This week the High Court delivered judgement in Stubbings v Jams 2 Pty Ltd  HCA 6, the final instalment of litigation which addressed whether asset-lending – loans made based on the value of security rather than the capacity of the borrower to repay by instalments – was inherently unconscionable, and the extent to which lenders might rely on certificates of advice.
The answers to those questions are: “no” and “it depends,” turning on quite specific facts.
An unemployed man (the Guarantor) wanted to buy a new home to live in, after falling out with his landlord – but he was unable to arrange bank finance. Supposedly guided by a consultant, he used a shelf company to borrow the whole of the purchase price from a private lender, secured by mortgages over two other properties that he owned in Narre Warren.
The Guarantor’s stated plan was to renovate the two Narre Warren properties and sell them, and then refinance through a bank after two or three months. The Court found that this plan “was never going to work” – he did not have the money to renovate the properties or pay interest while any renovation was underway, and he did not have a realistic chance of later arranging bank finance either.
The Guarantor’s disadvantage
The Guarantor was described as “completely lost, totally unsophisticated, incompetent and vulnerable…incapable of understanding the risks involved in the transaction” and “precisely the sort of person who needed protection and was vulnerable to being exploited.”
The Lender’s system
The lender was represented by a lawyer who “deliberately avoided knowledge of borrowers’ and guarantors’ personal and financial circumstances.” Through a system of conduct that was almost the opposite of bank lenders, he:
- Did not require application forms from borrowers.
- Did not seek any information about the income of borrower or guarantor.
- Did not run credit checks.
- Treated the asset position of the nominal borrower company as irrelevant.
- Refused to communicate, meet, or negotiate with proposed borrowers.
The Court found that “if enquiries had been made, they would have led to [the lawyer] discovering… that the transactions from the perspective of the [Guarantor] were not merely risky and dangerous but entirely uncommercial and could not in any way have advanced his interests…that the appellant had fundamentally misunderstood the transaction…and that it was possible that [the Accountant] had given [the borrower] and [the Guarantor] no financial advice at all.
Pro forma certificates of independent legal and financial advice
The lawyer prepared pro forma certificates of independent legal and financial advice, and the lender’s claimed reliance on them to the exclusion of any other information except valuations was crucial – but there were three problems with that claimed reliance:
- The certificate of legal advice addressed the consequences of default for the guarantor – but did not address the likelihood of default.
- The certificate of financial advice which would potentially address the likelihood of default was completed in respect of the borrower shelf company, not the Guarantor.
- The certificates could not displace the lawyer’s actual knowledge that “the loans were a dangerous transaction” for the Guarantor who, the Court found, the lawyer knew to be under a disadvantage.
The High Court clearly accepted that there was nothing inherently unconscionable about asset‑based lending. However, in the circumstances here, the lawyer’s conduct amounted to the unconscientious exploitation of the Guarantor’s special disadvantage, and the Court held that it would be unconscionable to allow the lender to be able to enforce its rights under the mortgages.