FM CUSTODIANS LIMITED v R [2020] NZCA 285

FM CUSTODIANS LIMITED v R [2020] NZCA 285 [14 July 2020]IN THE COURT OF APPEAL OF NEW ZEALANDI TE KŌTI PĪRA O AOTEAROACA294/2019[2020] NZCA 285BETWEEN FM CUSTODIANS LIMITEDAppellantAND THE QUEENFirst RespondentAND LINDSAY BECKETT SMITHSecond RespondentHearing: 13 May 2020Court: Kós P, Venning and Mallon JJCounsel: G P Blanchard QC, B K McLay and E B Moran for AppellantK South and J Mara for First RespondentNo appearance for Second RespondentJudgment: 14 July 2020 at 9.30 amJUDGMENT OF THE COURTThe appeal is dismissed.____________________________________________________________________REASONS OF THE COURT(Given by Venning J)Introduction[1] Lindsay Beckett Smith pleaded guilty to a representative charge of usingforged documents to obtain a pecuniary advantage and one charge of failing, withoutreasonable excuse, to comply with s 149 of the Insolvency Act 2006. He wassentenced in the District Court at Greymouth to two years and two months'imprisonment on the forgery charge, with a reparations order of $764,000,and convicted and discharged on the insolvency charge.1[2] The offending involved two loans totalling $784,000 which FM CustodiansLtd (FMC) had advanced to entities associated with Mr Smith. The loans were securedagainst several properties. As part of the sentencing process, the Crown soughtforfeiture of the proceeds of sale of the properties. FMC applied for relief againstforfeiture.[3] Judge Neave found that FMC did not have a valid interest in the property as itsmortgage was created by fraud. The Judge went on to reason that if he was wrong inthat conclusion, FMC was in any event involved in the qualifying instrument forfeitureoffence. It could not, therefore, meet the test for relief from forfeiture under s 142Lof the Sentencing Act 2002. The Judge made an instrument forfeiture order in relationto the proceeds of sale totalling $647,870.36.2[4] FMC appealed. Nation J dismissed the appeal.3 He held:(a) the properties in issue were an instrument of crime;4(b) the Judge was correct to find FMC did not have a valid interest inthe properties as its mortgages were created by fraud;5(c) the Judge was also correct to find that FMC, through Mr Smith as itsagent, had been involved in the relevant instrument forfeiture offence;6and1 R v Smith [2017] NZDC 27345 [Sentencing notes].2 R v Smith [2017] NZDC 19891 [District Court judgment]; and R v Smith DC GreymouthCRI-2014-018-39, 26 September 2017 [District Court recall judgment].3 FM Custodians Ltd v R [2019] NZHC 1128 [High Court judgment].4 At [55].5 At [151].6 At [178].(d) the Judge had properly concluded FMC was not entitled to relief fromthe forfeiture order and consequently the proceeds of sale should beforfeited to the Crown.7[5] FMC applied for leave to bring a second appeal. This Court granted leave toFMC to appeal the High Court decision that FMC was not entitled to relief fromthe instrument forfeiture order.8[6] The appeal raises the following issues:(a) Were the properties instruments of crime as defined in s 5 ofthe Criminal Proceeds (Recovery) Act 2009 (CPRA) and s 4 ofthe Sentencing Act?(b) If so, did FMC have an interest in the properties as required by s 77(1)of the CPRA and s 142L(1)(b)(i) of the Sentencing Act?(c) Was FMC involved in the qualifying instrument forfeiture offence?[7] FMC does not seek relief from forfeiture on the grounds of undue hardshipunder s 77(1)(b) CPRA and s 142M of the Sentencing Act.Background[8] Mr Smith was a well-known accountant on the West Coast. He becameinvolved in a number of other business ventures, including property development, amining operation, and a heliport project in Franz Josef. One of the propertydevelopments involved a subdivision and residential development at Blue Spur nearHokitika. Mr Smith went into that venture with a Mr and Mrs Ross. A company,Ballarat Terrace Limited (Ballarat), was incorporated for the purpose. In the courseof the development project Ballarat created over a dozen sections.7 At [180].8 FM Custodians Ltd v R [2019] NZCA 598.[9] Mr and Mrs Ross lived in Picton. They held 50 per cent of the shares in Ballaratthrough a family trust. Mr Smith lived in Hokitika. He held the remaining 50 per centof the shares in Ballarat through his family trust, the Prospect Family Trust(the Prospect Trust). Mr Ross and Mr Smith were also both directors of Ballarat.[10] Both the District Court and High Court found Mr and Mrs Ross had paid$115,000 for their shares in Ballarat, made further cash advances of $410,000 and paidan additional $260,000 into a Bartercard account in the name of Ballarat to whichMr Smith had access. In total, their contribution to Ballarat was $785,000. Over thecourse of the development, Ballarat had returned $114,760 to the Rosses, leaving abalance due to them of current account and shareholder advances of $670,240.[11] Mr Smith required funding for his various business ventures. He approachedFMC through its Dunedin based agent Fund Managers Otago Limited (FMO).FMO managed a group investment fund, the New Zealand Mortgage Income TrustNo 2 Fund (NZMIT Fund) for the trustee, Trustees Executors Limited (TEL).Members of the public invested in the fund by purchasing units in it. FMC is acustodial company for TEL and was the lender (as nominee of TEL) on the relevantdocumentation.[12] Judge Neave concluded that, although they were separate corporate entities,TEL, FMC and FMO were so interrelated and interdependent that each was acting asthe agent of the other during various parts of the relevant transaction.9 That finding isnot challenged.[13] Mr Smith applied to FMO for loans of $520,000 for the Prospect Trust and$264,000 for Ballarat. FMO's Chief Executive Officer, Mr Peter Hutchison, met anddealt with Mr Smith directly. Mr Smith offered mortgages over his family homeowned by the Prospect Trust (the Prospect property) and over the eight (as then yetunsold) sections belonging to Ballarat as security for the loans.[14] Mr and Mrs Ross were unaware of Mr Smith's approach to FMO or of anyproposal for borrowing using the Ballarat sections as security.9 District Court judgment, above n 2, at [23].[15] In May 2011, FMC agreed to lend:(a) $264,000 to Ballarat to be secured by a mortgage over the eight sectionsof the subdivision (and also to be supported by guarantees fromthe directors); and(b) $520,000 to the Prospect Trust to be secured by a mortgage overMr and Mrs Smith's family home owned by the Prospect Trust(and also to be supported by a guarantee from Ballarat).[16] Mr Hutchison instructed Mr Stephen Woulfe, of the Hokitika law firmMurdoch James & Roper, to act on the loan advances. Mr Woulfe also acted forMr Smith and Ballarat. He had prepared Ballarat's incorporation and constitutiondocuments. Mr Woulfe was aware Mr Ross lived in Picton.[17] Mr Woulfe allowed Mr Smith to take the relevant documentation away in orderto obtain Mr Ross' signature on behalf of Ballarat where it was required.[18] Rather than provide the documents to Mr Ross (who would not have agreed tothe borrowing), Mr Smith forged Mr Ross' signature as director of Ballarat on thefollowing documents in relation to the $264,000 loan to Ballarat:(a) acceptance of loan offer dated 23 May 2011;(b) loan agreement dated 24 May 2011;(c) deed of guarantee and indemnity dated 27 May 2011;(d) Authority and Instruction (A&I) form for electronic transaction(registration of mortgage) dated 27 May 2011; and(e) waiver of independent legal advice by directors of Ballarat dated27 May 2011.[19] Mr and Mrs Smith executed the following documents in relation tothe $520,000 loan to the Prospect Trust:(a) acceptance of loan offer dated 23 May 2011;(b) loan agreement dated 23 May 2011; and(c) as authorised signatories on the A&I form for electronic transaction(registration of mortgage) dated 27 May 2011.Mr Ross' signature was not required on these documents.[20] However, Mr Smith also forged Mr Ross' signature as director of Ballarat onthe following documents in relation to Ballarat's guarantee of the Prospect Trust'sobligations:(a) as guarantor on the loan agreement dated 23 May 2011; and(b) as guarantor on the deed of guarantee and indemnity dated23 May 2011.[21] Mr Smith returned the documents to Mr Woulfe. Mr Woulfe then falselycertified to FMC that he had witnessed Mr Ross sign the A&I form for the registrationof the mortgage over the Ballarat properties and that he, Mr Woulfe, had sightedMr Ross' driver's licence to confirm his identity as the person signing. Mr Woulfealso falsely certified that every guarantor had either received independent legal adviceor he had recommended to the guarantor that they should obtain legal advice.Mr Woulfe had not spoken to Mr Ross about the borrowing. Both the District Courtand High Court found that, although Mr Woulfe had been extremely careless,and indeed dishonest vis-à-vis FMC in doing so, he was not a knowing party toMr Smith's dishonesty in forging Mr Ross' signature.1010 At [109]; and High Court judgment, above n 3, at [100] and [170].[22] The mortgages were registered against the titles of the secured properties andthe loan funds advanced. Mr Smith misappropriated the loan to Ballarat for hispersonal use. Eventually, both Ballarat and the Prospect Trust defaulted on theirobligations and FMC took steps to realise its securities.[23] By the time Mr Smith was sentenced, FMC had sold the properties.FMC accepts that it holds its claimed interest in the proceeds of sale on trust forinvestors in the NZMIT Fund.[24] FMC tendered a late affidavit for the appeal. The affidavit is by AlexanderWainwright, Client Manager at TEL. Mr Wainwright confirmed that FMC hadreceived a payment of $800,000 from the settlement of proceedings it had issuedagainst Mr Woulfe but nevertheless calculated that its investors in the mortgages werestill out of pocket to the extent of $973,679 taking into account penalty interest, legalfees and the incidental costs of pursuing collection.[25] Although no formal application was made for the affidavit to be considered,Ms South, counsel for the Crown, addressed it in her submissions. Ms South submittedthat Mr Woulfe's settlement for $800,000 meant that FMC had effectively recoveredits losses and further, the settlement confirmed Mr Woulfe's liability to FMC as itsagent and its involvement in the offending. As to the additional money claimed, whichwas principally penalty and ongoing interest and recovery costs, Ms South noted thatFMC was on notice since June 2012 of Mr Smith's fraud but did not take proceedingsagainst Mr Woulfe until April 2017. She submitted that should count against FMCbeing granted any interest in the proceeds of sale from the secured properties.[26] For the reasons that follow, the appeal can be determined on the issues we haveidentified above, without the need to consider the further evidence in Mr Wainwright'saffidavit and Ms South's submissions as to its effect.The appeal grounds[27] FMC submitted:(a) the High Court erred in treating the properties as instruments of crime.It says the properties were not used to commit or facilitatethe commission of the qualifying offence; and, in the alternative,(b) the High Court erred in concluding that the Supreme Court's decisionin Nathan v Dollars & Sense Ltd was applicable and erred in relying onthat decision to find that Mr Smith was acting as agent for FMC tosupport its conclusion that FMC did not have an interest in theproperties or, alternatively, was involved in Mr Smith's offending.11FMC says Dollars & Sense is distinguishable.Statutory framework[28] Sections 142A–142Q of the Sentencing Act provide for instrument forfeitureorders to be made by a sentencing court. The following provisions are particularlyrelevant for present purposes:142N Instrument forfeiture orders(1) Following a hearing under section 142K, the court may, if it issatisfied that the property described in the notice given undersection 142B is an instrument of crime, order that the instrument ofcrime or any part of it specified by the court be forfeited to the Crown.(2) In considering whether or not to make an instrument forfeiture orderunder subsection (1) in respect of particular property, the court mayhave regard to—(a) any matter raised in an application for relief under section142J; and(b) the use that is ordinarily made, or was intended to be made,of the instrument of crime; and(c) any undue hardship that is reasonably likely to be caused toany person by the operation of such an order; and(d) the nature and extent of the offender's interest inthe instrument of crime (if any), and the nature and extent ofany other person's interest in it (if any); and11 Nathan v Dollars & Sense Ltd [2008] NZSC 20, [2008] 2 NZLR 557.(e) in addition to the matters referred to in section 77(1) ofthe Criminal Proceeds (Recovery) Act 2009, any other matterrelating to the nature and circumstances of the qualifyinginstrument forfeiture offence or the offender, including thegravity of the qualifying instrument forfeiture offence.[29] In addition to the matters referred to in s 142N(2), in considering whether ornot to make an instrument forfeiture order the court is directed to s 77(1) of the CPRA:77 Applications for relief from instrument forfeiture order(1) A person may make an application for relief from an instrumentforfeiture order under section 142J of the Sentencing Act 2002—(a) if the person claims an interest in property described in anotice issued under section 142B of the Sentencing Act 2002;[30] Section 142J of the Sentencing Act provides for relief from an instrumentforfeiture order and s 142L provides a court may grant such relief if the applicantestablishes an interest in the property and was not involved in the qualifyinginstrument forfeiture offence:142J Applications for relief from instrument forfeiture order(1) Any person (other than the offender) may make an application forrelief from an instrument forfeiture order.(2) An application by any person for relief must be made to the court thatconvicted the offender—(a) on either of the grounds set out in section 77(1) ofthe Criminal Proceeds (Recovery) Act 2009; 142L Court may grant relief from instrument forfeiture order toapplicant who establishes interest in property(1) This section applies if—(a) a person applies to the court under section 142J for relief froman instrument forfeiture order in respect of an interest inproperty on the ground set out in section 77(1)(a) ofthe Criminal Proceeds (Recovery) Act 2009; and(b) the court is satisfied, following a hearing under section 142K,that the applicant has established on the balance ofprobabilities that the applicant—(i) has an interest in the property to which the instrumentforfeiture order relates; and(ii) was not involved in the qualifying instrumentforfeiture offence to which the order relates.(2) If this section applies, the court must make an order—(a) declaring the nature, extent, and value of the applicant'sinterest in the property; and(b) either—(i) directing the Crown to transfer the interest tothe applicant; or(ii) declaring that there is payable by the Crown tothe applicant an amount equal to the value of theinterest declared by the court; or(iii) directing that the interest not be included in aninstrument forfeiture order made in respect ofthe proceedings that gave rise to the application; or(iv) determining, in accordance with section 142N, not tomake an instrument forfeiture order.(3) Despite subsection (2), the court may, but is not required to, refuse tomake an order under subsection (2) if it is satisfied that—(a) the applicant was, in any respect, involved in the commissionof the offence in respect of which forfeiture of the property isor was under consideration; or(b) if the applicant acquired the interest at the time of or after thecommission of the offence, the applicant did not acquire theinterest in the property in good faith and for value.(4) The court must not make an order under subsection (2)(b)(ii) unless itis satisfied that it cannot reasonably make an order undersubsection (2)(b)(i) or (iii) (for example, because the interest ofthe applicant is not severable from the other property in question).Were the properties instruments of crime?[31] In the High Court, FMC had argued for the first time the properties (the Ballaratsections and the Prospect Trust property) were not instruments of crime as they werenot used to commit the relevant offence. Nation J found they were.12 FMC challengesthat finding.12 High Court judgment, above n 3, at [50]–[55].[32] The operative wording of the definition of "instrument of crime" is the samein both s 4 of the Sentencing Act and s 5 of the CPRA:instrument of crime—(a) means property used (wholly or in part) to commit, or to facilitate thecommission of, a qualifying instrument forfeiture offence; and(c) in relation to any property referred to in paragraphs (a) and (b),the proceeds of any disposition of that property or any other propertyinto which that property is converted, after the commission of thequalifying instrument forfeiture offence, except to the extent providedotherwise by any order of a court excluding any severable interestor granting relief.[33] Mr Blanchard QC, counsel for FMC, repeated the argument advanced inthe High Court that the properties had not been "used" to commit or facilitate thecommission of Mr Smith's offence. He noted the ordinary meaning of the verb "use"is:13[t]o make use of as a means or instrument; to employ for a certain end orpurpose.[34] Mr Blanchard sought to distinguish the present case from what he described asthe typical situation in which it could be said property had been used to commit orfacilitate the commission of an offence, such as using it to grow, manufacture or storeprohibited drugs. Here, the offence was using forged documents to obtain a pecuniaryadvantage. The property used to commit the offence were the forged documentsthemselves and the tools required to produce the false documents. The properties,and the equity in them, were best characterised as the target of the offending. In effect,Mr Smith's offending was designed to steal value from the properties. The forgedsignatures on documents enabled him to gain access to that value in the form ofthe secured loans. Mr Blanchard submitted the present situation was analogous to aperson using a forged cheque to withdraw funds from another's bank account. In thatcase it could not be said the bank account was "used". Rather, it was the target ofthe offending.13 JA Simpson and ESC Weiner (eds) The Oxford English Dictionary (2nd ed, Clarendon Press,Oxford, 1989) vol XIX at 353.[35] We are unable to accept Mr Blanchard's analysis and argument. The chargeMr Smith was convicted on was a representative charge that:LINDSAY BECKETT SMITH between 23 May 2011 and 17 November 2012at Hokitika knowing documents to be forged used the documents to obtain apecuniary advantage or valuable consideration [36] The pecuniary advantage (or valuable consideration) Mr Smith obtained wasthe loan advances. While the forged documents were a necessary part of the offending,so were the properties and particularly, the equity in the properties. Without the equityin the properties being available as security, FMC would not have agreed to make theloan advances. The transaction would not have proceeded. The offence would nothave been completed. Mr Hutchison accepted as much in his evidence.During cross-examination Mr Hutchison was asked about a discussion he had withMr Smith regarding the securities: all I remember about this discussion was that I made it clear that if wewere going to entertain a lend it had to be on term and conditions that we couldbe comfortable with, that we were well protected for our unit holders againstthose two assets. We actually ended up — we were comfortable withthe Prospect loan because it captured the family home and we were verycomfortable with the money on Ballarat because it was at 264 over 1.6.[37] And then, after confirming it was an "asset lend" and Ballarat's borrowing wasalways going to be serviced from sale of the sections, Mr Hutchison confirmed theimportance of the security:Q. This lending wasn't going anywhere without a mortgage overBallarat Terrace was it?A. No.Q. It was fundamental to both the Prospect loan and the Ballarat loan thatyou got Ballarat?A. Correct.[38] The money from the loan drawdowns was the target of Mr Smith's offending.He needed the money from the loan advances to maintain his business ventures.He had to provide the equity in the properties to obtain the loan advances. As such,the properties were used to facilitate the commission of his fraud.[39] In his submissions, Mr Blanchard criticised an aspect of Nation J's reasoningconcluding that the properties themselves were not targets of the offending. The Judgenoted that the extent to which the value of the properties would ultimately diminishwas not known at the time of the offending.14 Mr Blanchard submitted the Judge waswrong to look at it that way. He submitted the value of the properties was diminishedimmediately on registration of the mortgages. Whether it may or may not have beenrestored was irrelevant.[40] Rather than regarding Mr Smith's offending as "steal[ing] value" fromthe properties, we agree with Ms South's submission that the better analysis is thatMr Smith, by the forgery, enabled the equity in the properties to be provided to FMCin exchange for the loans, thereby allowing FMC to effectively hold or securethe properties until repayment or to sell them (as it did). That was a use ofthe properties. We agree with the Judge that such an analysis accords with the ordinarymeaning of use in a manner that people would understand and accept.15[41] We also agree with the Judge that just how the loans and securities wouldultimately have affected the value of the land (the equity) owned by Ballarat couldonly be a matter of speculation.16 While Mr Smith may have hoped to pay theadvances back and cover up the fraud; that was irrelevant. Mr Smith had to usethe properties to obtain the loans in the first place.[42] Nor is the analogy of using a forged cheque to withdraw funds from a bankaccount particularly apt. The forged cheque may be equivalent to the forgeddocuments in this case, but in the forged cheque example nothing further is needed tobe used to commit the offending. In this case, the forged documents would be of nouse to Mr Smith unless the properties were provided (used) as security.[43] Mr Blanchard next submitted that, even if the properties could be characterisedas a necessary pre-condition of the offending, that did not mean that they were used tocommit the offending. He relied on the High Court of Australia case of Milne v R as14 High Court judgment, above n 3, at [52].15 At [53].16 At [52].authority for the proposition that the word "use" in the definition of "instrument ofcrime" requires "an instrumental connection between the intended use of the propertyand the commission or facilitation of the commission of an offence."17 In Milne,the Court drew a distinction between property with an instrumental connection tothe offence and property that was merely a necessary condition of the offending.18[44] However, as Ms South pointed out, the facts of Milne were quite different,as was the statutory context. In Milne, a company under Mr Milne's control disposedof shares in Admerex Ltd by means of a swap for investments in shares in anothercompany. Mr Milne intended the company would not declare the capital gain, whichwas an offence again s 134.2 of the Criminal Code Act 1995 (Cth). Mr Milne wascharged with one count of an offence against s 400.3(1) of the Code which alleged hehad dealt with the shares in Admerex Ltd by disposing of them, intending that theywould become an instrument of crime in that they would be used to facilitate thecommission of an offence under s 134.2. Importantly, an integral part of the offencewas the intention to use the property as an instrument of crime.[45] The question on appeal to the High Court was whether the original shares onwhich the capital gain was made could have been an instrument of crime in that way.The answer was no. There was no use of the property (the shares) to committhe offence of failing to declare the capital gain because the offence, the failure todeclare the gain, took place at a later time. The Court noted the definition of"instrument of crime" as used in s 400.3(1)(b)(ii) required an instrumental connectionbetween the intended use of the property and the commission or facilitation of thecommission of an offence. The shares were no more than a necessary condition of thecommission of the subsequent offence. That did not amount to the use of the sharesto facilitate or commission that offence. Nor was the instrumental connectiondemonstrated merely by an intention to take advantage of circumstances arising afterand as a result of the dealing.1917 Milne v R [2014] HCA 4, (2014) 252 CLR 149 at [37].18 At [37].19 At [37].[46] Here, there was such an instrumental connection between the use ofthe properties as security for the loans and the loans' drawdown. Upon the registrationof the mortgages (on the basis of the fraudulent documents), the loans were advancedand the offender, Mr Smith, obtained the benefit. The offence was complete at thattime. The properties were more than a necessary condition of the commission ofthe offence. They were an integral element of it.[47] Mr Blanchard next submitted that the Judge had erred in failing to considerthe Ballarat and the Prospect Family Trust properties separately. In effect, the Judge'sapproach treated them as part of a single transaction, the whole of which was taintedby Mr Smith's forgery of Mr Ross' signature on certain limited documents.Mr Blanchard submitted that approach overlooked that the loan and mortgagedocuments providing security over the Prospect Trust property were validly executedby Mr Smith and his wife as the registered proprietors. The Prospect Trust propertycould not itself be viewed as an instrument of crime. There was no criminality in theuse of that property to obtain the loan from FMC to the Prospect Trust.[48] But that argument overlooks the structure of the loan offer and the basis uponwhich FMC agreed to the advances. It is quite apparent from Mr Hutchison's evidencethat the Prospect Trust loan would not have proceeded without the security offered bythe Ballarat properties. Again, under cross-examination, Mr Hutchison's evidencewas:Q. And therefore the Ballarat security was the thing that made thiswhole deal work wasn't it?A. It was certainly a — that's why we collateralised them, it wasimportant to be able to have access to equity in Ballarat.[49] As Mr Hutchison said, the advances were cross-collateralised. The loan toProspect Trust would not have been granted unless Mr Smith was able to offerthe equity in the Ballarat sections to Mr Hutchison as additional security.That required Mr Smith to forge Mr Ross' signature on the loan agreement andsupporting guarantee provided by Ballarat to support the Prospect Trust borrowing,which in turn tainted the Prospect Trust borrowing with Mr Smith's fraud.[50] Mr Blanchard also submitted that treating the Ballarat properties as havingbeen used in the offending had the perverse result that the instrument forfeiture orderwas sought against the victim of the offending, in this case, Ballarat. He submittedthe situation was akin to a person stealing an innocent bystander's car and using thatcar to commit a bank robbery. It could not be sensibly suggested that an instrumentforfeiture order should be made in respect of the car. He noted that the structure of therelevant provisions in the Sentencing Act contemplate that instrument forfeiture orderswould generally be made in respect of property in which the offender has an interest.It would be inconsistent to treat property over which the offender has no ownership orlawful control as an instrument of crime.[51] There is a short answer to Mr Blanchard's point. One of the considerationsthe court may have regard to under s 142N(2)(d) when considering whether to makean instrument forfeiture order is "the nature and extent of the offender's interest inthe instrument of crime (if any)". The subsection expressly contemplates there willbe situations where the offender does not have an interest in the property which isthe instrument of crime. Further, in the example given by Mr Blanchard, the innocentcar owner would be entitled to relief given their prior property interests.20[52] Mr Blanchard also criticised the Judge's reasoning that treating the propertiesas instruments of crime accorded with the purposes of the CPRA in that it enabled thevalue of the property to be available to compensate the victims of Mr Smith's fraud,namely, Mr and Mr Ross.21 He submitted the direct victim of the fraud in relation tothe Ballarat properties was Ballarat. If the High Court judgment was correct,all owners of fraudulently mortgaged land (or chattels over which fraudulent securityhas been obtained) would be at risk of an instrument forfeiture order being made overtheir property and would need to apply for relief, albeit they were plainly victims offraud. That cannot have been intended.[53] We consider that Mr Blanchard's submission overstates the apparentdifficulties. First, Mr and Mrs Ross are properly regarded as victims of Mr Smith's20 Sentencing Act 2002, s 142L(1)(b); and Criminal Proceeds (Recovery) Act 2009, s 77(1)(a).21 High Court judgment, above n 3, at [54].offending. They meet the definition of victims in the Sentencing Act.22 They have,by means of Mr Smith's offending, suffered loss of property, namely value in theirfamily trust's shares in Ballarat.[54] Secondly, each case will turn on its own facts. It will be a rare case wherea mortgagor would be required to apply for relief on the basis the mortgage has beenfraudulently obtained where they, the mortgagor, will have granted the mortgage.Further, as Nation J observed, FMC's interest as mortgagee would be protected if itheld a valid mortgage and was not involved in the relevant offence.23[55] In summary on the first appeal point, we agree with the High Court thatthe properties (the Ballarat sections and the Prospect Trust property) were instrumentsof Mr Smith's crime.Did FMC have an interest in the properties?[56] The next issue is whether FMC is entitled to relief against forfeiture. To beentitled to relief, FMC was required to establish both that it had an interest inthe properties and also that it was not involved in Mr Smith's offending.24[57] Mr Blanchard submitted that, even if it could be said the properties wereinstruments of crime, Nation J erred in his conclusion that FMC lacked a valid interestin the properties. Prima facie, FMC's registered mortgages were valid. That gaveFMC an interest in the properties. That interest could only be defeated if the mortgageswere void ab initio.[58] FMC itself was not guilty of fraud. To find the mortgages were void ab initiorequired a finding of fraud by its agent(s) in the creation and registration of themortgages. Nation J applied the Supreme Court decision in Dollars & Sense to findMr Smith was acting as the agent for FMC.25 That finding underpinned the Judge'sconclusions that FMC lacked a valid interest in the properties in terms of22 Sentencing Act, s 4(1)(a)(ii): victim means "a person who, through, or by means of, an offencecommitted by another person, suffers physical injury, or loss of, or damage to, property ".23 High Court judgment, above n 3, at [54].24 Sentencing Act, s 142L(1)(b).25 High Court judgment, above n 3, at [148]–[149].s 142L(1)(b)(i) of the Sentencing Act, its registered mortgage having been obtainedby fraud for the purposes of ss 62 and 63 of the Land Transfer Act 1952.26 It alsosupported his conclusion that FMC was involved in the offending in terms ofs 142L(1)(b)(ii).27[59] Mr Blanchard submitted that Dollars & Sense was distinguishable on its facts.In his submission, the crucial distinction was that Dollars & Sense had implicitlyagreed to the appointment of a sub-agent and had placed no restrictions on who thatsub-agent could be. By contrast, FMC had placed express restrictions on the extent ofthe sub-agency. FMC had instructed Mr Woulfe's firm of Murdoch James & Roper toact as its agent. It specifically required the firm to comply with the New Zealand LawSociety guidelines when registering the mortgage.[60] The guidelines contained important provisions relating to the identification ofpersons signing the A&I forms. Compliance with the Land Information New Zealandstandard was required. The standard itself provided that verification of identity couldonly be delegated to an "independent trusted person the practitioner can reasonablyrely on" and that it would not be reasonable to rely on documents witnessed by"a friend or relative selected by the client".28 Importantly, it also provided the witnessmust "not be a party to the transaction".29[61] Mr Blanchard argued that FMC expressly incorporated the guidelines andthe standard in its instructions to Mr Woulfe's firm. They excluded sub-delegation ofverification of Mr Ross' identity to Mr Smith, who was a party to the transaction andclearly not an independent party. Mr Blanchard submitted that it followed thesub-delegation by Mr Woulfe to Mr Smith was invalid and without FMC's authority.As Mr Woulfe was not able to appoint Mr Smith as a sub-agent, the present case wasdistinguishable from Dollars & Sense.26 At [150]–[151].27 At [152]–[156]. See [84] below.28 Registrar-General of Land Standard for verification of identity for registration under the LandTransfer Act 1952 (Land Information New Zealand, LINZS20002, 30 October 2013) at 4 and G2.29 At 6.[62] We will return to Mr Blanchard's submissions focused on FMC's instructionsand their relevance to Mr Smith's actions shortly, but it is clear that Mr Woulfe wasauthorised to act as agent for FMC. The District and High Courts both found thatMr Woulfe was dishonest in certifying that he had personally witnessed Mr Ross'signature on the A&I form and in certifying that he had established the person signingas Mr Ross was in fact Mr Ross.30 The A&I form was a document relied upon in theregistration process of the FMC mortgages, so that FMC obtained their mortgage overthe Ballarat properties, in part, through the dishonesty of Mr Woulfe while he wasacting as their agent. The mortgage over the Ballarat sections was wrongfullyregistered through a combination of Mr Smith's forgery and Mr Woulfe's dishonestcertification. Without Mr Woulfe's dishonesty, the documents could not have beenregistered.[63] On that basis alone, FMC obtained its mortgages over the Ballarat propertiesby a fraud sufficient to vitiate that mortgage. FMC had no valid interest in the Ballaratsections as the mortgage over them was void ab initio.[64] Quite apart from Mr Woulfe's involvement, we consider that Dollars & Senseis not distinguishable and that the evidence supports Nation J's finding that Mr Smithwas FMC's agent.31[65] With respect to Mr Blanchard's argument that FMC placed express restrictionson the sub-agency so that Mr Smith was not able to act as agent for FMC for thepurpose of verifying Mr Ross' identity, we consider it proceeds on a misapprehensionof the factual position and a misreading of the relevant documents.[66] Mr Blanchard accepted that the instructions did not expressly proscribesub-delegation, but he argued they did place express limits on the type of person towhom the task of verifying the identity of persons signing the A&I form could bedelegated. He argued that as Mr Smith was a party to the transaction and was notindependent, the task of verifying Mr Ross' identity could not be sub-delegated to him.30 District Court judgment, above n 2, at [99]; and High Court judgment, above n 3, at [100].31 High Court judgment, above n 3, at [148]–[149].As Mr Woulfe was not authorised to sub-delegate that task to Mr Smith, FMC couldnot be held vicariously liable for Mr Smith's fraud.[67] However, the task of verifying Mr Ross' identity on the A&I form was neverdelegated to Mr Smith by Mr Woulfe. Mr Smith was not the verifier of Mr Ross'identity on any occasion. That always remained Mr Woulfe's responsibility.[68] FMO's instructions to Mr Woulfe were set out in the letters of instruction andthe solicitor's certificates, which required him to:(a) attend to disclosure to the borrowers and guarantors;(b) return the executed lending documents;(c) where the documents were signed by a corporation, ensurethe documents had been executed so the corporation's acceptance ofthose was valid and enforceable;(d) provide a certified copy of all debtors' identifications; and(e) effect registration of the mortgage.[69] Mr Woulfe effectively sub-delegated Mr Smith to provide borrower disclosure,ensure Mr Ross agreed to guarantee the Prospect Trust loan, and obtain Mr Ross'signatures and driver's licence. The obligation to certify Mr Ross' identity, however,was not sub-delegated to Mr Smith.[70] The standard itself confirmed that ultimate responsibility for certifyingMr Ross' identity rested with Mr Woulfe:32A practitioner may discharge these obligations by personally conducting theidentity checks or by delegating these functions to some other independenttrusted person the practitioner can reasonably rely on. In either case,the practitioner who provides the certification is responsible for the adequacyof the identity verification.32 Registrar-General of Land, above n 28, at 4.For the above reasons, Mr Woulfe remained FMC's agent for that purpose.[71] In carrying out the general sub-delegation, which included obtaining Mr Ross'signature, Mr Smith signed the documents for himself and forged Mr Ross' signature.We consider Mr Smith's sub-agency in relation to those tasks is analogous tothe sub-delegation to Rodney Nathan in Dollars & Sense.[72] In Dollars & Sense, the Supreme Court accepted the approach of the Court ofAppeal and rejected the appellant's argument against the sub-agency:[22] The majority also rejected an argument that Mr Thomas, himselfan agent of D & S, had no power to appoint Rodney as a sub-agent. There wasnothing in the evidence to suggest that D & S had expressly prohibited thedelegation of functions by Mr Thomas. Nor would that have been sensible.Mr Thomas was in Auckland. It would have been quite routine, for example,for him to arrange with a Kerikeri solicitor to deal with the Nathans or theirsolicitor in matters relating to the execution of the documents.[28] The argument that Mr Thomas, himself an agent, had no power tocreate a sub-agency, was renewed before us but has no weight, for the reasonsgiven by the Court of Appeal majority. By instructing an Auckland solicitorwhen documents were likely to be signed in Northland D & S implicitlyagreed to the appointment of a sub-agent. We add that there was no evidenceconcerning ordinary practices of solicitors in this respect.(footnotes omitted)[73] In the present case, similarly, both Mr Hutchison and Mr Woulfe knew Mr Rosslived in Picton. FMC, through Mr Hutchison, authorised Mr Woulfe to take whateversteps were necessary for the documents to be executed. Mr Hutchison accepted in hisevidence that he knew from the company searches that Mr Ross lived in Picton.He said he anticipated Mr Smith would be discussing with the other shareholders whatwas proposed with regard to Ballarat. Neither of FMC's agents, Mr Hutchison norMr Woulfe, attempted to contact Mr Ross or to discuss the documents with him.They left that task to Mr Smith. Mr Hutchison implicitly agreed to the appointmentof Mr Smith as agent for that purpose and ultimately, for execution of the documents.[74] We accept Ms South's submission that the only differences between Dollars &Sense and this case were the additional step in Dollars & Sense when the solicitorreturned the documents to Mr Nathan to have them witnessed and the fact that in thepresent case, Mr Hutchison also sought a General Security Agreement fromthe borrowers, including from Ballarat. Dollars & Sense is not materially differentfrom this case and is not distinguishable on the basis argued for by Mr Blanchard.[75] In Dollars & Sense, it was accepted for Dollars & Sense that, for the purposesof establishing fraud in terms of ss 62 and 63 of the Land Transfer Act,Rodney's forgery must be treated as the fraud of Dollars & Sense if he was acting inthe course of an agency for Dollars & Sense when he committed the forgery, regardlessof the absence of any knowledge of the fraud by Dollars & Sense or its solicitor.33The Supreme Court recorded the concession was properly made.34 The issue waswhether Rodney had actual authority, whether either express or implied, to obtainexecution of the documents from Dollars & Sense.35[76] Similarly, in the present case, Mr Smith had actual authority to obtain Mr Ross'signature on the relevant documents. This was an important task directed at perfectingFMC's security. He was acting as FMC's agent to achieve this. His frauds are thefrauds of FMC as a lender. As the Supreme Court held, the liability of the principal isnot dependent upon imputation of the knowledge of the agent to the principal, butrather the liability arises because the agent has done an act which the principal isvicariously liable for.36 The Supreme Court further noted:37 the signing of the documents was central to this agency and that is what,in relation to his mother, Rodney took it upon himself to do, albeit in a criminalmanner. It could fairly be said that, despite that centrality, forging a signaturewas exactly what D & S did not want Rodney to do to fulfil the task entrustedto him. But cases like Lister v Hesley Hall have demonstrated that an act canbe within the scope of an agency even when it is the antithesis of whatthe principal really wanted. The true test is whether the tortious act has asufficiently close connection with the task so that the commission of the tortcan be regarded as the materialisation of the risk inherent in that task. If thatis so, what the agent did can fairly be treated as an improper mode of fulfillingthe allocated task[77] Mr Smith's forgery was sufficiently closely connected to an authorised act,the obtaining of Mr Ross' signature on the relevant documents, to be treated as a means33 Nathan v Dollars & Sense Ltd, above n 11, at [6] and [44].34 At [6].35 At [9].36 At [44].37 At [46].of performing it and was therefore, within the agency. Mr Smith's fraud took place toachieve the very thing he was asked to do as an agent and is properly characterised asan improper mode of fulfilling the authorised task. It is the act, not the knowledge, ofthe agent which is the critical element.38 FMC implicitly authorised Mr Smith torepresent it in its dealings with Mr Ross concerning Mr Ross' signature ofthe documents.[78] Further, FMC accepted the documents and acted upon them, thereby ratifyingMr Smith's authority. As the Supreme Court said in Dollars & Sense:[26] In view of this engagement of Rodney by D & S, throughMr Thomas, to get the mortgage signed and then witnessed, it would beartificial and commercially unrealistic to take the view that there was norelevant element of agency in what Rodney did. Any doubt aboutMr Thomas's acceptance of Rodney's role was removed when the documentscame back witnessed by a lay person, no objection was taken, the advance wasmade and the mortgage was presented for registration. If it were necessary todetermine the point, we would be inclined to the view that, at the very least,this acceptance amounted to a ratification by Mr Thomas of Rodney'sauthority to arrange execution of the documents.[79] Mr Smith's fraud renders the mortgages over the Ballarat sections andthe Prospect Trust property void ab initio.[80] Mr Blanchard repeated his alternative argument that, in the case ofthe mortgage over the Prospect Trust property, Dollars & Sense was distinguishableon a further, more fundamental basis. The Prospect Trust mortgage was not obtainedusing forged documents. It was properly executed by Mr and Mrs Smith.Therefore, even if Mr Smith were treated as FMC's agent in that transaction there wasno fraud to be imputed to FMC as the FMC mortgage of the Prospect Trust propertywas validly registered.[81] But again, while the mortgage itself might have been validly executed byMr and Mrs Smith, without Mr Smith's forged guarantee of the Prospect Trust'sborrowing by Ballarat, FMC would not have made the advance to the Prospect Trustand the mortgage would not have been registered. The signature of Mr Ross on38 At [45].the guarantee which gave effect to the cross-collateralisation was central to FMCaccepting the security of the Prospect Trust property.[82] Next, Mr Blanchard argued that even if the mortgage over the Prospect Trustproperty was found to have been obtained by fraud, it was a fraud committed bythe registered proprietors themselves, again a distinction from Dollars & Sense.The registered proprietors and the mortgagor are the one and the same. To applyagency principles in this situation and find Mr Smith was acting as agent for FMCwould be to state in effect that FMC obtained its mortgage as a result of fraud byMr and Mrs Smith against Mr and Mrs Smith, which cannot be correct. But the issueis the validity of the mortgage, not the interest of the registered proprietors.[83] For the above reasons, we agree with Nation J that FMC does not have aninterest in the proceeds of sale. It is unnecessary in the circumstances to determinethe extent and value of FMC's interest or Ms South's submissions based on the caseof Westpac New Zealand Ltd v Clark which were directed at that issue.39Was FMC involved in the qualifying instrument forfeiture offence?[84] As we have found against FMC on the argument that the properties were notinstruments of Mr Smith's crime and have also concluded that FMC does not have aninterest in the proceeds as the mortgages were void ab initio, it is strictly unnecessaryto consider whether FMC can satisfy the Court it was not involved in the commissionof the offence which is the second element required for relief under s 142L(1)(b)(ii).[85] Although Mr Blanchard noted that the High Court relied on the Supreme Courtdecision of Dollars & Sense to also find that FMC was involved in Mr Smith'soffending, and as noted, he sought to distinguish Dollars & Sense, he did not developa separate argument on the issue of whether FMC was involved in Mr Smith'soffending in his written submissions or in his oral submissions.[86] In any event, we agree with Ms South that there are a number of ways in whichFMC could be said to have been involved in the offence:39 Westpac New Zealand Ltd v Clark [2009] NZSC 73, [2010] 1 NZLR 82.(a) vicarious liability for Mr Smith's fraud as the lender's agent, applyingDollars & Sense;(b) vicarious liability for Mr Woulfe's dishonest certification as FMC'sagent; or(c) taking all of the facts and circumstances into account, FMC was,through its agents, Mr Woulfe, Mr Smith, Mr Hutchison and FMO,so enmeshed in Mr Smith's offending that it cannot establish it was notinvolved.[87] As this Court confirmed in Lyall v Solicitor-General, something less thanparticipation as a party will suffice as involvement.40 A material association withthe offending is enough.41[88] The following circumstances point to FMC's involvement in Mr Smith'soffending in that way:(a) FMO and Mr Hutchison offered and then advanced the lending inbreach of FMC's policies and procedures (Mr Hutchison did soprimarily because he was satisfied as to the security available andoffered by Ballarat).(b) Both Mr Hutchison and Mr Woulfe relied on Mr Smith. They shouldhave ensured Mr Ross was independently aware of the borrowingproposal, particularly as the Ballarat equity was to be tied to moresubstantial borrowing for the benefit of Mr Smith rather than Ballarat.(c) FMC delegated the job of perfecting its securities to Mr Woulfe whopassed on key tasks to Mr Smith and then later dishonestly certified hehad personally verified Mr Ross' signature. The wilful blindness as to40 Lyall v Solicitor-General [1997] 2 NZLR 641 (CA) at 648.41 At 648.proper attestation by Mr Woulfe also meets the test of FMC beinginvolved in the fraud for the purposes of s 142L(1)(b)(ii).(d) Mr Smith was the lender's dishonest agent acting within the scope ofhis apparent agency procuring all necessary signatures through fraud.(e) By applying s 142N of the Sentencing Act and by considering the totalcombination of facts and circumstances, both lower Courts were correctin their conclusions FMC was involved.(f) The entire fraud would have collapsed had any of the professionalsinvolved carried out their functions competently.[89] For the above reasons, FMC was materially associated with Mr Smith'soffending.Result[90] The appeal is dismissed.Solicitors:DLA Piper, Wellington for AppellantCrown Solicitor, Christchurch for First Respondent