The High Court of Australia has ruled that ‘asset-based’ secured loans to a destitute and financially unsophisticated borrower were unenforceable due to the unreasonable conduct of the lenders’ solicitor.
Jeffrey Stubbings lived in Victoria. He was unemployed, had no regular income, had no savings, and received no government benefits. He owned 2 houses but lived in rental accommodation. His financial situation was “poor”. He was “naïve, naïve and had little financial sense”.
Stubbings wanted to buy a house to live in. He was introduced to a certain Mr. Zourkas (“the middleman”), who acted as an intermediary between the potential borrowers and a lawyer who acted for the “asset-based” lenders. Asset-based lending means lending based on the value of the assets that will be mortgaged to secure the loan, regardless of the borrower’s ability to repay the loan from income.
Through the attorney and the middleman, 3 lenders offered to loan Stubbings a total of approximately $1.2 million. The loans were to be secured by registered mortgages on the 2 Stubbings properties plus the property to be purchased. Stubbings accepted the offers.
Because the lenders did not want the loans to be governed by the National Credit Code, the loans were for business purposes and had to be made to a business. And so a shell company was formed, with Stubbings as sole shareholder and director.
The intermediary referred Stubbings to an independent lawyer and an independent accountant, who then certified that they had provided legal and financial advice regarding the loans to Stubbings. The certificates were then given to the lenders’ lawyer.
The company received the loan funds and Stubbings guaranteed repayment of the loans. Stubbings purchased the new property and registered mortgages were taken on all 3 properties.
Inevitably, the company defaulted on the loans. The lenders then sued Stubbings in the Supreme Court of Victoria, seeking to enforce the collateral and their rights under the mortgages.
The Supreme Court struck down the bond and mortgages, finding they had been obtained through unreasonable conduct. However, the Victoria Court of Appeal overturned the decision. Stubbings then sought and was granted special leave to appeal to the High Court of Australia.
Kiefel CJ, Keane, Gordon, Steward and Gleeson JJ unanimously allowed Stubbings’ appeal. Their Honors agreed with the trial judge that the lenders, through their attorney attorney, were guilty of conduct ineligible in equity. Stubbings was at a particular disadvantage relative to lenders; the lenders, through their notary, were aware of this particular inconvenience; and the lenders, through their attorney, have unknowingly exploited this particular disadvantage.
Even though the lawyer had no direct dealings with Stubbings – which was a deliberate act of “willful blindness” on his part, such that his clients could not be redressed by knowing of Stubbings’ particular disadvantage – he “had a sufficient appreciation of [Stubbings’] vulnerability and the disaster that awaited him under the mortgages”, that his conduct in obtaining the mortgages lacked conscience. The lawyer suspected that Stubbings had no income – the lawyer knew that if Stubbings could have repaid a loan, he would have approached a bank instead – and the lawyer knew that loans were a risky and dangerous business for Stubbings. In the circumstances, assistance and an explanation of the proposed transaction to Stubbings was required. However, no such help or explanation was provided. Instead, the lawyer pursued the loans, knowing that if the company defaulted – which it was still required to do – the mortgages were sufficient to cover the loans.
Lenders relied heavily on independent opinion certificates. However, the High Court said the certificates were flawed and were nothing more than ‘window dressing’. They were not sufficient to overturn a finding of inadmissible conduct.
Gordon J also found the lenders guilty of impermissible conduct in the provision of financial services under s. 12CB of the Australian Securities and Investments Commission Act.
Source: Stubbings v Jams 2 Pty Ltd  HCA 6March 16, 2022.
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