Australia: Banking & Finance Update – January 2006

Last Updated: 14 July 2006


  • Problems with new measures to counter identity fraud in Queensland
  • Guarantees: another one bites the dust!


Gadens Lawyers has identified a number of problems with the proposed amendments to the Land Title Act (Qld) 1994. A fundamental problem is the prescribed process of checking identification needs to be clarified. As a $1,500 penalty applies for each non-compliance, clarity is essential.

The amendments are intended to address the rising incidence of identity fraud in relation to mortgages. The amendments are expected to commence in February 2006. There may be changes prior to commencement.

Key issue

Do lenders need to repeat identification procedures when the mortgage is signed? If so, will it be necessary for mortgagors to attend the offices of the lender or its lawyers?


The Torrens system has a concept of indefeasibility, meaning that the interest of a person who becomes registered is protected by statute. If an owner or mortgagee suffers loss as a result of fraud or defect in the register, the State will pay compensation (subject to conditions).

Indefeasibility applies to mortgagees as well as owners. A mortgagee’s interest is indefeasible even if the mortgage is a forgery and the "real mortgagor" did not sign the mortgage. Where a title becomes subject to a fraudulent mortgage, normally the owner makes a claim for compensation equal to the debt owing under the mortgage and then pays out the mortgagee.

In several cases in NSW, the NSW Registrar General has taken the position that even if the mortgage is indefeasible, there is no money owing under it, and the real owner can demand a discharge. This is because there is no money owing by the "real mortgagor". Of course, from a mortgagee’s point of view, this makes indefeasibility of little value. It remains to be seen whether the NSW approach is correct when tested further in court.

The Queensland Government appears to take the view that a fraudulent mortgage will secure the mortgage debt even though forged. The Government proposes to amend the Land Title Act in the light of increased claims arising from fraud.

Proposed amendments

The amendments to the Act qualify indefeasibility in two ways:

  • indefeasibility will not be available unless the mortgagee has taken "reasonable steps" to identify the person(s) who sign the mortgage (irrespective of whether the mortgagee becomes mortgagee by a new mortgage or transfer of mortgage); and
  • if a mortgagee exercises power of sale under a mortgage which was executed fraudulently, the mortgagee may only retain out of the sale proceeds the aggregate of principal, reasonable enforcement costs, and interest, limited to the lesser of:
    1. the official cash rate plus 2% (currently about 7.5% per annum); or
    2. the rate in the mortgage.

It appears mortgagees will not be entitled to break costs or other fees and charges such as deferred establishment fees. The interest rate is too low to protect the legitimate interests of many mortgagees. Gadens Lawyers has lodged a submission to the Government proposing that mortgagees should be entitled to these amounts. It is important to note that the limitation only applies when a mortgagee successfully sells under a mortgage that was executed fraudulently, and will not impact "ordinary" mortgagee sales.

Taking reasonable steps to identify the mortgagor

It is unclear what constitutes "reasonable steps" to identify the person(s) who sign the mortgage as mortgagor. The Act directs mortgagees to the Queensland Land Titles Practice Manual; however, this manual simply advises that a "mortgage must be validly executed in a way permitted by law".

The Second Reading Speech suggests that the obligation to take "reasonable steps" to identify the mortgagor will be satisfied in most cases by the "100 point check" or similar checks. It is anticipated that the Queensland Land Titles Practice Manual will be amended in the future to reflect this. But is this check to be conducted at the time the mortgage is actually signed, or can a mortgagee rely on an earlier check?

Prudent lenders conduct extensive identity checks (often in excess of the "100 point check") as part of the loan approval process. However, the mortgage is signed later, usually by being sent to the mortgagor for execution. The amendments do not specify whether the identification process has to be repeated.

There is no guarantee that the person who satisfied the initial identity verification procedures is the same as the person who subsequently signs the mortgage. It would greatly inconvenience customers and slow down the lending process if the identification process has to be repeated. Mortgagors would generally have to attend at the lender's office or the lender's lawyer’s office to enable the identification process to be carried out again. This would run contrary to the concept that borrowers should not be pressured to sign and should have the opportunity to obtain independent legal and financial advice.

We have submitted that the law should be amended to make it clear that initial identity verification is sufficient.

Record keeping

The mortgagee must keep a record of the steps taken to identify the person signing the mortgage as mortgagor for seven years after the mortgage is registered. The record must be:

  • a written record in the "approved form"; or
  • originals or copies of documents used by the mortgagee to identify the person signing the mortgage as mortgagor.

What constitutes the "approved form" has not yet been specified.

Either before or after the registration of the mortgage the registrar may require a mortgagee to advise them of the steps taken, or produce the documents used to identify the person signing the mortgage as mortgagor. Failure to keep records or comply with the registrar’s request may result in a maximum fine of 20 penalty units (currently $1,500).

The way forward

  • We urgently need clarification of whether the identification process must be repeated.
  • The obligation to retain identification records may cause system problems, as currently the Financial Transactions Reports Act only requires a written record of the steps taken to be kept in the approved form.
  • The careful monitoring of how loan proceeds are applied remains in our view the key fraud mitigant.

By Jon Denovan


In a recent court case, a wife successfully applied to set aside a guarantee she gave in respect of her husband’s business. Although she was a director and shareholder of the borrowing company, the court found that Mrs Thompson had limited involvement in business and financial affairs. She had failed to understand the extent of her liability under the guarantee.


Mr and Mrs Thompson signed a guarantee on the understanding that it secured a loan and an overdraft for one of their companies.

Two bank officers attended the Thompsons’ home to have the guarantee and a number of other documents signed. At the meeting the Thompsons signed the guarantee and a third party equitable mortgage.

Unknown to both Mr and Mrs Thompson, the effect of the documents was to secure not only the $290,000 provided under the current facilities, but also the financial facilities of three other companies owned by Mr Thompson, to a total of approximately $4m.

In addition, signing the documents meant that the $290,000 facilities could be accelerated upon default by any of the other borrower companies. This was triggered when an administrator was appointed to one company, leading to the bank’s determination that a "material adverse change" had occurred which amounted to default under the terms and conditions of the facilities.

Mrs Thompson’s evidence

Mrs Thompson remembered little about the subject transactions.

Mrs Thompson said she signed the documents at the request of her husband. Despite being a director and shareholder in the borrowing company, she maintained that she knew nothing of the financial dealings between the bank and her husband. Furthermore, she had never seen the documents she signed prior to signing them.

She did not remember reading any of the documents she signed, nor could she recall the bank officers explaining to her the effect of the documents when she signed them.

The Bank’s defence

The bank officers made no diary note of their meeting with the Thompsons.

The bank officers could not remember exactly what was said at the meeting, but sought to rely on their "usual practice" as evidence of what they would have said at the meeting.

In respect of the guarantee, a bank officer stated that Mrs Thompson would have been advised she had the option to take the guarantee away and get legal advice prior to signing.

The "usual practice" of the bank officers did not always accord with the bank’s written procedures.

The findings of the court

The court considered that the bank was aware Mrs Thompson placed trust in her husband in matters of business and had limited involvement herself in business and financial affairs.

While Mrs Thompson was found to have understood the basic effect of a guarantee, she failed to understand the extent of her liability under the guarantee transaction or the circumstances in which liability could arise.

Despite being a director and shareholder of the borrowing company, Mrs Thompson was merely a volunteer and had no real involvement in the company Any benefits she gained from the business were completely at the discretion of her husband.

The court found that the bank officers did not take adequate steps to explain the effect of signing of the guarantee, in particular to Mrs Thompson.

While the court accepted that the bank’s booklet entitled "What it means to be a Guarantor" was produced during the meeting when the documents were signed, Mrs Thompson did not read the document that day or at any other time.

The court considered that Mr and Mrs Thompson were not given adequate opportunity to take time to consider documents and obtain independent legal or financial advice.

The court accepted that Mrs Thompson would not have signed the documents had she known the full effect of the guarantee transaction.

Lessons for credit providers

Alarm bells should ring whenever a customer appears to be at a certain disadvantage or there are unusual or complex terms in documents being signed.

Credit providers must ensure they allow customers sufficient time to consider the documents they are signing, and to obtain independent legal and/or financial advice.

This case also highlights the importance of keeping a diary note of meetings where important documents are signed, including noting what was explained to the customer. This may provide evidence that the credit provider has satisfied its obligations to the customer.
By Jon Denovan


Jon Denovan

t (02) 9931 4927


Elise Ivory

t (02) 9931 4810



Danny Moore

t (03) 9617 8696


Simon Wallace

t (03) 9252 2521



David Skender

t (08) 9220 4930


Richard Homsany

t (08) 9220 4955


This publication is provided to clients and correspondents for their information on a complimentary basis. It represents a brief summary of the law applicable as at the date of publication and should not be relied on as a definitive or complete statement of the relevant laws.

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