Claims of unconscionable conduct are a constant threat for lenders. Lenders may feel confident that a guarantor secures the debt repayment, only to find the guarantees struck out as unconscionable.
Therefore, many lenders now structure their facilities to avoid guarantees by listing parties as co-borrowers. However, a new line of cases may have extended the principles of unconscionable conduct to parties other than guarantors.
When assessing a borrower’s ability to service the loan, how much is enough?
Mortgagees are generally required to take steps to ensure a borrower is able to service the loan. Whether by investigating an exit strategy or seeking assurances through a declaration. However, the steps required need to be determined on a case-by-case basis as potential red flags can put a mortgagee on notice that further inquiries need to be made.
How important is independent legal advice when a guarantee is provided?
Importance of lenders requiring borrowers and guarantors to obtain independent legal advice once again confirmed by the courts in National Australia Bank Limited v Wehbeh & Anor  VSC 431.
Guarantor relieved of obligation to pay because Bank failed to adhere to a voluntary industry code.
In the matter of National Australia Bank Limited v John Albert Rose  VSCA 169, the Victorian Supreme Court of Appeal held that a guarantor was not required to repay loans totalling more than $8 million because the bank failed to comply with the Code of Banking Practice.
The courts will not intervene to assist borrowers who become the victim of their own imprudent transactions, even where they have not been advised to seek independent legal and financial advice.
In the matter of Donnelly v Australia and New Zealand Banking Group Ltd  NSWCA 145 the court held that a borrower who voluntarily engages in risky business is not entitled to call upon equitable principles to be redeemed from the consequences inherent in taking those risks.
Public policy does not necessarily require that asset lending be prohibited, or even deterred.
In Provident Capital Ltd v Papa  NSWCA 36 the New South Wales Court of Appeal found that a loan was not unconscionable simply because it was “asset lending”.
Another lender fails to insist on its borrower obtaining independent legal advice.
In Paccar Financial Pty Ltd v Menzies NSWSC 772 the critical issue before the court was whether certain loan documents had been signed and/or sufficiently explained to the borrower by the lender. None of which would have been required had the lender insisted on independent legal advice.
Solicitor’s Certificates – Do these cure undue influence, and does the solicitor advising a guarantor need to be independent from the borrower?
These issues were dealt with by Justice Applegarth in McIvor v Westpac Banking Corporation  QSC 404. It affirms how vital it is for lenders to ensure that all borrowers and guarantors receive independent legal advice in relation to their rights and obligations under loan agreements and mortgages prior to funding. His Honour also confirmed that it is not necessary for the solicitor advising the guarantor to be independent of the borrower.
Supreme Court of Queensland reduces amount guaranteed by a volunteer wife even though she obtained independent legal advice.
In Dowdle v Pay Now For Business Pty Ltd & Anor  QSC 272 the Supreme Court of Queensland considered the issue of misleading and deceptive conduct where a wife sought to have a guarantee and mortgage set aside even though she had received legal advice prior to executing a mortgage and guarantee to secure monies advanced to her husband.