Author : Robert Hay QC - 06-02-2015

There have been many cases about whether a mortgage procured by fraud secured any money in circumstances where the mortgagee is innocent of the fraud. The latest case is Perpetual Trustees Victoria Limited v Xiao Hui Ying [2015] VSC 21 (Ying) where Hargrave J refused to follow the Victorian decision of Solak v Bank of Western Australia [2009] VSC 82.

 

There is no question that a lender mortgagee has an indefeasible mortgage when registered provided the mortgagee is not involved in the fraud. The question is whether any amount is secured?

In NSW and Victoria the issue has been resolved by determining whether the payment covenant in the forged collateral agreement is incorporated into the registered mortgage.

In Ying the mortgage incorporated a memorandum of common provisions which contained a covenant for payment by reference to any amounts owing under any other agreement between the mortgagor and the lender. The other agreements were also forged.

The thrust of the NSW decisions is that, where the loan agreement on which the lender relies is forged and therefore void, there is no “secured agreement” and therefore no “secured money” within the meaning of the payment covenant in the mortgage. See: Perpetual Trustees Victoria v English [2010] NSWCA 32. The same logic has been applied where the loan agreement (but not the mortgage) is forged. See: Perpetual Trustees Victoria Ltd v Cox [2014] NSWSC 328. In Solak Pagone J reached a contrary conclusion to the NSW courts. In Solak the mortgage and the loan agreement were forged. Pagone J distinguished the NSW cases on the basis that the mortgage, memorandum of common provisions and loan agreements all defined the mortgagor/borrower as ”You” and “You” was in each case the forger purporting to be Mr Solak. The mortgage was therefore effective as a security.

In Ying Hargrave J disagreed with Solak and followed the NSW decisions. His Honour said that Solak was “plainly wrong” and that there was nothing secured by the mortgage in Solak because there could be no amount owing under a forged loan agreement and there was also nothing secured by the mortgage in Ying. In Ying the plaintiff mortgagee was ultimately successful on the ground that the mortgagor held the mortgaged land on trust for the forger (the husband of the mortgagor) and that the mortgagee was entitled to have the value of the mortgaged land applied to partial repayment of its loans.

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Robert Hay QC

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