On 16 March 2022, the High Court of Australia unanimously found that the respondent, in the course of engaging in asset-based lending, acted unconscionably. This decision has arguably been one of the most awaited decision, for lenders, in recent history.
As a brief background, the respondents were in the business of asset-based lending - being that any loan provided was only ever assessed in the context of the value of the property being offered as security and not the borrower’s capacity to repay the loan.
Following an initial attempt by the appellant to obtain a loan from a bank, that was rejected as a result of his inability to prove his income, the appellant successfully obtained a loan from the respondent to purchase a property, in addition to two already owned, notwithstanding his recent unemployment, lack of assessable income, and no prospects of being able to repay the loan. This clear inability to repay the loan was highlighted by Robson J, when the matter was in the Victorian Supreme Court, who stated “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”.
During the course of the application process, the appellant met with the respondent’s agents who required him to obtain two certificates, one for financial advice and one for legal advice. The agent provided these certificates to him and guided him to applicable professionals, who were incentivised in signing them off.
Following the advancing of the loan, the appellant was subsequently unable to meet the ongoing payments, triggering a default under the loan agreement, which resulted in the respondent taking steps to take possession of the appellant’s property and sell it. After the sale of the appellant’s property, the appellant submitted that he was at a special disadvantage when entering into this loan and that the respondents, through their agent, were aware of this disadvantage.
While this judgment did not go as far to say that asset-based lending on a whole was unconscionable, with Steward J highlighting that “There is, however, no one "type" of asset-based lending. Parties are always free to negotiate their own particular terms for lending money.”, the Court considered it necessary that equity step-in in this asset-based lending circumstance, “not merely to relieve the [appellant] from the consequences of his own foolishness ... [but] to prevent his victimisation.”
It is clear that this decision turned on the extent that the respondent knew, by its agent, of the appellant’s disadvantage, and then took steps to exploit that disadvantage to the respondent’s benefit.
This case emphasises that in assessing whether a party is subject to a special disadvantage it must go beyond simply the parties bargaining power, or a party’s profound disability in controlling their own affairs or illiteracy. It must be an inability to act in one’s own best interest and that the benefiting party knew, or ought to have known, of that disadvantage. Which, in this decision, was highlighted to be that the simple act of the appellant being minded to enter into such a transaction, having regard to his own circumstances, was evidence of his vulnerability.
If you have concerns that you as a borrower, or a borrower to a loan you have provided, were at a special disadvantage, then please do not hesitate to contact Longton Legal for assistance.
*Disclaimer: This is intended as general information only and not to be construed as legal advice. The above information is subject to changes over time. You should always seek professional advice beforetaking any course of action.*
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