The recent Supreme Court decision of his Honour Justice Hargrave in Perpetual Trustees Victoria Ltd v Xiao & Anor [2015] VSC 21 concerned a loan procured by fraud.  One of the questions before the Court was whether a forged mortgage registered over Torrens system land secured the amount owing under the forged loan agreement.  It was held that the mortgage did not secure the loan.  In reaching that view, Hargrave J declined to follow the approach taken by his Honour Justice Pagone in the well-known Victorian Supreme Court case of Solak1.


Ms Xiao's husband obtained two loans from Perpetual in Ms Xiao's name. The loans were secured by a mortgage over their home in Vermont registered in Ms Xiao's name.  The husband was found to have acted fraudulently in obtaining the loans - he did not tell Ms Xiao about the loans and he forged her signature on the loan and mortgage documents. 

Perpetual had no knowledge of the fraud and retained indefeasibility of title2.  The question was whether the mortgage secured anything given Ms Xiao's signature on the loan agreement was forged.  This answer to this turned on the construction of the documents.

The decision

The mortgage instrument registered on title stipulated that it was given in consideration of and to secure loans, advances, or financial accommodation provided by the mortgagee to the mortgagor.  However, Ms Xiao never received any loans, advances or financial accommodation from Perpetual.  The memorandum of common provisions (the MCP) incorporated into the mortgage by reference contained a typical "all monies" clause in these terms:

The Mortgage is security for payment to You of the Secured Money and for performance of all of my obligations under the Mortgage.  I agree to pay the Secured Money as and when Secured Money becomes due and payable in accordance with the provisions of each Secured Agreement or the Mortgage.

The term 'Secured Agreement' meant any present or future agreement between the mortgagee and mortgagor and the term 'Secured Money' meant all amounts actually or contingently payable under a Secured Agreement.

In considering whether the indefeasibility of the mortgage gained on registration extended to the covenant for payment contained in the MCP, his Honour Justice Hargrave referred to a number of single judge and Court of Appeal decisions in NSW.  Those decisions say that the issue can be resolved by determining whether the covenant for payment in the MCP is, on a proper construction of the documents, incorporated into the registered mortgage3.

The effect of the MCP provisions in this case was that Ms Xiao had to pay all amounts owing by her to Perpetual under any present or future agreement between them.  However, Hargrave J pointed out that the substance of the NSW decisions, which he found to be convincing, was that where the loan agreement sought to be enforced was forged, there is in fact no "Secured Agreement" and no 'Secured Money" (to use the relevant terms in the MCP applying to this case).

The lender relied on the earlier Victorian Supreme Court decision of Justice Pagone in Solak4 who took a different approach to the NSW courts.  The terms of the memorandum of common provisions in Solak were similar in structure.  However, Pagone J distinguished the case from the NSW cases on the ground that the mortgage and loan documentation all defined mortgagor/borrower as "You" and "You" in each case was the person pretending to be Mr Solak.  Justice Hargrave declined to follow that approach and described it as "plainly wrong" in his view.

Despite the finding that the mortgage secured nothing, Perpetual had other means of recovering the debt owed to it.  Ms Xiao's husband was ordered to pay damages to Perpetual in the amount of the balance of the loan plus interest and it was found that Ms Xiao held the land on trust for her husband.

Takeout from the decision

The effect of the decision in Xiao is to create doubt, in Victoria, that an "all monies" clause incorporated into an indefeasible mortgage will give a lender the ability to recover from the registered proprietor money advanced under a forged loan agreement.

Finally, the mortgage in Xiao was registered prior to the amendments to the Transfer of Land Act 1958 (Vic) which commenced on 24 September 2014.  Those amendments included the imposition of an obligation on a mortgagee to take reasonable steps to verify the authority and identity of the mortgagor to ensure that the person executing the mortgage is the same person who is, or is to become, the registered proprietor of the land that is security for the payment of the debt owed to the mortgagee.  See link below to my earlier article which highlights the changes.

If there is a failure to verify identity in accordance with the new law, the registered mortgage will be void in cases of fraud (whether the mortgagee had knowledge of the fraud or not) and any argument about whether indefeasibility extends to a covenant to pay found in a mortgage will be a moot point.