Key Takeaways

The HCA recently delivered its decision in Stubbings v Jams 2 Pty Ltd (HCA 2022)¹ which demonstrates the Court’s willingness to intervene and discharge liabilities (if necessary) in circumstances where to not do so, unconscionable conduct would go unrectified.

This decision considered and highlighted unconscionable conduct arising from implementation of processes and procedures designed to camouflage from the lender, knowledge of information key to lending considerations, such as the loan’s serviceability.

The case also reinforces the position that an agents’ actions are attributable to the agent’s principal (the Lender) and therefore the agent’s unconscionable actions attach to the Lender and its security.

The biggest take away from this decision is the HCA’s emphasis on substance over form. The Court found that merely obtaining certain documents from the Borrower, such as certificates of independent legal and financial advice and declarations that the funds were for business purpose and not ‘for personal, domestic or household purpose’, were not sufficient to displace a finding of unconscionable conduct, or avoid the application of the National Credit Code.

Brief Facts

The Lenders (Respondents in the proceeding) provide asset-based lending in which loans are assessed and approved solely based on the value of the asset that will be taken as security for the loan. The approval process of these loans involves minimal credit-risk and serviceability assessment.

Mr Stubbings, the appellant in the HCA proceedings, was an unemployed 60 year old, with no regular income or assets except two rental properties that both had significant equity. He was also the sole director of a Company, which was not trading. Mr Stubbings sought finance to purchase a third property, which he intended to live in.

Mr Stubbings engaged an intermediary to assist him obtain the finance. The intermediary made representations to him in relation to his borrowing capacity and the operation of the loan. The intermediary approached AJ Lawyers, a law firm who documented, prepared and advanced the loan to Mr Stubbings on behalf of the Lender. The Lender was also a client of the law firm. In all the circumstances, the law firm was found to be an agent of the Lender.

The law firm drew up the loan documents in the Company’s name, rather than Mr Stubbings. The loan documents contained the following notable features:

• The facility was to be guaranteed by Mr Stubbings and secured by mortgages over all three properties.
• A condition of the finance approval was the need for the borrower to obtain and return signed certificates of independent legal and accounting advice to the law firm. The intermediary provided Mr Stubbings with contact details of a lawyer and accountant to obtain the required certificates.
• The loan amount was sufficient to discharge the mortgages on Mr Stubbings’ two existing properties, purchase the third property and cover the loan repayments on this new facility for two months.
• The purpose of the loan was recorded as ‘set up and expand the business’ and a declaration was required stating the funds were for business purpose and not ‘for personal, domestic or household purpose’.

Mr Stubbings maintained the first 2 months of repayments, before defaulting on the loan.

Following the sale of the first two properties, the Lender sought possession of the third property (the one Mr Stubbings was residing in). Mr Stubbings opposed the possession proceedings on the basis that the facility and mortgages obtained by the Lender were not enforceable due to misleading, deceptive and unconscionable conduct.

Judgment

The HCA held:

• Use of an asset based lending approach of itself is not unconscionable, but rather the conduct and procedures implemented by the law firm in setting up this loan amounted to unconscionable conduct.
• The law firm, who acted as an agent for the Lender, had implemented processes and procedures which would distance it from the information gathering step of the loan application. This included a refusal to meet or communicate with potential borrowers other than through an intermediary. Such conduct was found to amount to wilful blindness to the circumstances of this particular loan.
• The law firm’s use of pro forma documents was a standardised practice implemented by the law firm and not an accurate representation of the circumstances in this case. The conditions imposed to sign and return the certificates of independent legal and financial advice and a declaration that the funds were for business purpose and not ‘for personal, domestic or household purpose’ were imposed as an attempt to ‘safe guard’ the Lender from liability should the borrower default on the loan and to avoid the application of the National Credit Code.

It was accepted by a majority of the HCA Justices that the law firm did not have actual knowledge that Mr Stubbings would default on the facility, however the solicitor had ‘sufficient appreciation’ of Mr Stubbings’ vulnerability to justify the need for further enquiries.

Implications

This case is an important reminder to lenders, particularly those generating business through agents and brokers, of the following:

• Know your customer!
• Ensure you are aware of the actual purpose and nature of the loan being funded.
• All documentation must be consistent with the actual circumstances and information gathered from the borrower.
• The mere existence of certificates of independent legal and financial advice does not negate a lenders’ actual knowledge, or the knowledge they ought to have if appropriate enquires were made.

¹ https://eresources.hcourt.gov.au/showCase/2022/HCA/6