Best option when buying a car that may be under finance or even just for your own peace of mind, is to do a VSR check (Vehicle Security Registry) to see if the vehicle has any encumberances on it from a financial interest. If the seller claims the loan will be paid out, then the transfer papers should not be signed until proof of the loan being paid out is received. Or if in doubt, rather than a cash transaction make the bank cheque out to the financial institution and to be paid into the account of the loan only.
It all comes down to caveat emptor (buyer beware), i'd say your friend may have to pay the cost and then chase the owner he bought it from. But best to ring Legal Aid or similar to get an exact answer.