Associate Justice Macready of the Supreme Court of New South Wales was recently called upon to determine a priority dispute between two lenders.
In Australian Financial Services and Leasing Pty Limited v All Up Finance Pty Limited  NSWSC 1004 the circumstances were:
Australian Financial Services and Leasing Pty Limited, the Plaintiff ("AFS") carried on a finance business, providing customers with finance to purchase commercial or industrial equipment for use in the customer's business. Typically this involved AFS purchasing equipment from a supplier, upon the presentation of an invoice from a supplier, and then entering into a rental agreement with a customer. Under the rental agreement the customer paid an agreed monthly rental payment but the equipment remained the property of AFS.
All Up Finance Pty Ltd, the first defendant ("All Up"), carried on a short-term finance business. It provided customers with brokerage and other financial services by arranging loans from lenders to its customers. Its customers typically had bad credit ratings, and due to the high-risk nature of the lending, All Up was able to charge high rates of interest. Its customers usually required these services for the purpose of home loans, debt consolidation, bridging loans, and commercial finance requirements.
In late 2009, two companies controlled by Richard Skarzynski, the husband of the Third Defendant, (Total Concept Projects (Australia) Pty Ltd and Total Concept Productions (Australia) Pty Ltd) perpetrated a fraud on AFS. AFS entered into a number of rental agreements with these 2 companies under which AFS would own certain equipment to be used by these companies and those companies would rent that equipment from AFS. It was a term of the rental agreements that these companies would make rental payments to AFS for the equipment purchased by AFS. In fact, AFS financed business equipment based on forged receipts provided by Skarzynski.After the equipment finance fraud was committed, All Up purported to loan the third defendant wife $300,000, also secured with a charge protected by a caveat over her property. However the wife denied borrowing the $300,000 or signing the caveat. All Up did not have a registered mortgage over the property.
After AFS discovered the fraud, the wife agreed to charge her property to secure the debt and a caveat was lodged. AFS also did not have a registered mortgage over the property.
The wife's property was sold for $5million, and the net proceeds of the sale available for distribution to the competing claims by AFS and All Up were $500,000 (after paying in excess of $4million to the first registered mortgagee, St George Bank). The sum of $500,000 was paid into court, pending the outcome of the litigation. AFS and All Up both claimed that sum.
The normal rules of priority in a dispute between equitable interest holders are that the first in time prevails, provided there is no disentitling conduct. If those rules applied, All Up would win.
However, before considering those normal rules of priority to see whose equitable interest took priority, the court had to decide whether the All Up mortgage was forged (if it was forged it was void, meaning that All Up had no interest at all in the property, and hence no interest in the fund).
Although the wife was originally a party to the proceeding, by the time of the trial the only parties left were AFS and All Up.
AFS called the wife as a witness. In her evidence, she denied signing the All Up caveat and a mortgage dated the same day (among other documents). Expert evidence was also called by AFS to show that the All Up documents were forged.
The NSW Supreme Court concluded the All Up documents were forgeries because:
- the wife had no knowledge of her husband’s dealings with All Up;
- the wife’s actual signature appeared to be vastly different to the putative signature on All Up’s documentation;
- the expert evidence concluded that the wife’s putative signature on All Up’s documentation was questionable; and
- All Up failed to call the witness who allegedly saw the wife sign the All Up documentation, creating an inference that the witness’s evidence would have harmed All Up's case.
The "Briginshaw standard" is often spoken of quite loosely and as if it is a third standard of proof sitting somewhere between the balance of probabilities and beyond reasonable doubt. This is wrong. As Dixon J points out the civil standard of proof is proof on the balance of probabilities requiring the relevant party to prove the elements of its case to that standard.
The case raises a number of issues for lenders to consider in reviewing their lending practices in order to avoid losing to fraudsters.
First, always obtain registrable mortgages, not just an equitable charge;
Secondly, always register the mortgage, do not just lodge a caveat (in this case, the All Up mortgage was not registered because St George Bank required the execution of a deed of priority, which the wife refused) - once a mortgage is registered on title, it is indefeasible; and
Finally, ensure that the witness to any mortgage documents is known to the lender (it is obviously best practice to have the borrower sign the security documents in front of an employee of the lender, or an independent solicitor, who certifies that he or she has explained the documents to the borrower and that the borrower understood what they were signing).
Hayden Starke Chambers