Insight

Blurred Lines

Where does responsible lending end and unconscionability begin? Australian courts have come to vastly different conclusions. An overview of current case law.

Australian Courts Assess Loan Repayment
AK

Andrew Kirby

August 31, 2021 02:20 PM

Following recent findings of misconduct in Australia’s Banking Royal Commission, the obligation of lenders to properly assess a prospective borrower’s ability to repay a loan has come under greater scrutiny. In Australian Securities and Investments Commission v. Westpac, the regulator suffered a defeat when it challenged Westpac Bank over its systems for assessing borrowers’ ability to repay home loans regulated under the National Consumer Credit Protection Act of 2009.

The unsuccessful guarantor in Jams 2 Pty Ltd v. Stubbings was recently granted special leave to appeal to the High Court from its Victorian Court of Appeal decision, which dealt squarely with the issue of asset based lending and whether it constitutes unconscionable conduct that should result in a guarantee and mortgage being set aside. This was all in the context of the “sub-tier” lending market, which encompasses borrowers who, unable to obtain a bank loan, go through private lenders for financing, which is unregulated and comes at a higher interest rate.

One key point at issue for the High Court is freedom of contract, and whether borrowers should be able to obtain short-term, high-interest loans if lower-interest bank financing is not available. As the Court of Appeal put it in Jams 2:

. . . the loans offered by [the lenders] . . . fulfil a legitimate demand by persons who, for whatever reason, cannot obtain finance from banks and other lending institutions at lower interest rates and choose to accept “third tier” loans of the kind offered. In that regard, they rely upon the decision of the High Court in Paciocco, where the High Court found that bank fees charged to customers on a “take it or leave it basis” were not unconscionable.

This case has had an intriguing procedural history. Stubbings, the guarantor and individual who sought the loan through his company as the borrower, lost a summary judgment against the lenders before an Associate Justice. He appealed this and won, and he then had a comprehensive victory at trial followed by a comprehensive loss in the Court of Appeal.

Jams 2 involved “asset-based lending,” which the Court of Appeal describes as follows:

Asset-based lending 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. Thus, the lender makes the loan without regard to the ability of the borrower to repay by instalments under the contract, in the knowledge that adequate security is available in the event of default.

The trial judge in Jams 2 held that the loan to a company owned and controlled by Stubbings was unconscionable, as he was unemployed and had no regular income. Stubbings sourced the loan through a series of intermediaries who regularly obtained financing from private lenders who were clients of a firm of solicitors. The signed documents included certificates of Independent Financial Advice and Independent Legal Advice provided to Stubbings.

One key point at issue for the high court is freedom of contract, and whether borrowers should be able to obtain short-term, high interest loans if lower interest bank financing is not available.”

At trial, Stubbings contended that the loan constituted asset[1]based lending in circumstances when the lenders’ solicitor knew that the lenders would have to rely on the secured properties for repayment, and no evidence had been sought or obtained as to the ability of Stubbings or his company to repay the loan. The trial judge accepted Stubbings’s unconscionability case and set aside the mortgage and guarantee as invalid. It was critical to this finding that the lenders’ solicitor was held to have acted unconscionably.

Between the trial judge’s decision and the Court of Appeal’s decision, the High Court handed down its decision in ASIC v. Kobelt, splitting 4-3 on the application of the facts to the relevant principles and not speaking with one voice regarding the content of the relevant principles. The case involved a man named Kobelt, who ran a store in outback Australia for remote indigenous communities and concerned whether his system of providing “book-up credit” to impoverished and often illiterate and innumerate Aboriginal customers involved unconscionable conduct in contravention of Section 12CB of the ASIC Act. “Book-up” credit involves the customer giving the storekeeper such as Kobelt their debit card with authority to withdraw funds from the customer’s account in reduction of the customer’s debt and in return for the supply of goods over the interval between the customer’s “pay days”.

The majority judges in Kobelt determined that the book-up system was not unconscionable because it did not entail Kobelt exploiting or otherwise taking advantage of customers’ lack of education or financial acumen, due to the long history of book-up credit as a legitimate source of finance in rural and remote indigenous communities.

In the Court of Appeal for Jams 2, the lenders argued that there was nothing unconscionable about the system employed by the lenders’ solicitors. It involved no more than making asset-based loans available on a take-it-or-leave-it basis to companies that lacked sufficient income (or financial records to demonstrate sufficient income) to service the loan—particularly a short-term loan pending asset sales and refinancing. In that regard, they contended that the loans offered fulfil a legitimate demand from persons who, for whatever reason, cannot obtain financing from banks or other lenders at lower interest rates and who therefore choose to accept “third-tier” loans of the kind offered.

The lenders relied upon the decision in Paciocco, in which the High Court found that bank fees charged to customers on a take-it-or-leave-it basis were not unconscionable. They also relied on Kobelt, in which the book-up credit the customers chose to accept—which would be patently unacceptable conduct elsewhere in modern Australian society— was held to be not unconscionable according to the circumstances of the case.

To support their contention that the lenders’ solicitor had not been put on inquiry as to Stubbings’s personal and financial circumstances, the lenders argued that there was no reason for their solicitor to think that Stubbings—with the benefit of advice from an independent solicitor and accountant—was not fully aware of the risks and did not have a plan to obtain sufficient money to repay the loan.

The trial judge had characterised the solicitor’s system of arranging asset-based loans as the agent for its clients as one involving deliberate intention to neither seek nor receive information about the personal and financial circumstances of the borrowers, and held that the purpose of the system was to protect or “immunise” the lenders from claims that the loans should be set aside as unconscionable.

The Victorian Court of Appeal took a very different view about the transaction, holding that the loan and securities were valid and that the lenders’ solicitor had not acted unconscionably. The High Court will now have the final say on this important financial law case.

Andrew Kirby is an experienced and successful trial advocate with particular expertise in banking and finance and property law. Andrew brings expert experience to his banking and finance and commercial cases having worked previously as an investment banker in London and Australia. He has successfully acted in many cases involving mortgage enforcement, negligent financial and legal advice, failed investments and loans and investment fraud.

Related Articles

Accessorial Liability in the Fissured Workplace


by Rohen Cullen and Caroline O’Connor

The wilfully blind beware.

Accessorial Liability

Presenting The Best Lawyers in Australia™ 2025


by Best Lawyers

Best Lawyers is proud to present The Best Lawyers in Australia for 2025, marking the 17th consecutive year of Best Lawyers awards in Australia.

Australia flag over outline of country

Australasian In the Law: Legal News From Our Recently Awarded Countries


by Gregory Sirico

Best Lawyers highlights the top legal stories out of Australia, New Zealand, Japan and Singapore, in conjunction with the 2024 Australasian launch.

Suited man sitting at table using a tablet

The Best Lawyers in Australia™ 2024 Launch


by Best Lawyers

Best Lawyers is excited to announce The Best Lawyers in Australia™ for 2023, including the top lawyers and law firms from Australia.

Australian Parliament beside water at sunset

Announcing The Best Lawyers in Australia™ 2023


by Best Lawyers

The results include an elite field of top lawyers and firms from Australia.

The Best Lawyers in Australia™ 2023

Celebrating Lawyers From Around the World: Annabel West


by Rebecca Blackwell

We are honoring the achievements and career of Annabel West, lawyer and wife of South Australian Premier Peter Malinauskas.

Accomplished Australian Lawyer Annabel West

Checks and Balances


by Michael Sullivan

Ensuring probity and above-board behaviour in both the public and private sector is always important—and that importance can be particularly stark during a major crisis like the pandemic. An overview of a year’s worth of commissions and inquiries.

Australian Commission Governance Structure

The Partnership Opportunity


by David Harley, Shaun Whittaker, Tony Rutherford, and Troy Lewis

Doing well and doing good need not be mutually exclusive. Housing developments that provide both solid long-term returns and positive social outcomes, often through public-private partnerships, are an idea whose time has come throughout Australia.

Housing Developments in Australia

A Climate Duty


by Lara Douvartzidis and Samantha Daly

Converging trends in Australia and the Netherlands: reasonable foreseeability in climate change law and other novel developments.

Climate Change Law in Australia

The Great Debate Between Agriculture, Mining and Environment


by Rebecca Hoare

Can we really have it all?  The pursuit of the harmonious intersection of Australia’s agricultural and resources industries and the environment.

Australia Agriculture, Mining & Environment

Announcing the 2022 Best Lawyers™ in Australia


by Best Lawyers

The results include an elite field of top lawyers and firms.

Announcing the 2022 Best Lawyers™ in Australi

Hey, Big Lender


by Catherine M. Brennan and Latif Zaman

A contentious proposed federal rule would establish “true lender” guidelines for banks and third parties. Does Colorado show the way forward?

Financial Institution

What Does It Take to Join The Best Lawyers in Australia?


by Best Lawyers

We asked The Best Lawyers in Australia: What advice would you give your younger self?

Nominate a Lawyer in Australia

Working With Changes


by Best Lawyers

Carolyn Pugsley, the Joint Global Head of Practice for Corporate, Australia at Herbert Smith and Freehills, discusses policy changes affecting the M&A market in Australia as well as the impact of the pandemic on the practice.

An Interview With Herbert Smith and Freehills

A Legal Guide for Businesses During COVID-19


by Roy D. Oppenheim

Oppenheim Law creates a useful guide for problems small to medium-sized businesses may face during this time of uncertainty.

COVID-19 Legal Information for Businesses

Can Your Option to Purchase Get Lost in a Franchise Agreement?


by Alicia Hill and Benjamin Caddaye

With the changing of a contract in a franchise agreement, certain rights you thought you were entitled to might get lost in translation.

Franchise Agreements and Purchase Options

Trending Articles

2025 Best Lawyers Awards Announced: Honoring Outstanding Legal Professionals Across the U.S.


by Jennifer Verta

Introducing the 31st edition of The Best Lawyers in America and the fifth edition of Best Lawyers: Ones to Watch in America.

Digital map of the United States illuminated by numerous bright lights

Unveiling the 2025 Best Lawyers Awards Canada: Celebrating Legal Excellence


by Jennifer Verta

Presenting the 19th edition of The Best Lawyers in Canada and the 4th edition of Best Lawyers: Ones to Watch in Canada.

Digital map of Canadathis on illuminated by numerous bright lights

Legal Distinction on Display: 15th Edition of The Best Lawyers in France™


by Best Lawyers

The industry’s best lawyers and firms working in France are revealed in the newly released, comprehensive the 15th Edition of The Best Lawyers in France™.

French flag in front of country's outline

Presenting the 2025 Best Lawyers Editions in Chile, Colombia, Peru and Puerto Rico


by Jennifer Verta

Celebrating top legal professionals in South America and the Caribbean.

Flags of Puerto Rico, Chile, Colombia, and Peru, representing countries featured in the Best Lawyers

Announcing the 13th Edition of Best Lawyers Rankings in the United Kingdom


by Best Lawyers

Best Lawyers is proud to announce the newest edition of legal rankings in the United Kingdom, marking the 13th consecutive edition of awards in the country.

British flag in front of country's outline

Unveiling the 2025 Best Lawyers Editions in Brazil, Mexico, Portugal and South Africa


by Jennifer Verta

Best Lawyers celebrates the finest in law, reaffirming its commitment to the global legal community.

Flags of Brazil, Mexico, Portugal and South Africa, representing Best Lawyers countries

Prop 36 California 2024: California’s Path to Stricter Sentencing and Criminal Justice Reform


by Jennifer Verta

Explore how Prop 36 could shape California's sentencing laws and justice reform.

Illustrated Hands Breaking Chains Against a Bright Red Background

Announcing the 16th Edition of the Best Lawyers in Germany Rankings


by Best Lawyers

Best Lawyers announces the 16th edition of The Best Lawyers in Germany™, featuring a unique set of rankings that highlights Germany's top legal talent.

German flag in front of country's outline

Celebrating Excellence in Law: 11th Edition of Best Lawyers in Italy™


by Best Lawyers

Best Lawyers announces the 11th edition of The Best Lawyers in Italy™, which features an elite list of awards showcasing Italy's current legal talent.

Italian flag in front of country's outline

Tampa Appeals Court ‘Sends Clear Message,” Ensuring School Tax Referendum Stays on Ballot


by Gregory Sirico

Hillsborough County's tax referendum is back on the 2024 ballot, promising $177 million for schools and empowering residents to decide the future of education.

Graduation cap in air surrounded by pencils and money

Find the Best Lawyers for Your Needs


by Jennifer Verta

Discover how Best Lawyers simplifies the attorney search process.

A focused woman with dark hair wearing a green top and beige blazer, working on a tablet in a dimly

Key Developments and Trends in U.S. Commercial Litigation


by Justin Smulison

Whether it's multibillion-dollar water cleanliness verdicts or college athletes vying for the right to compensation, the state of litigation remains strong.

Basketball sits in front of stacks of money

Woman on a Mission


by Rebecca Blackwell

Baker Botts partner and intellectual property chair Christa Brown-Sanford discusses how she juggles work, personal life, being a mentor and leadership duties.

Woman in green dress crossing her arms and posing for headshot

Best Lawyers Celebrates Women in the Law: Ninth Edition


by Alliccia Odeyemi

Released in both print and digital form, Best Lawyers Ninth Edition of Women in the Law features stories of inspiring leadership and timely legal issues.

Lawyer in green dress stands with hands on table and cityscape in background

The Human Cost


by Justin Smulison

2 new EU laws aim to reshape global business by enforcing ethical supply chains, focusing on human rights and sustainability

Worker wearing hat stands in field carrying equipemtn

Beyond the Billables


by Michele M. Jochner

In a recently conducted, comprehensive study, data reveals a plethora of hidden realities that parents working full-time in the legal industry face every day.

Women in business attire pushing stroller takes a phone call