Stubbings v Jams 2 Pty Ltd

• Jurisdiction: Australia Federal only
• Court: High Court
• Judge: Kiefel CJ,Keane,Gleeson JJ.,Gordon J,Steward J
• Judgment Date: 16 March 2022
• Neutral Citation: [2022] HCA 6
• Docket Number: M13/2021

[2022] HCA 6

HIGH COURT OF AUSTRALIA

Kiefel CJ Keane, Gordon, Steward and Gleeson JJ

M13/2021

Jeffrey William Stubbings

Appellant

and

Jams 2 Pty Ltd & Ors

Respondents

Representation

N C Hutley SC with A M Dinelli and A Christophersen for the appellant (instructed by Garland Hawthorn Brahe Lawyers)

B W Walker SC with J D Watson for the respondents (instructed by Christopher William Legal)

Equity — Unconscionable conduct — Where respondents engaged in business of asset-based lending — Where system of lending involved law firm, acting through intermediary, facilitating secured loans by respondents — Where law firm acted as agent of respondents — Where respondents' agent never dealt directly with appellant — Where appellant unemployed with no regular income and poor financial literacy — Where appellant guaranteed loan made by respondents to company owned and controlled by appellant — Where company had no assets and never traded — Where loan and guarantee secured by mortgages over appellant's three properties — Where appellant provided signed certificates of independent financial advice and independent legal advice drafted by law firm — Where company defaulted on loan and respondents sought to enforce rights against appellant — Whether respondents acted unconscionably in seeking to enforce rights — Whether respondents' agent had knowledge of appellant's circumstances — Whether respondents entitled to rely on certificates of independent advice — Whether unconscientious exploitation of appellant's special disadvantage.

Words and phrases — “agent”, “asset-based lending”, “certificates of independent advice”, “knowledge of that special disadvantage”, “special disadvantage”, “system of conduct”, “unconscientious”, “unconscientious exploitation”, “unconscionable conduct”, “vulnerability”, “wilfully blind”.

ORDER

• 1. Appeal allowed.

• 2. Set aside orders 2 and 3 made on 5 August 2020 and orders 2 and 3 made on 24 August 2020 by the Court of Appeal of the Supreme Court of Victoria and, in their place, order that:

  • (a) orders 1 and 3 made on 22 July 2019 by the primary judge be varied so that the date of those orders be taken instead to be the date of final orders in Proceeding No M13 of 2021 in the High Court of Australia;

  • (b) the appeal be otherwise dismissed;

  • (c) the appellants pay the respondent's costs of the application for leave to appeal and of the appeal on the standard basis; and

  • (d) pursuant to r 63.34.2 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic):

    • (i) the appellants pay the costs of the legal assistance provided to the respondent by the legal practitioners on a pro bono basis, as if the legal assistance had been provided by the legal practitioners not on a pro bono basis but on the basis that the respondent was under an obligation to pay for the legal assistance in the ordinary way; and

    • (ii) costs payable in respect of legal assistance given on a pro bono basis are payable directly to the legal practitioners.

• 3. The respondents pay the appellant's costs.

1 Kiefel CJ, Keane and Gleeson JJ. The respondents in this matter are in the business known as asset-based lending, or “pure asset lending”. This type of lending has the distinguishing feature, which often makes it easier for a borrower to obtain finance, that loans are made exclusively on the basis of the value of the assets securing 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” 1.

2 The appellant was the guarantor of loans made by the respondents to a company owned and controlled by him, Victorian Boat Clinic Pty Ltd (“the company”) 2. The appellant's obligations as guarantor were secured by mortgages given over parcels of land owned by him. The company had no assets and had never traded. The appellant had no income or other means to meet his obligations to the respondents.

3 The primary judge (Robson J) found that the appellant's indebtedness to the respondents had been procured by unconscionable conduct on the part of their agent which was attributable to them. This conduct was found to be contrary to equitable principle and to s 12CB of the Australian Securities and Investments Commission Act 2001 (Cth) (“the ASIC Act”) 3. The Court of Appeal of the Supreme Court of Victoria (Beach, Kyrou and Hargrave JJA) overruled the primary judge's decision, concluding that the evidence could not support a finding of unconscionable conduct attributable to the respondents 4.

4 In this Court, 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.

5 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” 5.

6 The appeal to this Court should be allowed.

The facts

7 The appellant owned two houses in Narre Warren, both of which were mortgaged to Commonwealth Bank. The mortgage repayments were between $260 and $280 per week. The appellant did not live in either house; instead he lived at rental premises at Boneo, where he worked repairing boats for the owner of the property. Due to a falling out with the owner, the appellant ceased work and needed to move house. Rather than live at one of the Narre Warren properties, he sought to purchase another property on the Mornington Peninsula 6.

8 The appellant was unemployed and had no regular income. He had not filed tax returns in several years and was in arrears on rates payments in respect of the two Narre Warren properties 7. After a home loan application to ANZ was rejected for lack of financial records, the appellant was introduced to Mr Zourkas 8.

9 Mr Zourkas described himself as a “consultant”, in the business of introducing potential borrowers to Ajzensztat Jeruzalski & Co (“AJ Lawyers”). AJ Lawyers in turn provided a service to clients, such as the respondents, to facilitate the making of secured loans by those clients. The primary judge found

that Mr Zourkas played an “important and essential” role in these transactions, in that his involvement ensured that AJ Lawyers never dealt directly with the borrower or guarantor, such as the appellant 9

10 The appellant and Mr Zourkas met on a number of occasions in 2015. At their first meeting, the appellant said that he “wanted to buy a little house” to live in, to which Mr Zourkas responded that “there would not be a problem going bigger and getting something with land” 10. On the strength of that suggestion, the appellant found a five-acre property with two houses on it in Fingal, available for $900,000. At another meeting, Mr Zourkas told the appellant that he could borrow a sum sufficient to pay out the existing mortgages over the Narre Warren properties, purchase the Fingal property, and have approximately $53,000 remaining to go towards the first three months' interest on the loan. Mr Zourkas advised the appellant that he could then sell the Narre Warren properties, reducing the loan to approximately $400,000, which the appellant could then refinance with a bank at a lower interest rate 11.

11 The two Narre Warren properties and the Fingal property would secure the appellant's obligations as guarantor 12. The existing debt to Commonwealth Bank secured on the Narre Warren properties totalled approximately $240,000 13. On the basis that the two properties had a market value of $770,000, the appellant's equity was thus worth about $530,000 14.

12 On 30 June 2015, the appellant signed a contract to purchase the Fingal property for $900,000. A deposit of $90,000 became payable on 7 July 2015. The appellant only ever paid $100 towards it 15.

13 In late July or early August 2015, Mr Zourkas introduced the appellant to Mr Jeruzalski, a partner at AJ Lawyers. On 10 August 2015, AJ Lawyers arranged to have the two Narre Warren properties and the Fingal property valued as security for the loan. Together, the properties were valued at $1,570,000 16. Satisfied that this would support a loan, AJ Lawyers provided two letters of offer, on behalf of their clients, including the respondents, to provide first and second mortgage finance to the company. Each offer was conditional on the appellant acting as guarantor and with the three properties as security for his guarantee 17.

14 It is necessary to note here that AJ Lawyers, and Mr Jeruzalski in particular, acted for the respondents in these transactions 18. On that basis, Mr Jeruzalski's state of mind and his conduct can be sheeted home to the respondents.

15 The first mortgage loan was for a sum of $1,059,000 at an interest rate of 10 per cent per annum and a default rate of 17 per cent per...