In the matter of Jams 2 Pty Ltd v Stubbings [2020] VSCA 200, the Victorian Court of Appeal considered and clarified the principles of unconscionability, including statutory unconscionability. Further, Beach, Kyrou and Hargrave JJA were required to consider whether ‘asset-based lending’ was allowed in private lending sector.

What is asset-based lending?

Beach, Kyrou and Hargrave JJA summarised asset-based lending as [1]:

“… involves lending on the value of the assets securing the loan, without any consideration of the borrower’s ability to repay the loan from their own income or other assets. No credit-risk analysis other than the calculation of the loan amount to security value ratio is undertaken by the lender.”

Background

The lender provided two loan facilities to Victorian Boat Clinic Pty Ltd (the Borrower). The loans were guaranteed by Stubbings (the Guarantor), along with mortgages over properties owned by the Borrower and Guarantor. The loan was primarily for the purchase of a property in Fingal.

The Borrower had minimal income, with no other assets except the two properties it granted a mortgage over to the lender. Additionally, the Borrower did not have sufficient funds to pay the deposit for Fingal.

The lender received legal and financial advice certificates, signed by the solicitor and accountant, who provided advice to the Guarantor in relation to the loan facilities.

In September 2015, the two loans were paid to the Borrower and the Fingal property settled. After two monthly instalments, the Borrower defaulted on its loan facility with the lender and the lender sought to enforce its loan agreements.

Decision

Trial Proceedings

The trial judge cast doubt on the asset-based lending system, and found that the loan, mortgage, and guarantee were obtained by unconscionable conduct and ordered for the facility to be set aside.

As the guarantor was unemployed with no assets, except his personal home, the trial judge noted [17]:

“Any person with a modicum of intelligence, who was apprised of the actual nature of the loan and Mr Stubbings’ circumstances, would not have proceeded with the loan. It was bound to end with serious losses and damage to Mr Stubbings”.

Appeal

On appeal, the Court overturned the original decision, and noted that asset-based lending was not inherently unconscionable. Further, the Court was required to consider [2] “relevant factor in deciding whether a particular loan resulted from unconscionable conduct”.

The Court found that that the lender was entitled to rely on the legal and financial certificate, as [132]:

“…both as evidence that Stubbings had consulted a solicitor and an accountant for advice and as to the truth of the matters stated in the certificate’ and determined that they therefore ‘should not be fixed with knowledge of Stubbings’ personal and financial circumstances such that default under the loans was inevitable, as the trial judge appears to have found”.

Proper Test

Beach, Kyrou and Hargrave JJA, referred to the dicta of Gageler J in Australian Securities and Investments Commission v Kobelt [2019] 18 and applied his Honour’s rationale to the ‘proper test’, replacing the previous test of ‘moral obloquy’ or ‘moral tainting’.

Gaegelar J’s judgment clarified the test of statutory unconscionability, which applies to section 12CB of the ASIC Act and section 21 of the ACL. In simple terms, the test requires a Court to consider the whole conduct, before warranting any sanctions.

The Victorian Court of Appeal recited with approval Gageler J’s dicta in Kobelt in relation to the new test as follows [90]:

“The applicable standard is a normative one involving the evaluation of whether the conduct in question is ‘so far outside societal norms of acceptable commercial behaviour as to warrant condemnation as conduct that is offensive to conscience’; in the sense that a court should only take the serious step of denouncing conduct as unconscionable when it is satisfied that the conduct is ‘offensive to a conscience informed by a sense of what is right and proper according to values which can be recognised by the court to prevail within contemporary Australian society’.”

Appeal

On 26 February 2021, the Guarantor successfully obtained special leave to appeal the decision of the Victorian Court of Appeal to the High Court of Australia, who will deal with the issues of asset-based lending and what constitutes unconscionable conduct in the context of guarantee/mortgage.

Implications

As the law currently stands, lenders are entitled to rely on independent legal and financial advice certificates without making any further inquiries. Also, asset-based lending is not inherently unconscionable, nonetheless, lenders should require that borrowers and guarantors provide evidence of them having obtained independent legal and financial advice, especially when they decide not to make their own inquiries into the borrower’s ability to repay the facility.