Lenders, Borrowers and their Advisers, take note! (PART 2)
When we first published an article on this matter it had been decided by the Court of Appeal that there was no unconscionable conduct on the part of Jams 2 Pty Ltd (Lender) regardless of the condition or vulnerability of Mr Stubbings, the owner of Victorian Boat Clinic Pty Ltd (Borrower), which overturned the decision of the Trial Judge.
This is an update to our previous article as the High Court has now overturned the decision of the Court of Appeal. The High Court has decided that there was unconscionable conduct on the part of the Lender and has highlighted the importance of understanding the condition or vulnerability of Mr Stubbings in a lending scenario and not turning a wilful blind eye to Mr Stubbings’ circumstances which in turn, was sufficient in establishing equitable unconscionability as well as how the certificate of independent advice signed by the lawyer and the certificate of financial advice signed by the accountant (Certificates) cannot be used by the Lender to immunise it against unconscionable conduct.
The Lender gave a first loan of $1,059,000 and a second loan of $133,500 to the Borrower. The loans were to help Mr Stubbings in the funding of the purchase of a residential property in Fingal (‘Property’). The loans were secured by a guarantee given by Mr Stubbings along with mortgages over the Property and two other properties in Narre Warren.
Mr Stubbings lost his employment, had no income to service the loans, poor understanding of the commercial and financial implications of the loans and had no assets other than the properties which were mortgaged.
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 Lender by selling valuables that he owned, before defaulting on the instalments. Demands for payment were issued by the Lender before the Lender commenced legal proceedings for recovery of the guaranteed debt. The Lender took possession of the two properties which had been provided as security.
Trial Judge’s decision
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 preparing the loan documentation were aware of the Borrower’s personal and financial circumstances (ability to understand the loan transactions as well as ability to repay the loans) (Special Disadvantage) 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 client, the Lender.
Court of Appeal’s decision
The Court of Appeal upheld the Lender’s argument that asset-based loan was not unconscionable in this case. Amongst others it was also decided that the Lender and its agents were entitled to rely on the Certificates because that showed that Mr Stubbings had consulted a solicitor and an accountant for advice on the loans.
High Court’s decision
The High Court decided that due to the Special Disadvantage of Mr Stubbings and AJ Lawyer had sufficient appreciation of that but chose to turn a blind eye by not seeking or wanting any further information of his personal or financial circumstances, this amounted to the unconscientious exploitation of Mr Stubbings by AJ Lawyer on behalf of the Lender. This was sufficient in establishing equitable unconscionability. Justice Gordon also held that there was a breach of Section 12CB of the ASIC Act 2001 which tantamount to statutory unconscionability. Further, the High Court also found that the Certificates were ‘window dressing’ which acted as ‘a precautionary artifice’ designed to prevent an inference that the Lender were wilfully blind to the obvious risk or damage to Mr Stubbings.
What does this mean for Lenders, Borrowers and their Advisers?
From this case, we have learnt that the mere existence of the Certificates will not always be sufficient to protect a lender, but the vulnerability of a borrower is a consideration that any prudent lender must turn its mind on.
Need legal advice and assistance?
Please feel free to reach out to Elizabeth Ong (Special Counsel) on +61 3 9822 8588 or email@example.com. 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