In the High Court of Australia decision of Stubbings v Jams 2 Pty Ltd [2022] HCA 6 all 5 judges allowed an appeal by a guarantor claiming that the loan, mortgage and guarantee were procured by unconscionable conduct despite the fact that the borrower and guarantor had provided certificates of independent legal and financial advice and ordered that they be set aside. They concluded it was unconscionable for the lender to insist upon their rights under the mortgages

The majority approved the principle that a “disabling condition or circumstance is one which seriously affects the ability of the innocent party to make a judgment as to his [or her] own best interests, when the other party knows or ought to know of the existence of that condition or circumstance and of its effect on the innocent party.”

The lenders loaned $1,059,000 to Victorian Boat Clinic Pty Ltd, a shell company with no assets which was owned and controlled by Jeffrey Stubbings.

Stubbings was unemployed and had nominal income, no assets (other than the security properties) and insufficient funds to pay the 10% deposit on the property being purchased or to service the loan.

The lenders’ lawyer required Stubbings to receive legal and accounting advice by requiring a signed certificate. The solicitor and accountant who provided the certificates would only be paid if the loans proceeded.

The majority judgment of Chief Justice Kiefel and Justices Keane and Gleeson concluded:

“… the respondents argued that there is nothing inherently unconscionable about asset‑based lending insofar as it involves lending on the value of the assets that secure the loan without any reliance upon the borrower’s ability to repay the loan from his or her income or other assets. The appellant conceded this general proposition, but contended that in this case, on the unchallenged findings of fact made by the primary judge, the loans to the company and the appellant’s guarantee were effected in circumstances which made the enforcement of the respondents’ rights against the appellant unconscionable. The appellant’s contentions should be accepted.

The appellant’s lack of commercial understanding coupled with his inability to repay the loans from his own income or other assets meant that default in repayment, and the consequent loss by the appellant of his equity in his properties by way of interest payments to the respondents, were inevitable as a matter of objective fact. The respondents, through their agent, sufficiently appreciated that reality that the exercise of their rights under the mortgages to turn the appellant’s disadvantages to their own profit was unconscionable. Equitable intervention was justified in this case “not merely to relieve the [appellant] from the consequences of his own foolishness … [but] to prevent his victimisation” .

With respect to the certificates of independent advice they observed:

“The certificates contained nothing to suggest that the appellant had actually turned his attention to the difference between the cost of his existing borrowings with Commonwealth Bank and the proposed loans, or to how he would service the proposed loans. The absence of even the most general reference in the certificates as to the existence and terms of the company’s business plan or as to how the Fingal property zoning problem (of which Mr Jeruzalski [the lender’s lawyer] was aware) might be resolved is eloquent of their artificiality.

In addition, given the bland boilerplate language of the certificates and the statement therein of the purpose of the loan (which Mr Jeruzalski must have known to be inaccurate), it is open to draw the inference that the certificates were mere “window dressing”. A similar inference may be drawn in relation to the commercially unnecessary interposition of the company as borrower, a step calculated to prevent or impede scrutiny of the fairness of the transaction under the Code. The certificates might also be seen to have been a precautionary artifice designed to prevent an inference that the respondents were wilfully blind to the obvious danger to the appellant. But however one views the certificates, they could not negate Mr Jeruzalski’s actual appreciation of the dangerous nature of the loans and the appellant’s vulnerability to exploitation by the respondents. Indeed, one might regard the deployment of such artifices in a context where the lender or its agent deliberately distances itself from evidence that must confirm the dangerous nature of the transaction for the borrower or its guarantor as evidence pointing to an exploitative state of mind on the part of the lender.”

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