Worth the paper they are written on – the importance of independent advice certificates in financing transactions

Socrates famously said “to find yourself, think for yourself.” The Victorian Court of Appeal recently disagreed and reasserted the ability of lenders to rely on independent legal and financial advice certificates without making further inquiries of their own.

Jams 2 Pty Ltd v Stubbings [2020] VSCA 200 involved “asset-based lending”, lending on the value of secured property, rather than the borrower’s ability to repay from income or other assets. The borrower defaulted shortly after settlement.

The trial judge cast doubt on this system of lending, finding it to be unconscionable, despite the fact that the borrower and guarantor had provided certificates of independent legal and financial advice.

On appeal, the Court reasserted the prevailing view that asset-based lending is not inherently unconscionable. Notably, the Court emphasised a lender’s ability to rely on certificates of independent legal and financial advice, both as evidence that an independent professional has been consulted and as to the truth of those certificates, rather than requiring a lender to make its own inquiries into such matters.

Key points for lenders

• A lender can rely on certificates of independent legal and financial advice both to show that an independent professional has been consulted and as to the truth of the content.
• Independence of the professional is crucial – any influence by the lender could render the certificate ineffective.
• Asset based lending is not inherently unconscionable but lenders should ensure finance is conditional on receipt of independent legal and financial advice where not conducting their own inquiry into a borrower’s ability to repay.

Background

Jeffrey Stubbings (Stubbings) was unemployed and had no regular income. Stubbings was looking to purchase a property on the Mornington Peninsula and was referred to a finance broker. After discussions with the broker, Stubbings agreed to purchase a property in Fingal for $900,000 (Fingal Property) and the broker arranged finance.

The lenders agreed to lend to a company owned by Stubbings, the Victorian Boat Clinic Pty Ltd (Borrower). The offer was conditional on Stubbings personally guaranteeing the loan and granting a mortgage over the Fingal Property together with two properties that Stubbings owned in Narre Warren (Narre Warren Properties), and providing the lenders with certificates of independent legal and financial advice. The broker referred Stubbings to an independent solicitor and independent accountant who provided the independent legal and financial advice.

Within a few months of the purchase settling, the Borrower defaulted under the loan arrangements. The lenders commenced proceedings against Stubbings seeking possession of the property. Stubbings alleged (among other things) that the loan and his guarantee were procured by the unconscionable conduct of the lenders.

Trial Decision

Stubbings alleged that the loan was unconscionable because the lenders took advantage of his special disadvantage under the principles of Commercial Bank of Australia Ltd v Amadio. He claimed no inquiry was made into his understanding of the loan terms and his repayment abilities.

At trial, Robson J held that the lenders had acted unconscionably for a number of reasons, including:

• the lenders’ lawyers had a deliberate system to ensure they did not find out any information about the Borrower’s ability to repay;
• the lenders’ lawyers relied on a broker to interact with Stubbings and took deliberate steps to ensure they did not have knowledge of what the broker had told Stubbings or what Stubbings understood about the terms of the loan – in doing so, the lenders attempted to immunise themselves from any knowledge that might expose them to a claim they acted unconscionably;
• this system of conduct was enough to put the lenders on notice of the Borrower’s circumstances; and
• the lenders failed to rely on their rights under the loan documents to obtain information from the borrower.

Appeal

The lenders appealed on numerous grounds, including that the trial Judge erred in finding that the lenders acted unconscionably.

The lenders argued that even if they had suspected the Borrower did not have sufficient income to repay the loan, this alone is not enough to put them on notice. They argued that there was no reason to doubt that Stubbings was aware of all the risks involved given that he had the benefit of independent legal and financial advice.

Decision

The Court held there is no general principle that asset-based lending is inherently unconscionable given the direction in the ASIC Act that ‘all of the circumstances’ need to be considered in determining whether a person has engaged in unconscionable conduct.

The Court held that even if the lenders had the maximum level of knowledge alleged by the Borrower, including that they:

• assumed Stubbings and the Borrower had no income;
• knew Stubbings was only able to pay a nominal deposit on the Fingal Property;
• knew the loan was being used to refinance existing mortgages on the Narre Warren Properties; and
• knew they had the right under the loan documents to make further inquiries into Stubbings’ circumstances,

the lenders also knew, and relied on the fact, that Stubbings had obtained independent legal and financial advice.

The Court held the lenders were entitled to rely on these certificates — both as evidence that Stubbings had consulted an independent solicitor and accountant for advice and as to the truth of the matters stated in those certificates. The independent financial advice in particular made it reasonable for the lenders to refrain from further inquiry as to how the Borrower and Stubbings intended to repay the loan.

Authored by:

Elliot Raleigh, Partner
Yoni Baker, Lawyer