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Indefeasibility and Fraud Assoc Prof Cameron Stewart (c) Cameron Stewart 2009.

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1 Indefeasibility and Fraud Assoc Prof Cameron Stewart (c) Cameron Stewart 2009

2 Exceptions to indefeasibility - Fraud A person who acquires a registered interest through fraud has a defeasible interest: RPA ss 42, 43 Eg their interest can be set aside. The requirements for setting aside such an interest are: the registered proprietor’s interest must have been acquired through implication in the fraud; and the implication may be personal or through the acts of an agent.

3 Section 3 No comprehensive definition of fraud is set out in the Real Property Act. However, the Act stipulates in s. 3(1) that fraud ‘includes fraud involving a fictitious person’. Obviously an attempt to deal with Gibbs v Messer (c) Cameron Stewart 2009

4 Section 42 42Estate of registered proprietor paramount (1)Notwithstanding the existence in any other person of any estate or interest which but for this Act might be held to be paramount or to have priority, the registered proprietor for the time being of any estate or interest in land recorded in a folio of the Register shall, except in case of fraud, hold the same, subject to such other estates and interests and such entries, if any, as are recorded in that folio, but absolutely free from all other estates and interests that are not so recorded except:..... (c) Cameron Stewart 2009

5 Section 43 43Purchaser from registered proprietor not to be affected by notice (1)Except in the case of fraud no person contracting or dealing with or taking or proposing to take a transfer from the registered proprietor of any registered estate or interest shall be required or in any manner concerned to inquire or ascertain the circumstances in or the consideration for which such registered owner or any previous registered owner of the estate or interest in question is or was registered, or to see to the application of the purchase money or any part thereof, or shall be affected by notice direct or constructive of any trust or unregistered interest, any rule of law or equity to the contrary notwithstanding; and the knowledge that any such trust or unregistered interest is in existence shall not of itself be imputed as fraud. (c) Cameron Stewart 2009

6 Section 118 118 Registered proprietor protected except in certain cases (1) Proceedings for the possession or recovery of land do not lie against the registered proprietor of the land, except as follows: (a) proceedings brought by a mortgagee against a mortgagor in default, (b) proceedings brought by a chargee or covenant chargee against a charger or covenant charger in default, (c) proceedings brought by a lessor against a lessee in default, (d) proceedings brought by a person deprived of land by fraud against: (i) a person who has been registered as proprietor of the land through fraud, or (ii) a person deriving (otherwise than as a transferee bona fide for valuable consideration) from or through a person registered as proprietor of the land through fraud, (e) proceedings brought by a person deprived of, or claiming, land that (by reason of the misdescription of other land or its boundaries) has been included in a folio of the Register for the other land against a person who has been registered as proprietor of the other land (otherwise than as a transferee bona fide for valuable consideration), (f) proceedings brought by a registered proprietor under an earlier folio of the Register against a registered proprietor under a later folio of the Register where the two folios have been created for the same land. (c) Cameron Stewart 2009

7 What is fraud? Assets Co Ltd v Mere Roihi [1905] AC 176 - Assets became registered proprietor of certain lands formerly owned by certain Maoris. There were allegations of fraud against predecessors to Assets and from whom Assets purchased the land. However, there was no fraud committed by Assets. The Privy Council ruled that there was ‘no fraudulent statement made by the company’s agents … nor any bribery, corruption, or dishonesty’. Nor had Assets ‘refrained from making inquiries which an honest purchaser would have made’. (c) Cameron Stewart 2009

8 What is fraud? In Assets Co Ltd v Mere Roihi [1905] AC 176, at 210, the Privy Council defined fraud as follows: [B]y fraud in [the legislation] is meant actual fraud, that is dishonesty of some sort, not what is called constructive or equitable fraud … [T]he fraud which must be proved in order to invalidate the title of the registered proprietor for value … must be brought home to the person whose registered title is impeached or to his agents. Fraud by persons from whom he claims does not affect him unless knowledge of it is brought home to him or his agents. The mere fact that he might have found out fraud if he had been more vigilant, and had made further inquiries which he omitted to make, does not of itself prove fraud on his part. But if it be shown that his suspicions were aroused, and that he abstained from making inquiries for fear of learning the truth, the case is very different and fraud may properly be ascribed to him. (c) Cameron Stewart 2009

9 When is fraud relevant? 2 Situations: A previously registered proprietor seeks to set aside a transaction imputed by fraud; or A holder of an unregistered instrument seeks to set aside a later registered instrument in favour of another on the ground that the other has been guilty of fraud (c) Cameron Stewart 2009

10 Exceptions to indefeasibility - Fraud General principle: unless the fraud can be brought home to the registered proprietor, registration will confer indefeasibility. Definition of fraud: actual dishonesty, which can be attached to the registered proprietor’s title Sometimes said to be “moral turpitude”: Butler v Fairclough (1917) 23 CLR 604 at 630. In Wicks v Bennett (1921) 30 CLR 80, at 91, Knox CJ and Rich J referred to fraud as ‘something more than mere disregard of rights of which the person sought to be affected had notice’. What about equitable fraud?

11 (c) Cameron Stewart 2009 Equitable fraud Equitable fraud is constructive fraud – when the RP should have realised that the transaction was fraudulent In Bahr v Nicolay (No 2) (1988) 164 CLR 604, Mason CJ and Dawson J suggested that not all species of equitable fraud were outside the concept of fraud under the Real Property Act. This approach was endorsed by the Court of Appeal in Victoria in Russo v Bendigo Bank Ltd [1999] 3 VR 376 at 382-385, and by the Court of Appeal in NSW in Grgic v ANZ Banking Group Ltd (1994) 33 NSWLR 202 where, at 221, Powell JA said: [T]hose species of ‘equitable fraud’ which are regarded as falling within the concept of ‘fraud’ for the purposes of s. 42 of the Act are those … in which there has been an element of dishonesty or moral turpitude on the part of the registered proprietor of the subject interest or on the part of his or its agent.

12 (c) Cameron Stewart 2009 Equitable fraud ‘[T]he mere fact that a person might have found out fraud if further enquiries had been made does not of itself prove fraud. The enquiry is an enquiry for actual dishonesty not for want of due care’: Pyramid Building Society (in liq) v Scorpion Hotels Pty Ltd [1998] 1 VR 188 at 194 In Grgic, Powell JA cited, as an example, a collusive or colourable sale by a mortgagee to a subsidiary company such as occurred in Latec Investments Ltd v Hotel Terrigal Pty Ltd (1965) 113 CLR 265

13 Timing of Fraud When does the fraud have to exist? Ordinarily the fraud must occur in the lead up to rego (c) Cameron Stewart 2009

14 Timing of Fraud In Loke Yew v Port Swettenham Rubber Co Ltd [1913] AC 491, Port Swettenham purchased from Eusope. Loke Yew was part owner of the land but was not registered. Eusope only agreed to transfer the land to Port Swettenham when given an assurance that Port Swettenham would not disturb Loke Yew’s possession of the land. Upon registration Port Swettenham asserted title to the whole of the land to the exclusion of Loke Yew. The issue before the court was whether Port Swettenham’s title was obtained by fraud and thus defeasible to the interest of Loke Yew. The Privy Council found for Loke Yew and that Port Swettenham acquired title through fraud. Port Swettenham had more than mere knowledge of Loke Yew’s unregistered interest. The assurances it made to Eusope had been made to induce Eusope to execute the transfer of the land and amounted to a deliberate plan to deprive Loke Yew of his interest. (c) Cameron Stewart 2009

15 Timing of Fraud Mason CJ and Dawson J in Bahr v Nicolay (No 2) have suggested that post-registration conduct by the registered proprietor may be considered on the issue of whether there is fraud by the registered proprietor. This approach has been endorsed by Wood J in Snowlong Pty Ltd v Choe (1991) 23 NSWLR 198 at 212, but rejected by Owen J in Conlan v Registrar of Titles [2001] WASC 201 at [168]. (c) Cameron Stewart 2009

16 Timing of Fraud However, whether post-registration conduct is relevant for the fraud exception is to a large extent an academic question. This is so because post-registration conduct that would amount to fraud will be caught under the in personam exception to indefeasibility which we shall examine below in detail. This is well illustrated by the decision in Bahr v Nicolay (No 2), which we shall examine in detail under the in personam exception. (c) Cameron Stewart 2009

17 Fraud against whom? Fraud must be shown to have been practised against the person who seek relief Munro v Stuart (1924) 41 SR(NSW) 203 - fraud by a registered proprietor against a party other than that seeking to assert an interest against the registered proprietor does not bring the case within the fraud exception to s.42 of the Real Property Act (c) Cameron Stewart 2009

18 Fraud against whom? Efspratiou v Glantschnig [1972] NZLR 594: Mr G was the registered proprietor of a house in which he lived with his wife Mrs G. Mrs G had paid for half the house, but was not listed on the title. On basic trust law this means that she had a beneficial interest in the property and that Mr G was holding half of the property on trust for her. This meant that Mrs G had an unregistered equitable interest in the property under a trust. The marriage broke down and Mrs G went to court and obtained a court order barring Mr G from the house. Mr G upon receiving the injunction, got in touch with a friend of his who was a real estate agent and instructed him to sell the house for ₤5,000 which was ₤3,000 below market value. A buyer was located within a couple of hours and this was Mr E. Mr E agreed to buy the house, site unseen for ₤5,000 and settlement occurred the next day. Mr E was registered as owner of the house some three days after the injunction had been issued. Mr G immediately spent the ₤5,000. (c) Cameron Stewart 2009

19 Fraud against whom? When Mr E sought to exercise his rights as registered proprietor, Mrs G found out and was not happy. She made an application to have the transfer to E set aside, arguing that E did not have indefeasible title because of his own fraud. In this case the fraud of Mr G was clear. He had wilfully breached the trust that Mrs G had a half share in the house. But in order to establish fraud you need to show the registered proprietor had committed the fraud. Had Mr E been fraudulent? The court said that in this case Mr E was “a party to the whole scheme, whereby to his knowledge the wife was to be deprived of an equitable interest in the land”. Therefore, in this case the speed of the sale, the low market price, and the lack of inspection, all demonstrated that Mr E had knowledge of Mr Gs’ fraud and behaved dishonestly in agreeing to go along with the scheme. Therefore, Mr Es’ title was defeasible because of the fraud and the court ordered that his registered title would be held on trust for a half share for Mrs G, just as Mr Gs’ title had been. So his interest then became subject to her unregistered interest. (c) Cameron Stewart 2009

20 Fraud against whom? Australian Guarantee Corporation v De Jager [1984] VR 483: A husband and wife were jointly registered as the registered proprietors of a property. The husband arranged a mortgage over the property with AGC but his wife refused to sign the mortgage. Someone then forged her signature on the mortgage docs (it was not clear who). An intermediary of the husband took the mortgage docs to AGC. When he got there, AGCs employee noted that the signatures on the document were not attested. The intermediary said that he had witnessed the husband’s signature but not the wife’s – but he attested both in front of AGC’s employee anyway. The mortgage was registered, the husband defaulted in repayment of the loan and the mortgagee proceeded to exercise the power of sale. (c) Cameron Stewart 2009

21 Fraud against whom? The question for the court was: could the wife stop the sale? Was the title of the mortgagee under the mortgage defeasible against the wife? The wife could only stop the sale in this case if she could show an exception to the mortgagee’s indefeasible title to the mortgage. She argued the fraud exception: the fraud of the mortgagee in lodging the documents of mortgage in which they had made a fraudulent representation to the Registrar General. On this ground the court held that the mortgagee’s title was defeasible as against the wife because the bank represented to the Registrar General that the wife’s consent to the mortgage had been witnessed when they knew that it hadn’t. Without that attestation of witness, the RG would not have registered the mortgage. (c) Cameron Stewart 2009

22 Fraud against whom? In Russo v Bendigo Bank Ltd [1999] 3 VR 376 A false attestation of a signature on a mortgage as having been signed in her presence made by a clerk employed by a solicitor acting for a bank was held not to be fraud by the bank. However, in that case, the clerk gave evidence, and the Court held that it was not shown that she knew the significance of her attestation in the process of registration or even that the mortgage was to be submitted for registration. The Court also said that it was not shown that the clerk's attestation had the element of dishonesty or moral turpitude required for fraud. (c) Cameron Stewart 2009

23 Fraud against whom? However, if a registered proprietor has obtained registration by a fraud practised on the Registrar- General, that will be fraud for the purposes of s.42s.42 National Commercial Banking Corporation of Australia Ltd v Hedley (1984) 3 BPR 9477 (overturned but on another point) there was fraud by a bank where an acting manager had falsely certified that a mortgage was signed in his presence by a mortgagor, knowing that this mortgage was to be submitted to the Registrar-General for registration (c) Cameron Stewart 2009

24 Fraud against whom? Grgic v ANZ Banking Group Ltd (1994) 33 NSWLR 202 - a son had carefully practised signing his father's name for many years and signed his father's name to a mortgage and had it witnessed by a bank officer. Powell JA, with whom Meagher and Handley JJA agreed, said at 222 that the fact of the bank officer's "attestation could not, in my view, constitute statutory fraud unless it could be shown, either, that he knew that" the person who signed the mortgage was not in fact the registered proprietor or else "he was acting recklessly without caring whether or not" the mortgage was being signed by the registered proprietor. (c) Cameron Stewart 2009

25 Fraud against whom? In Bank of South Australia Ltd v Ferguson (1998) 192 CLR 248, 256, the High Court said that it must be remembered that: "(i) statutory fraud embraces less, not more, than a species of fraud which, at general law, founds the rescission of a conveyance; and (ii) statutory fraud is not itself directly generative of legal rights and obligations, its role being to qualify the operation of the doctrine of indefeasibility upon what would have been the rights and remedies of the complainant if the land in question were held under unregistered title." Here the internal bank document that was forged was designed to speed up the process within the bank and it had no effect on the mortgagor. The High Court held that the matter of forgery was irrelevant to statutory fraud. (c) Cameron Stewart 2009

26 Fraud against whom? Davis v Williams [2003] NSWCA, Young CJ in Eq: 110 Even though anyone who attests a dealing under the Torrens system falsely is in one sense committing fraud against the Registrar General, the cases show that that is not enough. It will be enough if an officer of the interested party which has become registered knowingly or recklessly certifies so that the registration is effected (De Jager, Hedley, Sansom). It will not be enough if some officer of the person who obtains registration without any moral turpitude or intention of depriving a person of an interest in land makes a false attestation (Russo). In all cases it must be shown that there was fraud by the person becoming registered or its agent in obtaining registration so that an interest which would otherwise take priority over that interest has been defeated. (c) Cameron Stewart 2009

27 Notice of an earlier interest? What about notice of an earlier interest? Under old system that would be enough for actual or constructive fraud if you then attempted to register and interest. Under RPA s 43(1) – notice does not have this effect and is taken to be outside the definition of “fraud” for the RPA – section takes effect on registration, not before

28 (c) Cameron Stewart 2009 Notice of an earlier interest? Mere prior knowledge of an unregistered interest is not of itself fraud: Oertel v Horden (1902) 2 SR (NSW)(Eq) 37. It is also the case that knowledge that the earlier unregistered interest will be defeated by registration is insufficient of itself to amount to fraud by the registered proprietor: Bahr v Nicolay (No 2), per Brennan J. Mere prior knowledge of an unregistered interest is not of itself fraud: Mills v Stockman (1967) 116 CLR 61, at 78

29 (c) Cameron Stewart 2009 Notice of an earlier interest? This point is in fact confirmed by the provisions of s. 43 of the Real Property Act which states that ‘the knowledge of any trust or unregistered interest’ on the part of the registered proprietor ‘shall not of itself be imputed as fraud’. However, with respect to s. 43, the courts have interpreted it in such a way that the section only becomes operative upon registration: IAC (Finance) Pty Ltd v Courtenay (1963) 110 CLR 550 at 572. Until that time a purchaser is affected by notice of unregistered interests. However, once registered the fact of mere notice of an unregistered interest will not affect the indefeasible title of the purchaser.

30 (c) Cameron Stewart 2009 Notice of an earlier interest? What then is the dividing line between cases of mere notice of earlier interest (which will not give rise to fraud on registration) and cases where notice is coupled with other factors (which do give rise to a finding of fraud)?

31 (c) Cameron Stewart 2009 Notice of an earlier interest? Wicks v Bennett (1921) 30 CLR 80 which is another example of the fraud of another person. A group of tenants took a lease over land for 12 years at a fixed rent but they didn’t register that lease on the folio and the tenancy was not an express exception to indefeasible title. So this meant that they had an unregistered interest in the land under their fixed term lease. One of the tenants, Bennett, had a dispute with the rest of them. After that dispute he agreed with the property owner to buy the fee simple. Bennett the former tenant became the registered proprietor and took over as landlord with respect to the lease. Bennett tried to raise the rent on the property, but the other partners resisted. Bennett sold the land to Mr Diplock at a very good price.

32 (c) Cameron Stewart 2009 Notice of an earlier interest? When Mr Diplock inspected the land he had a conversation with Mr Wicks, one of the partners, who said that “the land was held by the partners under an agreement.” Diplock became the registered proprietor and tried to raise the rent. When the tenants refused to pay the increased rent he served an eviction notice. Question in this case: was Diplocks title defeasible with respect to the unregistered lease? The partners raised Diplocks conversation with Wicks as evidence of fraud. In court it was held that this evidence did not establish fraud. The court said that you need to show more than just notice or disregarding of rights. Instead you need to be able to show Diplocks personal dishonesty, that Diplock knew what Bennett was doing and was involved in making it happen. The court said that there was no evidence that Diplock knew who the syndicate members were, or even that Bennett was a partner. He could have believed that Bennett was acting on the authority of the partners, or that it was a short term lease. So in this case it was held that there was no evidence that Diplock was dishonest in the sense of knowing about Bennetts’ conduct and participating in that conduct. Therefore, Diplock’s title was indefeasible.

33 (c) Cameron Stewart 2009 Notice of an earlier interest? The decision in this case can be contrasted to R M Hosking Properties Pty Ltd v Barnes [1971] SASR 100 where Barnes had an unregistered interest 2 year lease with an option to renew it for a further term of 2 years. During the term of the lease Hosking purchased the property from the original landlord Hosking knew of the lease and agreed to accept title subject to the occupation of the land by Barnes. When Barnes sought to exercise the option Hosking gave him a notice to quit the property, stating that he (Hosking) was not bound by the unregistered lease.

34 (c) Cameron Stewart 2009 Notice of an earlier interest? Hosking prevailed in court. The court ruled that, although Hosking knew of the unregistered interest, that knowledge was not enough to establish fraud. Unlike the case of Loke Yew v Port Swettenham, there was no proven plan of dishonesty or fraud, and no evidence that the original landlord had been induced to sign the transfer to Hosking on the basis of Hosking’s statements.

35 (c) Cameron Stewart 2009 Exceptions to indefeasibility - Fraud Fraud where: Registered proprietor has been given notice of unregistered interest and then assures that the interest will be protected and then registers seeking indefeasibility: Loke Yew; Registered proprietor receives notice and lulls unregistered interest holder into not registering, then seeks to claim indefeasibility: Heggies Bulkhaul Ltd v Global Minerals Australia Pty Ltd (2003) 59 NSWLR 312;

36 (c) Cameron Stewart 2009 Exceptions to indefeasibility - Fraud Fraud where: Notice and deliberate frustration of prior interest holder’s registration Costin v Costin (1994) NSW ConvR 55-715; Actual knowledge of a fraud and then an attempt to register to defeat the defrauded party (NOT Constructive knowledge).

37 (c) Cameron Stewart 2009 Exceptions to indefeasibility - Fraud Not fraud where: You have been given express notice of unregistered interest and then register to defeat that interest s43; You have been given notice and believe that unregistered interest is enforceable and discover on registration that it is not: Bahr v Nicolay (No 2); You register with the express aim of defeating a possible interest, which may arise from pending litigation: Waimiha Sawmilling Co Ltd v Waione Timber Co Ltd [1926] AC 101.

38 The rule in Barnes v Addy Knowing receipt of trust property In Barnes v Addy (1874) 9 Ch App 244, Lord Selborne LC said at 251–2: Those who create a trust clothe the trustee with a legal power and control over the trust property, imposing on him a corresponding responsibility. That responsibility may no doubt be extended in equity to others who are not properly trustees, if they are found either making themselves trustees de son tort, or actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust. But, on the other hand, strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, transactions, perhaps of which a court of equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees. (c) Cameron Stewart 2009

39 Knowing receipt In cases of knowing receipt the plaintiff must prove: (1)the defendant has received trust moneys; (2)the defendant knew the moneys paid were trust moneys; and (3)the defendant knew of circumstances which made the payment a misapplication of trust moneys. (c) Cameron Stewart 2009

40 Knowing receipt For a person to have ‘receipt’ requires him or her to have possession of the trust property for his or her ‘own use and benefit’ Banks will not generally be treated as having received of funds placed in accounts, unless they apply the proceeds to the reduction of an overdraft, or for security: Evans v European Bank Ltd [2004] NSWCA 82. (c) Cameron Stewart 2009

41 Knowing receipt In Baden v Societe Generale pour Favoriser le Developpment du Commerce et de L’Industrie en Franc SA [1992] 4 All ER 161 at 235, Peter Gibson J stated that there were five categories of knowledge in a recipient that were relevant to the decision to impose a constructive trust. (c) Cameron Stewart 2009

42 Knowing receipt They were: (1) actual knowledge; (2) wilfully shutting one’s eyes to the obvious; (3) wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make; (4) knowledge of circumstances which would indicate the facts to an honest and reasonable person; (5) knowledge of circumstances which would put an honest and reasonable person on inquiry. (c) Cameron Stewart 2009

43 Knowing receipt The first three categories are often collectively described as ‘actual knowl­edge’ while the last two are jointly referred to as ‘constructive knowledge’ The courts appear to be split between acceptance of all five categories or with limiting liability to those cases of actual knowledge. It has been argued that, in cases of receipt, the recipient gets the full advantage of the breach of trust and, as a result, the liability should be strict (c) Cameron Stewart 2009

44 Knowing receipt In Australia, it appears that knowing receipt will be established in cases 1 to 4 of the Baden categories, but confusion exists as to whether the category 5, negligent failure to inquire, should be included Consul Developments Pty Ltd v DPC Estates Pty Ltd (1974) 132 CLR 373 (c) Cameron Stewart 2009

45 The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239 Owen J at [4748] The resulting law, as I apprehend it, is that for a third party to be held liable for knowing receipt: (a)there must be a 'trust'; (b)the trustee must have misapplied 'trust property'; (c)the third party must have received trust property; (d)at the time of receiving the trust property, the third party must have known of the trust and of the misapplication of the trust property; and (e)the third party will be taken to have 'known' in the relevant sense if the third party: (i)has actual knowledge of the trust and the misapplication of trust property; or (ii)has deliberately shut his or her eyes to those things; or (iii)has abstained in a calculated way from making such enquiries as an honest and reasonable person would make, about the trust and the application of the trust property; or (iv)knows of facts which to an honest and reasonable person would indicate the existence of the trusts and the fact of misapplication. (c) Cameron Stewart 2009

46 Knowing receipt and Torrens Knowing receipt principles have caused difficulties for the courts when applied to interests in land under the Torrens system. In the Torrens system registered interests can be set aside if they have been procured by fraud, where fraud refers to actual fraud, personal dishonesty or moral turpitude (c) Cameron Stewart 2009

47 Knowing receipt In Macquarie Bank Ltd v Sixty Fourth Throne Pty Ltd [1998] 3 VR 133, a majority of the Victorian Court of Appeal decided that a registered mortgage under the Torrens system could not be set aside in a situation where the mortgagee acted honestly but with constructive knowledge that the mortgage document was a forgery, in breach of trust (c) Cameron Stewart 2009

48 Knowing receipt But what if the registered proprietor has actual knowledge that their interest came via breach of trust? On this issue the authorities are split. In Tara Shire Council v Garner [2003] 1 Qd R 556, a majority of the Queensland Court of Appeal accepted that knowing receipt could apply in circumstances where a registered properietor had actual knowledge that the property was trust property and that the registered transaction was a breach of trust. (c) Cameron Stewart 2009

49 Knowing receipt A similar approach was taken in Koorootang Nominees Pty Ltd v ANZ Banking Group Ltd [1998] 3 VR 16 at 105, although that case is distinguishable because it involved actual dishonesty on the part of the registered proprietor, in addition to knowing receipt The plaintiff was a trustee company and the second defendant, Jeffries, was its managing director. Jeffries' own businesses were in financial difficulties and owed money to ANZ. Jeffries informed ANZ that the plaintiff was the trustee of a non ‑ active trust and consequently security was taken over the trust property. But the bank had notice that this was not correct; the plaintiff was the trustee of merged family estates and held the property on trust for the beneficiaries. Hansen J found that the banks had actual knowledge that the property was trust property and were wilfully blind to the question whether the trust property had been misapplied (which therefore also constituted actual knowledge). (c) Cameron Stewart 2009

50 Knowing receipt In contrast, the Full Court of Western Australia rejected this use of knowing receipt principles in LHK Nominees Pty Ltd v Kenworthy (2002) 26 WAR 517. Anderson, Steyler and Pullin JJ all found that, absent ‘Torrens-style’ fraud, knowledge of a breach of trust would not defeat a registered interest, and knowing receipt principles could not be applied to set aside a registered interest. (c) Cameron Stewart 2009

51 Knowing receipt Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22 Building development in a joint venture whic stalled due to lack of land One party bought up more land and registered it as owner Claim of breach of fiduciary duty and Barnes v Addy HC finds that no there was no fiduciary relationship and that no trust property was received Obiter: HC says that knowing receipt cannot be applied apart from types of Torrens fraud (c) Cameron Stewart 2009

52 Knowing receipt "Fraud" in s 42(1) means "actual fraud, moral turpitude.” The findings above negate actual fraud or moral turpitude not only on the part of Mrs Elias and her daughters, but also on the part of Mr Elias; and Lesmint is in the same position as Mr Elias. Even if the Court of Appeal's factual findings about disclosure were not reversed, Mr Elias's non- disclosures cannot be described as amounting to "actual fraud", and the other parties are in no worse position. (c) Cameron Stewart 2009

53 Fraud and Agency A final aspect of fraud to be noted relates to fraud by the agent of the registered proprietor. If the fraud by the agent is within the scope of the agent’s actual or apparent authority, on ordinary agent principles that fraud binds the registered proprietor, even if the registered proprietor was innocent and the agent was acting for his or her own fraudulent purposes. If the agent’s fraud is not within his or her actual authority then the registered proprietor is not affected by that fraud: Schultz v Corwill Properties Pty Ltd (1969) 90 WN (NSW) (Pt 1) 529.

54 (c) Cameron Stewart 2009 Fraud and Agency Mrs Schultz invested money with a Mr Galea, solicitor, who lent it on mortgage to Corwill Properties Pty Ltd. Mr Galea was in fact the controller of that company. Mr Galea used Mrs Schultz's money for his own purposes, and without authority he had affixed Corwill's seal to the memorandum of mortgage over its land and forged his mother's signature as a co-director. The mortgage was registered. L W Street J held that Mr Galea was not authorised by the company to commit the fraud, that fraud did not affect the registered proprietor. Accordingly Mrs Schultz's suit failed

55 (c) Cameron Stewart 2009 Fraud and Agency In Dollars & Sense Finance Ltd v Nathan [2008] 2 NZLR 557, a mortgage was registered in favour of a lender as security for a loan that it had made to a borrower. The borrower had forged the signature of the mortgagor, in circumstances where the lender had forwarded the relevant documentation to the borrower to obtain the signature of the mortgagor. In these circumstances, the New Zealand Supreme Court held that the borrower had acted as agent for the lender and that the forgery was an act done within the scope of the agency, even though the lender had no knowledge of the forgery and the forgery was done exclusively for the benefit of the lender.

56 Fraud and agency Davis v Williams [2003] NSWCA 371 - Mr and Mrs Williams purchased a house and land together as joint tenants in 1956. The property was owned by the Housing Commission and was to be registered in the Williams' name once payment was completed. In 1969 the couple separated, but never formally divorced. The house was fully paid off in 1987. In 1993 Mr Williams saw a solicitor, who arranged for a signed transfer from the Commission in favour of the Williams as joint tenants. (c) Cameron Stewart 2009

57 Fraud and agency Mrs Williams' whereabouts were unknown and attempts were not made to contact her. The registration was effected by documents that had, without the knowledge of any other parties, been changed by the registration clerk. She changed the registration from joint tenancy to tenancy in common Later Mrs Williams claimed the whole house and said that her interest had been affected by fraud Did the registration of the transfer effect an indefeasible tenancy in common? (c) Cameron Stewart 2009

58 The clerk Hodgson JA at [25] - For my part, however, I do not see that as being, in this case, a requirement distinct from those I have already raised. If the registration clerk made a representation to the Registrar-General, knowing it to be false in a material respect, and intending that the Registrar-General be induced by the representation to act in a way materially different from what otherwise would have been done, then I think that would be sufficient dishonesty or moral turpitude, irrespective of whether she had any intention that anyone be disadvantaged by this. If a lie is material in respects such as these and understood to be so, I do not think that lack of intent to harm can justify treating it as a "white lie" and as excluding dishonesty or moral turpitude. On the facts there was not enough to find knowledge of dishonesty (c) Cameron Stewart 2009

59 The solicitor 32 Questions concerning the authority of agents arise in various circumstances. One area concerns an agent's authority to make a contract binding on the principal. Another concerns the vicarious liability of employers for wrongful acts committed by their employees. And another concerns a vicarious liability of persons for wrongful acts committed by other persons who are not their employees. This case seems to fall within the last area: the wrongful act was committed, not by an employee of the registered proprietor but by a contractor engaged by his solicitor (c) Cameron Stewart 2009

60 The solicitor 34 In the case of alleged agents who are not employees, it appears that a person may be liable as principal on a similar basis to an employer, if the wrong-doer was carrying out some activity as the principal's authorised representative in dealing with a third party:... A person may also be liable as principal where the wrong-doer is carrying out a task that the principal has undertaken to do, at least where the wrong-doing is merely negligent:...If a person commits an unauthorised wrong-doing while acting as the authorised representative of another in dealing with a third party, then it seems that much the same question would arise as in the case of an employee, namely whether the connection between the wrong- doing and the authorised acts is sufficiently close to regard the wrongful act as being within the scope of the engagement. In both cases, the question whether the wrong-doing was for the benefit of the wrong-doer or the alleged principal will be a relevant, but not on its own conclusive, factor. (c) Cameron Stewart 2009

61 The solicitor No benefit to the RP 40 In this case, in substance the only "benefit" of the fraud to Mr. Williams is that he obtained registration as tenant in common through the registration of one document rather than two, with a relatively trivial saving of government charges. Mr. Williams cannot give up this "benefit" without also giving up what he would have obtained in the absence of fraud, because, for reasons discussed by Young CJ in Eq., the second transfer cannot now be registered. In my opinion, the "benefit" accepted by Mr. Williams is insufficiently substantial, or insufficiently a matter of choice for Mr. Williams, to require that he be considered answerable for the fraud of his agent. According, if I had considered that the registration clerk was guilty of fraud, I would not have found Mr. Williams to be answerable for it. (c) Cameron Stewart 2009

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