In the case of Stubbings v Jams 2 Pty Ltd  HCA 6, the High Court allowed an appeal in relation to unconscionable conduct surrounding asset-based lending and vulnerable borrowers. In particular, the High Court found that lenders cannot rely on Certificates of independent legal and financial advice alone to prove they have enquired into the personal and financial circumstances of borrowers.
The respondents in these proceedings were in the business of asset-based lending. This type of lending provides an easier way for a borrower to obtain finance, with loans made based on the value of assets securing the loan and without considering the borrower’s ability to repay by instalments under the contract, with the knowledge that adequate security is available if default occurs.
The appellant, Mr Stubbings, owned two properties in Narre Warren and was looking to purchase a third property in Fingal. At the time he was unemployed and had no regular income. Mr Stubbings used his company, the Victorian Boat Clinic Pty Ltd, to enter an asset-based loan with the respondents. The loan was arranged through Mr Jeruzalski, a partner at Ajzensztat Jeruzalski & Co (“AJ Lawyers”) and a lawyer acting as an agent of the Lenders. Mr Stubbings’ obligations as guarantor were secured by mortgages provided over his properties in Narre Warren and his Fingal property.
The Primary Judge’s Decision
The primary judge found that the loans were obtained through the unconscionable conduct of Mr Jeruzalski on behalf of the Lenders. His Honour found that Mr Stubbings was under a “special disadvantage” and that Mr Jeruzalski demonstrated a high level of “wilful blindness” to Mr Stubbing’s financial and personal circumstances.
Victorian Court of Appeal‘s Decision
The Victorian Court of Appeal overruled the primary judge’s decision. The Court of Appeal was not satisfied that Mr Jeruzalski had either actual or constructive knowledge of the appellant’s circumstances and concluded that:
- The primary judge’s adverse view of asset-based lending overly affected his finding of unconscionability, and
- Mr Jeruzalski was entitled to rely on Certificates of independent advice as showing that the appellant had consulted a solicitor and an accountant for advice and as to the truth of the matters stated in the Certificates. The Certificates meant it was reasonable for Mr Jeruzalski to refrain from further inquiry as to Mr Stubbings’ circumstances.
High Court Judgment
In reaching their decision, the High Court considered whether the actions of the Lenders constituted unconscionable conduct and if Mr Stubbings was under a “special disadvantage”, meaning something that seriously affected his ability to make a judgment as to his own best interests.
The High Court determined that Mr Stubbings was incapable of understanding the risks involved in the transaction. It was held that Mr Jeruzalski had sufficient appreciation of Mr Stubbing’s vulnerability, the dangerous nature of the loans and the bleak situation awaiting Mr Stubbings under the mortgages. Additionally, the Certificates contained nothing to suggest that the appellant had turned his attention to the implications of the proposed loans. The Certificates could not negate Mr Jeruzalski’s actual appreciation of the dangerous nature of the loans and Mr Stubbing’s vulnerability to be exploited by the Lenders.
Also, there was evidence that Mr Jeruzalski suspected that Mr Stubbings did not receive independent advice regarding the loans and that there was nothing to suggest Mr Stubbings had an income that would enable him to refinance. Therefore, the High Court held that Mr Jerulzalski exploited Mr Stubbings’ lack of business knowledge and bleak financial situation to secure business for the Lenders.
In a separate judgment, Gordon J considered the application of s 12CB of the Australian Securities and Investments Commission Act 2001 (Cth) to the Lenders’ conduct which prohibits persons from engaging “in conduct that is, in all the circumstances, unconscionable”, in connection with the supply of financial services in trade or commerce. Gordon J concluded that the Lenders’ system constituted a “system of conduct or pattern of behaviour” designed to hide from the Lenders any information which might later make the loan, the guarantee or the taking of security unconscionable. The loans were also made to companies to avoid those loans being subject to the National Credit Code (Cth).
This matter demonstrates:
- The importance of lenders undertaking due diligence before lending to borrowers.
- Deliberately avoiding information of the guarantor or borrower’s financial or personal circumstances to refrain from gathering knowledge of vulnerability will be considered unconscionable conduct.
- While obtaining Certificates of independent advice from accountants and legal advisors is beneficial, the Certificates cannot be relied on alone to prove the borrowers’ actual appreciation of the nature of proposed loans. The lender must be satisfied that the borrower has turned his or her attention to the proposed loans, and how he or she will service the loans.