Australia: Low Doc; No Doc; Fake Doc

Last Updated: 29 October 2007

You may recall the Karl Suleman Enterprises (KSE) investment scam, where investors were lured into a trolley collection business on the basis of unrealistic returns. The investors have returned to court seeking relief from the loan agreements and mortgages they entered into to raise funds to invest in KSE.

In the Khoshaba decision1, the Supreme Court set aside the loan agreement and mortgage on the basis that they were unfair under the Contracts Review Act, and found in favour of the investors. However, in a decision handed down last Thursday, concerning the Contracts Review Act in Riz v Perpetual Trustee Australia Limited, the Court has gone the other way and found in favour of the lender.

Riz v Perpetual Trustee Australia Ltd

Mr and Mrs Riz came to Australia from Lebanon in 1977. Their first language was Arabic. Their English was poor. At one time they operated a Pizza Shop. At the time they applied for the loan to invest in KSE, they were reliant on income from part-time work and Centrelink benefits.

Their loan application was accompanied by a bundle of income tax returns and financial statements for a purported partnership of Mr and Mrs Riz, and for each of them individually for the financial years ending 1999 and 2000. The tax return copies were unsigned by either Mr or Mrs Riz but apparently signed by a tax agent.

A close inspection of the tax returns would have revealed, in the distribution statement, a reference to a Mr and Mrs Saddi as the partners to whom income was distributed. This contradicted the personal income statements and was accepted at the hearing as being indicative of fraud.

Mr and Mrs Riz claimed the lender should not have relied upon the tax returns to verify the applicant's income. They also submitted that there were other features of the tax returns that supported this conclusion. These included:

  • they were undated and unsigned
  • they disclosed a fax imprint of "Sanctuary Windows" (an entity that the lender knew had no connection with Mr and Mrs Riz)
  • they were transmitted as page 27 onwards of a facsimile transmission of about 90 pages
  • there was no indication that they had been explained to Mr and Mrs Riz, who could not read English.

A distinguishing feature from Khoshaba was that in Riz the Court drew an inference that the fraud had been perpetrated by the broker and that the lender's rights were not affected by the broker's knowledge.

In Khoshaba the Court did not make any such conclusions.

The Court noted that the lender is not an auditor. Lenders are not expected to scrutinise every entry in tax returns to ascertain whether the borrower or the borrower's agent engaged in some fraud.

The Court held that a lender's failure to detect fraud by or on behalf of a borrower does not result in a finding that the consequent loan contract is unjust.

Take out

The Riz judgment is good news for lenders. It will assist in confining the Khoshaba decision to its own unique circumstances. It also shows the importance, when being met with a Contracts Review Act defence, in establishing who in the introduction chain was in all likelihood responsible for the fraud and that this party was not an agent of the lender.

Claim against solicitor

Mr and Mrs Riz also sued the solicitors who acted for them on the loan. The Court found that the solicitors did not do enough to prevent Mr and Mrs Riz from investing part of the loan proceeds in a highly speculative venture. The damages that the Mr and Mrs Riz recovered against their solicitors included higher rate interest and lender legal enforcement costs.

It was noteworthy that the solicitors advising the borrowers had "multiple allegiances" as their firm was involved in advising Mr Suleman. The firm had also acted on 95 matters where clients had invested in KSE Enterprises.

The Court was critical of the solicitors in not doing enough to bring home the importance to Mr and Mrs Riz of obtaining independent advice in circumstances where the borrowers believed that their investment in KSE would generate income of $10,000.00 per fortnight on an investment of $150,000.00.

Lenders need to be mindful that third parties may be responsible for the borrower's predicament.

It is often in the mutual interest of the borrower and lender to ensure these parties are joined to the proceedings.


1. NSW Court of Appeal decision 20 March 2006




Justin Bates

t (02) 9931 4763


Campbell Hudson

t (02) 9931 4957


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