Lenders, Borrowers and their Advisers, take note!
In the matter of Jams 2 Pty Ltd v Stubbings, the Victorian Supreme Court of Appeal clarified key principles of unconscionability. The Lenders were found by the trial judge to have acted in an unconscionable manner in arranging an asset-based loan. The loan relied only on property as security. It failed to assess the Borrower’s limited ability to repay the loan. However, this finding was overturned by the Victorian Supreme Court of Appeal.
The Lenders gave a first loan of $1,059,000 and a second loan of $133,500 to a company owned by Stubbings, Victorian Boat Clinic Pty Ltd, the Borrower. The loans were to help Stubbings in the funding of the purchase of a residential property in Fingal (‘Property’). The first loan had an interest rate of 10% per annum and a default rate of 17% per annum. The second loan had an interest rate of 18% per annum and a default interest rate of 25%. The loans were secured by a guarantee given by Stubbings along with mortgages over the Property and two other properties owned by the Borrower.
The Borrower had minimal income and had no assets other than the properties which were mortgaged. The Borrower had insufficient funds to pay the deposit of 10% towards purchase the Property.
In September 2015, the loans were advanced, and the Property purchase settled. The Borrower moved into the Property and paid the first two monthly interest instalments to the Lenders by selling valuables that he owned, before defaulting on the instalments. Demands for payment were issued by the Lenders before the Lenders commenced legal proceedings for recovery of the guaranteed debt. The Lenders took possession of the two properties of the Borrower which had been provided as security.
The Trial Judge upheld the Borrower’s claim stating that the loan, mortgage and guarantee were procured by unconscionable conduct and ordered that they be set aside. The Judge stated that the Lender’s lawyers (AJ Lawyers) in providing legal and accounting advice were aware of the Borrower’s personal and financial circumstances and willingly chose to turn a blind eye to them. The Judge found the Borrower’s position to be one of special disadvantage when giving the guarantee and the mortgages and that AJ Lawyers’ behaviour constituted unconscionable conduct which also bound their clients, the Lenders.
The Borrower joined the following as third parties to the litigation:
- Mr Zourkas, the consultant who organised the loan;
- Mr Topalides, the accountant who signed the certificate of independent financial advice; and
- Mr Kiatos, the solicitor who signed the solicitor’s certificate.
Court of Appeal Proceedings
The Court of Appeal upheld the Lenders’ argument that making asset-based loans available on a ‘take it or leave it’ basis was not unconscionable in this case. The Court stated that asset-based lending will not automatically be deemed unconscionable but will simply be a ‘relevant factor in deciding whether a particular loan resulted from unconscionable conduct’ in all the circumstances of the case.
What does this mean for Lenders, Borrowers and their Advisers?
The Court of Appeal has clarified the test for statutory unconscionability. Lenders have been provided with a level of certainty regarding their ability to provide asset-based lending and to rely on solicitors’ and accountants’ certificates in some circumstances. The case also warns borrowers, guarantors and their advisors that the law will not always be available to protect them from a bad bargain.
Need legal advice and assistance?
Please feel free to reach out to Elizabeth Ong (Special Counsel) on +61 3 9822 8588 or firstname.lastname@example.org. Burke & Associates Lawyers are here support you in your commercial, banking and finance needs. We look forward to hearing from you.
Insight written by Elizabeth Ong