The High Court has ruled that a lender cannot rely on the fact that a loan guarantor has received independent advice to enforce a guarantee if unconscionable conduct is involved in the transaction.
In a ruling handed down earlier this month, Stubbings v Jams 2 Pty Ltd [2022] HCA 6, the court ruled that Ajzensztat Jeruzalski & Co (AJ Lawyers) acted unconscionably when it arranged two loans for a company whose owner (and the loan guarantor) had no income, lacked business or financial skills and “was clearly out of his depth”.
In 2015, Jeffrey Stubbings owned two houses in Narre Warren, outer Melbourne, which he rented out. Both were mortgaged to Commonwealth Bank, with a combined market value of $770,000 and a total of around $240,000 owing.
Stubbings wanted to buy a property at Fingal on the Mornington Peninsula and possibly sell the Narre Warren properties to help finance the purchase. There was a possibility that he would conduct his busines, Victorian Boat Clinic Pty Ltd, at the Fingal property.
He was unemployed, had not filed tax returns for several years and his company had no assets or revenue. ANZ knocked back a loan application.
He was introduced to a consultant, Mr Zourkas, who put him in touch with AJ Lawyers, which facilitated the making of secured loans from lender Jams 2 Pty Ltd.
AJ Lawyers arranged two loans to Stubbings’ company: a first mortgage of $1.06 million at 10 per cent interest (and a 17 per cent default rate) and a second mortgage of $133,500 at 18 per cent interest (and a default rate of 25 per cent).
Because the loans were made to the company and ostensibly for business purposes, they were outside the consumer protection provisions of the National Consumer Credit Protection Act.
On that basis, AJ Lawyers made no inquiries about income, capacity to service the loan or credit history. Its only interest was in the sufficiency of the security. AJ Lawyers had no contact with Stubbings at all.
Stubbings was guarantor for the loans to his company. The two Narre Warren properties and the Fingal property were security.
The loan documents included a “certificate of independent financial advice”, which had to be signed by an accountant, and a “certificate of independent legal advice”, which had to be signed by a lawyer.
Zourkas referred Stubbings to a lawyer and an accountant to have the documents signed.
The company defaulted on the third month’s interest and AJ Lawyers commenced proceedings to enforce the guarantee.
When the case first went to court, the Supreme Court of Victoria ruled that Stubbings’ indebtedness “was procured by unconscionable conduct”, based on his lack of commercial understanding and his clear inability to repay the loans.
The primary judge found that AJ Lawyers did not seek any information about Stubbings or his business affairs and that it knew the loans were “a risky and dangerous undertaking for Stubbings”.
This ruling was overturned in the Court of Appeal. It took the view that the primary judge formed an adverse view of asset-based lending, which “overwhelmed his determination on the