Nick Cooper

nick.cooper@oracleis.com.au

A recent High Court decision found that lenders, through their agent, exploited a vulnerable consumer and set aside a loan and mortgages on the basis on unconscionability.

In the matter of Stubbings v Jams 2 Pty Ltd [2022] HCA 6, the High Court unanimously overtured a Victorian Court of Appeal decision and set aside a $1.2 million loan and mortgages.

The case has been subject to tumultuous history in Court, with the High Court decision providing a pertinent reminder to lenders about the need for thorough due diligence prior to providing loans to borrowers, particularly if there are concerns regarding the borrower’s vulnerability.

Background

The appellant, Mr Stubbings, owned two properties in Narre Warren, Victoria, and wanted to purchase a third.  However, at the time he was unemployed and had no regular income.  Mr Stubbings used his company, Victorian Boat Clinic Pty Ltd (the “Company”), to enter into an asset-based loan with the respondents, after an intermediary arranged for Mr Stubbings to obtain a loan through a law firm that specialised in asset-based lending.  The loan was obtained by an agent for the lenders.  The lenders were Jams 2 Pty Ltd, Conterra Pty Ltd and Janaco Pty Ltd.

The Company was given a first loan of $1,059,000 (with an interest rate of 10% per annum and default interest rate of 25%), and a second loan of $133,500 (with an interest rate of 18% per annum and a default interest rate of 25%).  Furthermore, Mr Stubbings provided a personal guarantee, which was secured by his two existing properties in Narre Warren as well as the property that he was purchasing.  The two properties in Narre Warren had combined equity of approximately $530,000.

Prior to being granted these loans, Mr Stubbings saw a lawyer and accountant who signed independent legal and financial advice certificates.

Mr Stubbings defaulted on the loans and two of the properties were sold.

When the matter first went to Court, it was found that the loans were procured by unconscionable conduct, however, this decision was reversed by the Victorian Court of Appeal, which held that the transaction was enforceable.

The High Court then overturned the Victorian Court of Appeal’s decision and set aside the loans and mortgages on the basis of unconscionable conduct.  The High Court’s findings were as follows:

Special Disadvantage

Consideration: Whether Mr Stubbings was under a special disadvantage.

Case Law: ASIC v Kobelt (2019) 267 CLR 1, ACCC v Quantum Housing [2021] FCAFC 40

Statutory Provision: s. 12CB of the Australian Securities and Investments Commission Act 2001 (“ASIC Act”).

The High Court found: Mr Stubbings was unemployed and with no income, and his act of entering into the transaction in itself shows his inability to make a realistic assessment of the consequences of the transaction.  The High Court held that this demonstrated his vulnerability and that he was under a special disadvantage.

Knowledge of the Agent

Consideration: Whether the agent for the lenders knew that Mr Stubbings was under a special disadvantage.

Case Law: R v Crabbe (1985) 156 CLR 464 (re “wilful blindness”)

Statutory Provision: s. 12CB ASIC Act

The High Court found: By majority, the agent for the lenders did not have actual knowledge that Mr Stubbings would inevitably default and lose his equity in his properties by taking out the loans.  However, it was found that the agent had a lively appreciation of the likelihood that the loss of Mr Stubbings’ equity in his properties would be due to his financial naivety and absence of income, which was deemed to be sufficient to establish equitable unconscionability.

Further, the High Court held that the agent’s reliance on a system of conduct and failure to make further enquiries amounted to wilful blindness.  The system of conduct in question in these circumstances, was using an intermediary to deal exclusively with Mr Stubbings, and obtaining legal and financial advice certificates to enhance the enforceability of the loan.  Finally, it was held that the agent exploited Mr Stubbings’ special disadvantage and therefore the lenders also acted unconscionably.

Advice certificates

Consideration: Whether the independent legal and financial advice certificates could protect the lenders from a finding of unconscionable conduct.

The High Court found: The certificates could not displace a finding of unconscionable conduct, in that the certificates did not negate the actual appreciation of Mr Stubbings’ vulnerability and risk in the transaction.  It was found that the certificates were more of a “precautionary artifice” or ‘window dressing’, due to the standardised nature of the language contained within the certificates and nothing inferred that Mr Stubbings turned his attention to how he could service the loan.