Elfar was the lender and held a second registered mortgagee over the development property owned by the defendant company.
Elfar alleged that there had been a fraudulent discharge of the lender’s second mortgage. As a result of registration of the discharge from Elfar was deprived of his security as second mortgagee. A receiver had been appointed to the development company after the second mortgage was discharged.
Elfar applied for compensation from the Torrens Assurance Fund pursuant to s 129 of the Real Property Act 1900 (NSW) (“RPA”) for loss suffered as a result of the operation of the Act.
The Registrar General (“RG”) relied on s 129(2)(a) and (c) of the RPA, that any loss suffered by Elfar was the result of his own acts or omissions and was not compensable under the Act. The RG in essence claimed that Elfar was complicit in allowing the registration of the discharge of mortgage so that there was no fraud. In the alternative, that Elfar had failed to mitigate his loss. Evidence of the authenticity of the signature on the mortgage discharge form was given by both sides. The RG also argued Elfar had not suffered loss by operation of the Act as there was insufficient equity in the development property to discharge the mortgage by repaying the loan on the sale of the property.
Elfar was required to prove the fraud he alleged in relation to the discharge of the mortgage. The mortgage was discharged in the course of refinancing the development. Elfar denied signing the discharge to allow for the refinancing to go ahead so that the development could be completed and give him a better chance of recovering the debt. Elfar denied signing the discharge of mortgage form and denied authorizing anyone to do so.
Justice Ward set out the legal principles that apply to a party seeking to recover compensation for loss caused a forged mortgage document:
Mr Elfar clearly bears the onus of proving that, as a consequence of the existence of fraud, he is deprived of an interest in land which causes him loss or damage (Behn v Registrar General  2 NSWLR 496, this issue not being questioned on appeal in Registrar General v Behn  1 NSWLR 589; (1980) NSW ConvR [55-002], nor Registrar General v Behn (1981) 148 CLR 562; (1981) 35 ALR 633).
There is authority (Brott v R (1992) 173 CLR 426; (1992) 105 ALR 189;  HCA 5; R v Forbes (1835) 7 Car & P 224; 173 ER 99; R v Beard(1837) 8 Car & P 143; 173 ER 434; R v Parish (1837) 8 Car & P 94; 173 ER 413; R v Beardsall (1859) 1 F & F 529; 175 ER 839; R v Hartshorn(1853) 6 Cox CC 395) to the effect that there can be no fraud or forgery where the alleged victim is complicit in or consents to the alleged forgery, on the basis that the necessary elements to establish the forgery will not have been made out.
Justice Ward set out the elements of fraud and forgery as follows:
“Fraud” has been interpreted broadly for the purposes of s 129, in Parker v Registrar General  1 NSWLR 22, Glass JA (with whom Street CJ agreed) stated, (at 25-26):
In my opinion, the section should be construed so as to embrace all frauds within the ordinary legal meaning of that term. I can see every reason why some might think it undesirable that, whenever the fraudulent party absconds, dies or becomes bankrupt, the assurance fund should bear the brunt of the many varieties of moral turpitude normally encompassed by the word fraud. But I can see no warrant for reading down the language of the section so as to restrict it to forgery or quasi-forgery.
Relevantly, in Brott v R, Brennan J sets out a comprehensive explanation of the common law elements of forgery (at 193) (which I have extracted below) and importantly indicates that there will be no forgery when a signature is placed on a document by a person having the purported signatory’s authority to do so (at 192, citing R v Forbes; R v Beard; R v Parish; R v Beardsall).
Brennan J goes on to note (at 192) a ruling by Crompton J sitting in the Staffordshire Assizes in R v Hartshorn, and explains it as follows:
There, a statute provided that illiterate voters should place their mark on a ballot paper and have the mark attested by a witness. The witness placed his signature on the voting paper when the mark had been placed on it not by the voter but by another person, albeit with the voter’s express or implied consent. His Lordship ruled that there was no forgery, saying ibid., at 402:
“There is no false statement implied, and the essence of the crime of forgery is making a false entry or signature, knowing it to be without authority and with intent to defraud.”
As to failure to mitigate loss by delaying commencing proceedings to recover from the borrower when the lender found out that the discharge of mortgage had been registered, Justice Ward stated the relevant legal principles as follows:
As to what would be necessary as a matter of general principle by way of mitigation, in Segenhoe Ltd v Akins (1990) 29 NSWLR 569, Giles J (as his Honour then was), there considering whether there was a failure to mitigate by reason of the fact that litigation had not been commenced, noted that (at 582);
In fulfilling its obligation to mitigate its loss, Segenhoe is only required to act reasonably, and the standard of reasonableness is not high in view of the fact that DHS is the wrongdoer: see Banco de Portugal v Waterlow and Sons Ltd  AC 452 at 506;Sacher Investments Pty Ltd v Forma Stereo Consultants Pty Ltd  1 NSLWR 5; McGregor on Damages, 14th ed, Sweet & Maxwell, 1980, para 233.
Whether the plaintiff has acted reasonably or unreasonably must depend on the circumstances of the individual case (British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd  AC 673, at 688–9 per Viscount Haldane LC (with whom Lords Ashbourne, Macnaghten and Atkinson agreed); Payzu Ltd v Saunders  2 KB 581; Sotiros Shipping Inc v Sameiet Solholt (The Solholt)  1 Lloyd’s Rep 605; Burdis v Livsey  QB 36, at 86;  3 WLR 762, at 804).
Justice Ward found that Elfar had not acted unreasonably in failing to commence proceedings against the borrower to recoup the debt, in circumstances where it was not clear that there would be sufficient funds available form the sale of the property to discharge the second mortgage. It seemed likely that such action would only have resulted in the borrower being forced into receivership at an earlier time. Therefore, the RG did not succeed in establishing a defence under s 129(2)(c) of the RPA, although it was not necessary to determine the issue given the conclusions reached below.
Justice Ward concluded Elfar did sign the discharge of mortgage form and/ or was complicit with someone else forging his signature. As a result, there was no fraud. Even if there was fraud, Elfar’s complicity in the discharge of the mortgage meant that the defence under s 129(2)(a) was successful. There was no question as to the loss suffered, but if that question had arisen Justice Ward stated she would have found Elfar suffered no loss. It was likely that BankWest would have sold the property as mortgagee in possession pursuant to a first registered mortgage which would have meant there was insufficient equity remaining to discharge the second mortgage.