The Facts
Unemployed man takes out secured loan to buy new home
A case in the High Court in 2022 revolved around whether or not a complex loan arrangement amounted to unconscionable conduct and predatory lending.
Mr S owned two houses in suburban Melbourne, both of them mortgaged to the Commonwealth Bank.
Despite being unemployed, with no regular income, and having fallen behind on rates payments for his existing properties, Mr S decided to buy a rural property just outside Melbourne.
Mr S’s application for a home loan with ANZ was rejected. However, he was subsequently introduced by a consultant to a lawyer who acted as an agent for private lenders, who provided finance to those who were unable to get a loan from a bank.
The loan from the lenders was made to a company owned by Mr S. The company had no assets and had never traded. The loan was structured this way because the lender wanted to give the appearance that the loan was for business purposes, thereby avoiding the application of the National Credit Code.
Mr S acted as guarantor for the loan.
His guarantee was secured by mortgages over his two existing properties and the rural property he was buying.
Borrower receives complex asset-based loan
The loan arrangement between Mr S and the lenders was asset-based. In other words, the loan was made exclusively based on Mr S’s three properties being security for the loan, without regard to whether or not Mr S had the ability otherwise to repay the loan.
This type of lending can make it easier for a borrower to obtain finance, because a lender is assured that there is adequate security available in the event of default.
Mr S obtains certificates of independent financial and legal advice
The lenders required Mr S to obtain a certificate of independent financial advice and a certificate of independent legal advice.
The lenders gave Mr S sealed envelopes containing the certificates and told him to have them signed, specifying the lawyer and the accountant he should contact for this purpose. Mr S did so.
Lenders seek to enforce mortgages while borrower condemns predatory lending practices
After Mr S bought the rural property and moved into it, he quickly fell behind on his loan repayments.
The lenders commenced proceedings against Mr S in the Supreme Court of Victoria to enforce the guarantee and to seek possession, as mortgagees, of Mr S’s home.
Mr S responded by arguing that due to the predatory lending conduct of the lenders, it would be unconscionable for them to insist on their rights under the mortgages.
The trial judge ruled in favour of Mr S.
The lenders appealed to the Court of Appeal, which found in their favour, overruling the trial judge’s decision.
Mr S then appealed to the High Court.
Expert commentary on the court's decision
High Court finds in favour of borrower
In Stubbings v Jams 2 Pty Ltd [2022] HCA 6, the High Court of Australia found in favour of the borrower, Jeffrey William Stubbings. The court ruled that the lenders, Jams 2 Pty Ltd, were guilty of unconscionable conduct and that they should not be allowed to enforce their rights under the mortgages.
The court acknowledged that asset-based lending is not inherently unconscionable. However, in this case, the specific circumstances and the system of lending employed by the lenders crossed the line into unconscionable conduct.
Relationship with lenders placed borrower at special disadvantage
Referring to previous caselaw, the court noted that unconscionability involves a relationship that places one party at a “special disadvantage” vis‑à‑vis the other, knowledge of that special disadvantage by the stronger party, and unconscientious exploitation by the stronger party of the weaker party’s disadvantage.
According to the court, “special disadvantage” means something that “seriously affects the ability of the innocent party to make a judgment as to his [or her] own best interests”.
The court agreed that Mr Stubbings was incapable of understanding the risks involved in the transaction, emphasising that he could not even perform simple calculations such as 10 per cent of $130,000.
On appeal, even Jams accepted the primary judge’s findings that Mr Stubbings was at a special disadvantage vis‑à‑vis them.
Exploitation of borrower’s special disadvantage was “good business” for lenders
Given Mr Stubbings’ special disadvantage, the question before the court was whether the lenders’ appreciation of that special disadvantage was such as to amount to an exploitation of that disadvantage. The court concluded that it was.
The court noted witheringly that the lenders had “sufficient appreciation of Mr Stubbings vulnerability and the disaster awaiting him under the mortgages” but that “the prospect of obtaining the profit to be made by the taking of [Mr Stubbings’] equity by way of interest payments made the exploitation of [his] disadvantages good business for the respondents”.
Certificates of advice did not reflect truly independent advice
Jams had argued that it was entitled to rely on the certificates of independent legal and financial advice as evidence that Mr Stubbings understood the transaction.
The primary judge rejected this argument, finding that the certificates did not reflect truly independent advice.
The Court of Appeal reversed this finding, saying that the lenders were entitled to rely on the certificates and so did not need to make any further inquiries.
The High Court disagreed with the Court of Appeal. The court noted that the certificates contained nothing to suggest that Mr Stubbings had turned his attention to how he would service the loans.
Characterisation of loan as “commercial” casts further doubt on certificates of advice
In addition, the statement that the purpose of the loan was commercial, which the lenders knew was inaccurate, made it open to draw an inference that the certificates were “mere window dressing”.
The court also noted that in a context where the lenders deliberately distanced themselves from evidence confirming the dangerous nature of the transaction to Mr Stubbings, this could itself be regarded as evidence pointing to their exploitative state of mind.
Lessons for lenders and borrowers
This case serves as a warning to lenders that they cannot turn a blind eye to borrowers’ circumstances, even in asset-based lending.
Further, lenders should be mindful that while certificates of independent advice can be useful, they should not be treated as a foolproof shield against claims of unconscionable conduct and predatory lending.
Lenders should ensure that these certificates are meaningful and address the real risks of the transaction.
For borrowers, this case highlights the dangers of entering complex financial arrangements without truly understanding the risks.
If you’re considering taking out a loan, especially one secured against your home, ensure you fully understand the terms, including interest rates and what happens if you default.
You should also seek genuine independent advice from legal and financial professionals you trust, not just those suggested by the lender.