Unconscientious exploitation of borrower’s special disadvantage
The High Court has clarified the law in relation to what will amount to unconscionable conduct in lending transactions.
In Stubbings v Jams 2 Pty Ltd, the Lender conducted a business known as asset‑based lending, or “pure asset lending”. This type of lending has the distinguishing feature, which often makes it easier for a borrower to obtain finance, that loans are made exclusively on the basis of the value of the assets securing the loan “without regard to the ability of the borrower to repay by installments under the contract, in the knowledge that adequate security is available in the event of default”.
The Appellant was a guarantor to 2 loans. The first mortgage loan was for a sum of $1,059,000 at an interest rate of 10 percent per annum and a default rate of 17 percent per annum. The second mortgage loan was for a sum of $133,500 at an interest rate of 18 percent per annum and a default rate of 25 percent per annum.
His obligations as guarantor were secured by mortgages given over parcels of land owned by him.
The borrower company had no assets and had never traded. The appellant guarantor had no income or other means to meet his obligations to the Lender.
Despite a signed declaration that the loans were not for personal, domestic or household purposes, (and outside of the protections afforded by the National Credit Code), the true purpose of the loans was identified by the Court of Appeal as being “to enable [the appellant] to purchase, in his own name, a property as a home”.
The guarantor to the Borrower
The primary judge also found that the appellant was “unsophisticated, naïve and had little financial nous”. The primary judge observed that the appellant’s demeanour at trial – at which he represented himself – indicated that he was “completely lost, totally unsophisticated, incompetent and vulnerable”
Findings on trial
On the unchallenged findings of fact made by the primary judge, the loans to the company and the appellant’s guarantee were effected in circumstances that made the enforcement of the respondents’ rights against the appellant unconscionable.
His lack of commercial understanding coupled with his inability to repay the loans from his own income or other assets meant that default in repayment, and the consequent loss by him of his equity in his properties by way of interest payments to the respondents, were inevitable as a matter of objective fact.
The Lender, through their agent, sufficiently appreciated the reality that the exercise of their rights under the mortgages to turn the appellant’s disadvantages to their own profit was unconscionable.
The agent’s role in the offering and obtaining of the loans in this matter was highly relevant:
He was found to have had ” a lively appreciation of the likelihood that the loss of the appellant’s equity in his properties would be suffered by reason of his financial naïveté and his lack of means.”
Of the Lender’s solicitor’s role, it was said “An interest-only, asset-based, 12-month loan of around $1 million at a high rate of interest will always be, at the very least, an extremely risky product for a person who has no income and is unbankable. Mr Jeruzalski was aware that a loan of this kind could be “a dangerous product in the hands of the wrong person…… He did not run credit checks: if the borrower was a registered corporation, that satisfied AJ Lawyers’ requirements. Mr Jeruzalski did not make any inquiries into whether borrowers (or guarantors) had any assets other than the proffered security. And despite the requirement that loans be “for business purposes”, Mr Jeruzalski’s evidence was that his practice was not to ask what the actual purpose of the loan was.”
The primary judge concluded that these findings demonstrated a “high level of moral obloquy” and “wilful blindness” as to the appellant’s financial and personal circumstances. His Honour found that the loans were procured by unconscionable conduct, and ordered that the mortgages be discharged, and the loan agreement be declared unenforceable
Accepting that the list was not exhaustive, the High Court cited Fullagar J in Blomley v Ryan[ where he considered that special disadvantage may be inferred from “poverty or need of any kind, sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation is necessary”. No particular factor is decisive, and it is usually a combination of circumstances that establishes an entitlement to equitable relief[6
The equitable intervention was justified in this case “not merely to relieve the [appellant] from the consequences of his own foolishness … [but] to prevent his victimisation”
The case illustrates the way in which equity will intervene in appropriate circumstances and look beyond signed documentation and commercial processes to reveal the true nature of transactions to afford protection to parties under “special disadvantage.”
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