NSW Supreme Court provides guidance on the procedural requirements for disputes determined by AFCA

31 March 2022
Scott Couper, Partner, Brisbane

The case of Australian Capital Financial Management Pty Limited v Australian Financial Complaints Authority Limited (2021) NSWFC 1577 concerned an application made by Australian Capital Financial Management Pty Ltd seeking to have the Court set aside a previous determination made by AFCA.


In 2014, Mr Bai, Ms Yang and Mr Lee established Australian Sheepskin & Hide Pty Ltd (ASSH), a business which imported sheepskins into China. Both Mr Lee and Ms Yang were directors of ASSH.

On 16 May 2014, Australian Capital Financial Management (ACFM) as lender, ASSH as borrower and Mr Lee, Ms Yang and Mr Bai as guarantors entered into a loan agreement by which ACFM agreed to lend ASSH an amount of up to $2 million in connection with the business of ASSH. Mr Lee, Ms Yang and Mr Bai agreed to guarantee ASSH’s obligations under the agreement. Mr Bai and Ms Yang also granted ACFM mortgages over their two properties.

The loan agreement and associated documents were signed by Mr Bai and Mr Lee. Mr Lee signed on behalf of Ms Yang, pursuant to an authority given to him by Ms Yang, while she was overseas. Ms Yang then signed the documents herself in June 2014 upon her return to Australia, by which time ASSH had drawn down $390,000 under the facility. ASSH drew down a further $800,000 under the facility between 18 June 2014 and 29 August 2014.

By July 2014, ASSH had run into financial difficulties and as a result, on 15 July 2014, ACFM placed a caveat on the title of one of the properties owned by Mr Bai and Ms Yang. Contracts for the sale of that property for a price of $625,000 were exchanged on 26 August 2014. At settlement, ACFM received $254,646.10 from the sale proceeds.

In November 2014, ACFM sent the first demand to ASSH requiring it to rectify various breaches of the loan agreement, including the failure to repay a drawdown of $271,000.

In February 2015, ACFM commenced proceedings in the District Court of New South Wales against Mr Bai and Ms Yang to recover the amount of $742,800 owing under the loan agreement. In July 2015, Mr Bai and Ms Yang filed cross-claims seeking to have the loan agreement and guarantees declared void.

In March 2016, Mr Bai and Ms Yang departed Australia following an unsuccessful appeal to the Administrative Appeals Tribunal against the Minister’s refusal to grant Ms Yang a business owner visa. The District Court proceedings were heard in June 2016, at which there was no appearance by Mr Bai or Ms Yang. As a result, judgment was awarded in favour of ACFM against Mr Bai and Ms Yang in the amount of $738,876.39.

In October 2018, the judgment was set aside and Mr Bai and Ms Yang were ordered to pay ACFM’s costs.

In January 2019, ACFM was admitted to membership of AFCA and became bound by its constitution and rules. In February 2019, Mr Bai and Ms Yang, through their litigation funder, lodged a complaint with AFCA against ACFM.

AFCA’s Determination

After AFCA handed down its preliminary assessment and further submissions were made by both parties, AFCA made its final determination in February 2021. Its key findings were as follows:

The guarantees provided by Mr B and Ms Y were unfairly obtained because they did not understand the purport and effect of the guarantee and did not have the benefit of independent legal advice. The guarantees are invalid and unenforceable. The mortgages over Mr B’s properties are also unenforceable as they were obtained to secure Mr B’s guarantee.”

In its reasons for reaching that conclusion, AFCA stated that, having regard to the size and purpose of the loan and good industry practice, the lender must:

  1. Provide a prominent notice to the proposed guarantor regarding the risks in providing a guarantee and a recommendation that the guarantor obtain legal advice;
  2. Provide a copy of the relevant loan contract and security documents;
  3. Permit the guarantor until at least the next day to consider the guarantee, unless the guarantor is legally advised;
  4. Provide the guarantee directly to the guarantor, not to the borrower; and
  5. Ensure the guarantee is signed by the guarantor in the absence of the borrower.

AFCA noted that the loan documents provided to the borrowers were in English and that Mr Bai and Ms Yang did not speak or read English. AFCA concluded that both Ms Yang and Mr Bai did not properly understand the guarantee.

On the question of whether the mortgages granted by Mr Bai were unenforceable, AFCA found that, as the unregistered mortgages were intended to secure Mr Bai’s guarantee and the guarantee was unenforceable, the mortgages were also unenforceable.

ACFM challenged the determination on several grounds, including that it was denied procedural fairness in relation to the way in which AFCA determined the factual issues relevant to the complaint.


The Court ultimately rejected the submissions made by ACFM and concluded that the proceedings by ACFM against Mr Bai and Ms Yang ought to be dismissed.

On the question of whether ACFM was denied procedural fairness, the Court held that:

  1. AFCA was not required to conduct a hearing, although it was required to give the parties an opportunity to make submissions, which it plainly did;
  2. AFCA is not bound by the rules of evidence and was only required to do what it considered to be fair in all of the circumstances, having regard to legal principles, industry codes and good industry practice;
  3. AFCA did have the discretion to exclude a complaint, although that discretion is only to be exercised sparingly; and
  4. Both parties were given an opportunity to make submissions.

Based on the above, the Court reached the conclusion that ACFM had been afforded procedural fairness, and on that basis, the proceedings were dismissed.

Key Takeaway

When involved with AFCA complaints, lenders should bear in mind that AFCA has broad powers to deal with disputes and will make a determination in accordance with what it considers to be fair in all of the circumstances. Careful consideration should therefore be given to the submissions made to AFCA, in particular when addressing requests from AFCA for information.

Considering that AFCA is not bound by the usual rules of evidence, lenders should ensure that submissions focus on established legal principles, the applicable industry codes and good industry practice, addressing any specific concerns which AFCA raise.

If you found this insight article useful and you would like to subscribe to Gadens’ updates, click here.

Authored by:

Scott Couper, Partner
Isabelle Quinn, Associate

This update does not constitute legal advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of the content.

Get in touch