Lenders will not always be able to use the fact that a borrower took "independent advice" as a shield to an allegation of unconscionable conduct. This was the case in the High Court decision of Stubbings v Jams 2 Pty Ltd [2022] HCA 6, where a lender and its intermediaries sought to rely on boilerplate certificates of independent advice to avoid a finding of unconscionable conduct. Key to the High Court's decision to allow the appeal and set aside the guarantee and mortgages on the basis of unconscionable conduct were the circumstances whereby the lender and its intermediaries had taken deliberate steps not to ascertain information about the borrower's or guarantor's personal and financial circumstances. This amounted to "unconscientious exploitation of the appellant's special disadvantage".
The appellant in this case was Mr Stubbings, the sole director and shareholder of Victorian Boat Clinic Pty Ltd (VBC). The respondents were lenders who had provided a loan to VBC to acquire a property to live in. Mr Stubbings was introduced to the lawyers to the lenders through an intermediary, Mr Zourkas. The loan was guaranteed by Mr Stubbings and secured by a second mortgage against two rental properties that he already owned, as well as a mortgage against the property to be acquired. Mr Stubbings was unemployed and had no regular income, and VBC had no assets and did not trade.
Two loans totalling almost $1.2 million was provided to VBC, which were used to acquire the property for $815,000, make payment of fees and expenses to the lender and also to make payment in advance of the first month's interest payment. At the time the loans were provided, Mr Stubbings had approximately $530,000 in equity in the rental properties owned. The loans had interest rates of 10% pa and 17% pa (increasing to 17% pa and 25% pa if a default occurred), and were structured as interest-only loans with a term of 12 months.
The Court found that in providing the loan to VBC the lender had utilised an elaborate scheme and two levels of intermediaries in a "system of conduct designed to inhibit the grant of equitable relief" and to prevent the application of the National Credit Code to the loan. The system of conduct was described by the Court as being one in which "deliberate steps were taken to ensure that [the Lender's lawyers] did not obtain any information about the appellant's financial circumstances and, further, to ensure that the firm was not informed of the representations and inducements made by [the Lender's Agent] to [the Borrower]". Relevantly, the system involved:
- an intermediary who liaised with the borrowers, so that the lawyers never dealt directly with the borrower or guarantors;
- ensuring that loans were made to companies to attempt to prevent application of the National Credit Code;
- the use of pro forma certificates of independent legal and financial advice, arranged by the intermediary; and
- deliberately avoiding information regarding the borrower or guarantor's financial circumstances and ability to repay the loans.
Here the Court found that it could be inferred that the lender's agents, and therefore the lender, must have known that the transaction was dangerous for the borrower and guarantor given Mr Stubbings' "lack of commercial understanding coupled with his inability to repay the loans from his own income or other assets". This inferable risk was supported by what in fact occurred - within 3 months of entering the loan agreement, the borrower and therefore the guarantor, were in default and faced enforcement action being taken against the three properties mortgaged as security for the loan.
By unanimously finding that the system of conduct amounted to unconscionable conduct, the High Court has clearly signalled that schemes intended to permit wilful blindness to special disadvantage are no answer to equity. It is important to note that here the appellant conceded that there is nothing inherently unconscionable about asset-based lending, rather the issue was the particular system of conduct.
The decision affirms the leading authorities on unconscionability, Amadio and Blomley, and the importance of the particular factual circumstances when assessing whether there has been either equitable or statutory unconscionable conduct.
The High Court has highlighted that where a lender either has knowledge of a borrower's special disadvantage, or such knowledge was inferable, a pro forma certificate of independent legal or financial advice will be insufficient and in fact may support a finding of unconscionable conduct. Here the Court accepted that Mr Stubbings was incapable of understanding the risks involved in the transaction. The High Court majority described the certificates relied on by the lender in this case as "window dressing" and a "precautionary artifice designed to prevent an inference that the [lenders] were wilfully blind to the obvious danger to [the guarantor]", and did not contain anything to suggest that Mr Stubbings had turned his mind to how the loans would be serviced. The High Court majority further stated that rather than being evidence of a borrower entering a transaction fully informed, the certificates were "evidence pointing to an exploitative state of mind on the part of the lender".
As a result, lenders must carefully consider the circumstances of their lending and then whether the certificates of independent advice they receive are fit for purpose – the higher the risk profile of a lend, the more a lender must do to understand the level of danger to the guarantor and the borrower and to ensure that those parties have been warned accordingly.