In Australian and New Zealand Bank Group Ltd v Beamond & Anor [2017] QSC 208 the Supreme Court of Queensland rules in favour of Bank’s right to recovery of possession of mortgaged properties. The Court also dismisses all counterclaims submitted by Borrowers.

Background

Over a period of three years, starting in 2007, the Australian and New Zealand Bank (the Bank) loaned a total of $1.5m to Adrian Beamond and Deborah Smith (the Borrowers). This took the form of five separate loans each secured by registered mortgages over properties located in North Queensland, near Mission Beach.

Summary of the five loans

1. First loan agreement – $150,000, dated 15 January 2007 and secured by mortgage over Lot 73 Bicton.
2. Second loan agreement – $930,000, dated 2 July 2008. Secured by mortgages over the Penthouse and Lot 80 Bicton.
3. Third loan agreement – $70,000, dated 1 August 2008. A second-ranking mortgage over Lot 73 Bicton secured this loan.
4. Fourth loan agreement – $270,000, dated 25 August 2009. Secured by mortgages over Mitchell Street and the Penthouse.
5. Fifth loan agreement – $80,000, dated 1 February 2010 and secured by a mortgage over Mitchell Street.

In May 2010, by obtaining a partial refinancing from Bendigo Bank, the Borrowers paid about $120,000 to ANZ thereby repaying the fifth loan. As a result the Bank released security over Mitchell Street.

Default and demand for recovery of possession

However, in March 2012 the Borrowers stopped making payments and defaulted on each of the outstanding four loans. In November 2014 the Bank issued notices of default and demand. The Borrowers ignored these.

Therefore, the Bank claimed for payment of the sums due under the unpaid loans. The calculated amount totalled $1,989,534.02, including interest.

Further, the Bank claimed recovery of possession of Lot 73 Bicton, Lot 80 Bicton and the Penthouse. The Borrowers offered no real defence to the recovery of possession claim but instead counterclaimed for damages.

Counterclaim

The Borrower’s counterclaim included allegations of forgery, fraud, breach of fiduciary duties and unconscionable conduct. They submitted that a number of acts and omissions by the Bank during the approval process of the loans freed them from any liability to repay the four outstanding loans.

The acts and omissions focussed on Mr Eather, the Bank officer who dealt with the Borrowers. They claimed Mr Eather falsely manipulated figures on a number of the bank applications to ensure loan approval. If the figures were correct, the loans would have been declined, claimed the Borrowers.

Furthermore, the Borrowers claimed that the Bank’s refusal to advance more money after the fifth loan resulted in loss and damages. In this regard, the Borrowers claimed damages in excess of $50m.

To summarise the counterclaim Burn J stated:

“Thus, their essential complaint was that five loans were approved when they should not have been and that a sixth loan was not approved when it should have been.”

Conclusion

The Court found no substance to the counterclaim. Therefore it was dismissed.

The Court ordered the Borrowers to deliver up possession of the three properties, pay the Bank $1,989,534.02 in settlement and cover the costs of the proceeding.

Related articles

Guarantees Tagged Unconscionable: What Can Lenders Do?

Unconscionable Conduct: Can a Lender Protect Itself?

Court Reduces Amount Guaranteed by Volunteer Wife

This publication is for your general information and interest only. It is therefore not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. You must seek advice tailored to your specific circumstances. 

The post Bank Wins Despite Claims of Fraud & Unconscionable Conduct appeared first on Elliott May.

Australian Securities Ltd v Borina Pty Ltd [2017] NSWSC 1073 considers whether a mortgagor’s claims are futile and doomed to failure.

Background

Australian Securities Ltd (ASL) made a loan of $2, 280, 000 to Borina Pty Ltd (Borina) on 14 November 2005. A mortgage over a motel at 513 Princes Highway, Blakehurst (the property) acted as security for the loan.

ASL rolled over the initial due date multiple times, with the relevant repayment date being 15 December 2014. Thereafter ASL claimed repayment was due. On 19 October 2015 ASL filed a statement of claim to take possession of the property.

Disputed due date

Borina, however, asserted that because of another roll over of the loan for a further two years, the due date was in fact the 15 December 2016. During 2016 the parties filed a number of defences and statements of claim. The trial date was set for 20 February 2017.

As the date loomed ASL pointed out to Borina that the loan payment, even with the alleged loan roll-over, was now without doubt due on 15 December 2016. Settlement negotiations started immediately.

As a result on 22 December 2016 Borina paid $ 2,752,712.99 to ASL. This included $459,187.49, on a without prejudice basis, in order for the discharge of the mortgage. Borina needed to refinance the loan with Baccus Investment Ltd.

The filing of the cross-claim

Thereafter Borina filed a cross-claim to which ASL did not consent. Borina claimed it had suffered loss and damages, in the form of interest, costs and interest on costs.

Borina then filed a second cross-claim which included the following claims of loss and damages due to:

1. a breach of contract when ASL failed to rollover the loan to 15 December 2016;
2. costs incurred in having to borrow a higher principal sum ($2.7m) from Baccus as ASL compelled Borina to repay $459,187.49 on top of the original $2.3m loan;
3. ASL charging Borina interest as if it was in default under the Facility Agreement;
4. unconscionable conduct by ASL in breach of section 21 of the Australian Consumer Law (ACL). Borina claimed ASL made unreasonable demands and unfairly forced it to repay the loan.

Further, Borina claimed for money had and received. It also sought an order that an account be taken.

Submissions made in response to filing of the cross-claim

ASL made the following submissions:

1. a damages claim, in any form, should not be permitted to go forward as in law such a claim was not available;
2. Borina could seek an account and make a claim for money had and received;
3. a claim of unconscionability, relying on the ACL, was an arguable claim but no loss flowed from any possible breach.

Conclusions

The Court rejected Borina’s claim of a breach of contract. It stated that the only right the mortgagor has after redemption of the mortgage, was taking of accounts between the two parties.

However, the Court did not find Borina’s argument of unconscionability to be hopeless or doomed to fail.

The Court concluded that Borina could file a cross-claim confined to:

1. taking an account;
2. the claim for money had and received; and
3. the claims seeking relief for breaches of section 21 of the ACL.

But, if Borina wanted to pursue its claim for the additional Baccus interest, it must provide ASL with $10,000 as extra security.

This publication is for your general information and interest only. It is therefore not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. You must seek advice tailored to your specific circumstances. 

The post Mortgagor Wins Right to File Cross-Claim Against Mortgagee appeared first on Elliott May.

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.

Relevant Facts

In Bank of Western Australia Ltd v Abdul & Anor [2012] VSC 222 (Abdul), the Bank of Western Australia (Bankwest) advanced funds under five separate facilities totalling approximately $18 million (inclusive of interest). 

Four of the facilities were extended to corporate borrowers of which Mr Abdul had control. Mr and Mrs Abdul (Abdul Companies) guaranteed these facilities.  The fifth facility was extended to Mr and Mrs Abdul personally (Abdul Facility).

Even though the Abdul Companies did not hold the Abdul Facility, Bankwest was aware of the purpose of the loan. It was to fund a business conducted within the Abdul Companies’ operations.

The borrowers defaulted on the loans and Bankwest demanded payment of all sums owing to it.  The demands were not paid and Bankwest began proceedings to recover the funds.

The Garcia Principles and Unconscionable Conduct

There is an established principle of equity that applies to a wife who is a volunteer guarantor for a loan facility. It states that she will not have given a valid and enforceable guarantee if there is little or no evidence to suggest that:

• she was able to understand what she was signing,
• the document was explained to her,
• she was able to obtain independent legal advice.

This principle stems from the four-pronged test put forward by the High Court in Garcia v National Australia Bank (1998) 194 CLR 395.

This article provides a summary of the principle. 

Garcia Principles applied by the Court to Abdul

1. Understanding the Effect

   There was no evidence to suggest that Mrs Abdul understood the nature of the documents she was signing. She was not involved in the running the Abdul companies. At most Mrs Abdul completed administrative tasks.  The Bank did not ask her to examine the documents in any detail. The evidence suggests she had a large pile of documents placed in front of her with tabs to show where she should sign.  The fact that she had previously signed guarantees did not indicate she understood what the guarantees meant.

2. Voluntary Transaction

   It is an existing principle that where the wife has an interest in a company through a shareholding, and where her husband conducts the business and she has no real involvement, a guarantee given by the wife over the company’s debts is involuntary. The evidence suggests Mrs Abdul did not have any real part in running the companies and therefore her guarantee must have been voluntary.

3. Husband and Wife Relationship

   Bankwest knew Mr and Mrs Abdul were husband and wife. Therefore, it was likely Mrs Abdul would trust her husband in matters of business. And that Mr Abdul may not have explained commercial matters fully to his wife.

4. Lender did not take Steps to Explain the Transaction

   The evidence suggests Mrs Abdul received the documents in a large pile; she was just was told where to sign. She did not have the documents individually explained to her. There was no evidence that the lender instructed her to seek legal advice on the documents.

The court in Abdul therefore held that in relation to the Abdul Companies, Mrs Abdul (as a traditional guarantor on the facilities) had not given a valid and enforceable guarantee. As a result it could be set aside on the grounds of unconscionable conduct.

Extending the Garcia Principles

Later cases suggest that the High Court’s position in Garcia need not only apply to traditionally-structured guarantees. Facilities with different structures that in substance amount to unconscionable guarantees could also be included:

For example, consider the position of Santow JA and Campbell JA in Elkofairi v Permanent Trustee Co Ltd [2002] NSWCA 413:

“Here the lender lends under a transaction where the money is intended to go to the husband, though framed in terms rendering husband and wife jointly liable as co-principals.  Such a situation may, in the eye of equity, involve a transaction of guarantee or, as sometimes described, constructive suretyship.”

Further, Nettle JA in Narain v Euroasia (Pacific) Pty Ltd (2009) 26 VR 387, followed this reasoning (though noted the court’s position in Elkofairi that it wasn’t for an intermediate appellate court to extend the Garcia principle):

“Were it not for Elkofairi, I should have thought that it was open to this court to construe Yerkey as capable of application to instruments apart from suretyship which operate to a wife’s husband’s advantage or confer a voluntary benefit on him.”

The Abdul Facilities

The court considered the position of Mrs Abdul in relation to the Abdul Facility, as a co-borrower, not a guarantor.  As noted, Mr and Mrs Abdul used the facility to fund further operations of the Abdul Companies.

Mrs Abdul was a volunteer, given that Mr Abdul controlled the Abdul Companies. Her inclusion was merely to secure the facility by her personal liability. Further, there was no evidence that she obtained legal advice, nor had the documents been explained to her above and beyond what was done for the Abdul Companies.

The Court decided that in substance, if not form, the Abdul Facility was identical to the Abdul Companies. Therefore, Mrs Abdul’s liability as borrower under the Abdul Facility was void due to unconscionable conduct.

Conclusions

The principle from Bank of Western Australia Ltd v Abdul & Anor shows that a party to a loan who giving a guarantee (notwithstanding the legal form of the loan) will still be able to access the equitable remedy of unconscionable conduct as previously defined in Garcia. 

Therefore, it is important for lenders to be wary of co-borrowing husbands and wives. This especially applies when there is an unfair balance of power between the parties. Lenders should look beyond the structure of a borrowing company into the roles performed by each party. 

The best step to prevent unconscionable conduct unravelling a facility is making sure the transaction parties get independent legal advice.

You can find the full case for Bank of Western Australia Ltd v Abdul & Anor [2012] VSC 222 here. 

Please contact our office if you would like assistance structuring a secured loan facility.

Related articles:

Unconscionable Conduct: Can a Lender Protect Itself?

Court Reduces Amount Guaranteed by Volunteer Wife

This publication is for your general information and interest only. It is therefore not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. You must seek advice tailored to your specific circumstances.

The post Guarantees Tagged Unconscionable: What Can Lenders Do? appeared first on Elliott May.

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 [2014] VSC 431.

Relevant Facts

In 2008, NAB (Bank) registered a mortgage over Mr and Mrs Wehbeh’s Greenvale property. This was to secure the repayment of a home loan. And also to secure the performance of Mr and Mrs Wehbeh’s obligations as guarantors under a guarantee provided to the Bank for a business loan that was made to a company, 888 Investments Pty Ltd (Company). Mr Wehbeh and a business partner were the only directors and shareholders of the company.

In mid-2010, Mr and Mrs Wehbeh separated. Shortly thereafter, repayments towards the home loan stopped. The repayments on the business loan also ended. Because of the loan defaults, the Bank served the parties with default notices. However, the borrowers continued to be in default of their obligations under the loan transactions. The Bank commenced proceedings against Mr and Mrs Wehbeh, as mortgagors, to recover possession of the Greenvale property and judgment for the debt owed under their guarantees.

In 2012, the Bank obtained summary judgment against Mr Wehbeh. However, Mrs Wehbeh defended the claims made against her.

Main Issues

The Court found that the Bank had established its right to possession of the Greenvale property. As well as its entitlement to judgment on the debt outstanding in relation to the guarantee of the business loan.

Therefore the main issues that the Court had to consider were the two defences raised by Mrs Wehbeh:

• unconscientious dealing in relation to the home loan and,
• undue influence in relation to the guarantee provided for the business loan.

Unconscientious dealing defence in relation to home loan

In relation to the home loan, the Court had to determine whether Mrs Wehbeh was under some form of special disability or a situation of disadvantage which the Bank had unconscientiously taken advantage of. Previously the courts have granted relief against an unconscionable dealing in circumstances where the consideration from the stronger party (such as the Bank) does not flow to the party under the disability, but rather to a third party.

In this instance, the Court found that consideration did flow from the Bank directly to Mrs Wehbeh. She used the home loan in question to discharge a pre-existing mortgage over the Greenvale property held by another financier, Perpetual.

The Court noted that Mr and Mrs Wehbeh had re-financed their home loan a number of times with various banks. Further, it appeared that Mrs Wehbeh understood the nature and effect of those past transactions. There was no substance to Mrs Wehbeh’s assertions that she was under some form of special disability or disadvantage. Such as lacking experience in the type of home loan she entered with the Bank. Or that her will was overborne by her husband causing her to enter the home loan.

Undue influence defence in relation to guarantee of business loan

In relation to her guarantee of the business loan, Mrs Wehbeh argued that the Bank should have known that she reposed trust and confidence in her husband when she entered the transaction. She also stated she did not receive benefit from the transaction. And that she did not properly understand the nature of the transaction.

Garcia decision influential

In determining whether it was unconscionable to enforce the guarantee provided by Mrs Wehbeh, the Court took into account the Garcia decision. The Court considered whether the:

1. surety (guarantor) understood the purport and effect of the transaction;
2. transaction was voluntary (in the sense that the surety obtained no benefit from the contract the performance of which was guaranteed);
3. lender is taken to have understood that, as a wife, the surety may repose trust and confidence in her husband in matters of business and therefore to have understood that the husband may not fully and accurately explain the purport and effect of the transaction; and
4. lender took its own steps to explain the transaction to the wife or to find out whether someone else had explained the transaction to her.

Whilst Mrs Wehbeh alleged that she did not understand the effect of the transaction, that she was a volunteer to the transaction, and that the Bank knew she was married to Mr Wehbeh and would repose trust and confidence in him, the Court noted that she did not allege that the Bank had failed to ascertain whether an independent person had explained the transaction to her.

In this case, the Bank had received and relied upon a certificate provided by Mrs Wehbeh’s solicitor, Mr Raso. Therefore it is clear that she had been adequately advised as to the nature and effect of her obligations as guarantor.

The Court therefore found that Mrs Wehbeh did receive independent legal advice before she signed the document. Furthermore, the Court held that it is the knowledge of NAB that characterises whether its behaviour is unconscientious and in this instance, NAB understood it to be that Mrs Wehbeh received independent legal advice regarding the guarantee.

Conclusion

The Court was not satisfied that Mrs Wehbeh had established all the necessary elements required under the defences she raised. In conclusion, given the above findings, the Court held that the bank was entitled to possession of the Greenvale property and to judgment for the debt she owed under the guarantee.

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Guarantees Tagged Unconscionable: What Can Lenders Do?

Guarantee Provider Must Obtain Independent Legal Advice

Asset Lending Not Necessarily Prohibited By Public Policy

Solicitor’s Certificate: Do These Cure Undue Influence?

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This publication is provided for your general information and interest only. It is not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. You must seek specific advice tailored to your circumstances.

The post Guarantee Provider Must Obtain Independent Legal Advice appeared first on Elliott May.

Too often commercial lenders have to contend with allegations made by defaulting borrowers that they are guilty of unconscionable conduct. An easy phrase to include in a letter or a pleading; but what does it really mean? And is there anything a lender can do to protect itself from these allegations?

The Amadio example

Perhaps the most famous statement of unconscionable conduct is that of Mason J in Commercial Bank of Australia Ltd v Amadio (1983), where his Honour stated that the underlying general principle of unconscionable dealing:

“may be invoked whenever one party by reason of some condition of circumstance is placed at a special disadvantage vis-a-vis another and unfair or unconscientious advantage is then taken of the opportunity thereby created”

In short, the lender must (or ought to) know that the borrower has a special disadvantage that it takes advantage of.

Examples of circumstances that Mason J found could constitute a “special disadvantage” include:

• poverty,
• sickness,
• age,
• sex,
• infirmity of body or mind,
• drunkenness,
• illiteracy or lack of education or lack of assistance of explanation where assistance of explanation is necessary.

In the Amadio case, Mr and Mrs Amadio were elderly migrants with limited English skills. Their son asked them to mortgage their property in favour of the bank. The bank manager went to Mr and Mrs Amadio’s home to have them sign the mortgage. Mr and Mrs Amadio did not read the document and the bank manager did not explain the mortgage because he was under the belief that the son had explained the transaction to them. Importantly, Mrs and Mrs Amadio were under a false belief as to the liability they were securing.

In conclusion, the majority of the High Court held that the mortgage should be set aside unconditionally. The reason was because Mr and Mrs Amadio were under a ‘special disability’ when executing the mortgage and that such special disability was evident to the bank.

The Garcia example

The High Court has also found, in Garcia v National Bank of Australasia Ltd (1998), a lender’s conduct to be unconscionable even though there were no facts alleged to support a conclusion that the guarantor wife was under a ‘special disability’ as per Amadio.

Garcia considered a financial transaction involving a husband and wife and the NAB. The husband had amassed a significant amount of debt to the bank arising from multiple business ventures. Subsequently, the husband and wife separated and divorced. The majority of the High Court identified that in order to classify conduct as unconscionable, the circumstances would have to be that the:

1. guarantor (wife) did not understand the effect of the transaction;

2. transaction was voluntary (in the sense that the wife obtained no benefit from the contract);

3. lender appreciates that the husband may not have fully explained the effect of the transaction to the wife; and

4. lender did not itself take steps to explain the transaction to the wife.

What can a lender do to protect itself from allegations of unconscionable conduct?

In almost all circumstances, the key to a lender being able to resist allegations of unconscionable conduct is to ensure that all parties, whether borrower, guarantor or mortgagor (“transaction parties”), understand the exact nature and effect of the proposed transaction. Also, this includes the consequences should the borrower default on the loan. 

Whilst there are a variety of ways to achieve this, we strongly recommend lenders insist all transaction parties obtain independent legal advice before signing any of the transaction and security documents. Further, the lender should retain a certificate of independent legal advice on the loan file as evidence that the transaction parties received legal advice from a solicitor independent of the lender.  Whilst not strictly necessary, we also believe it prudent in certain circumstances for the lender to require the guarantor / mortgagor who is a volunteer (often a wife or parent of the party driving the transaction) to be advised by a different solicitor to the solicitor advising the borrower (often the husband or son).

For more details on unconscionable conduct visit the Australian Competition and Consumer Commission website.

Related articles

Court Reduces Amount Guaranteed by Volunteer Wife

Guarantees Tagged Unconscionable: What Can Lenders Do?

Guarantee Provider Must Obtain Independent Legal Advice

Solicitor’s Certificate: Do These Cure Undue Influence?

This publication is provided for your information and interest only. It is not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. You must seek specific advice tailored to your circumstances.

The post Unconscionable Conduct: Can a Lender Protect Itself? appeared first on Elliott May.

In the matter of Donnelly v Australia and New Zealand Banking Group Ltd [2014] 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.

Background

Mrs Donnelly and her husband drew down HK$4,105,056.00 (about AUD600,000) under an “Expat Mortgage Loan Facility”. ANZ Asia Ltd (the Bank) granted it to them on 12 June 2008. The loan agreement contained a “clawback clause”. The clause entitled the Bank to convert the currency of the borrower’s liability from Hong Kong Dollars to Australian Dollars. This clause operated where, as a result of exchange rate fluctuations, the borrower’s liability when converted to Australian Dollars exceeded 85% of the assessed value of the security property.

After the loan was made, the Australian Dollar depreciated sharply against the Hong Kong Dollar. Therefore the Bank exercised its right under the clawback clause. The Bank converted the borrower’s indebtedness to approximately AUD730,000. This was about AUD130,000 more than the original value of the loan.

The Bank then commenced proceedings in the New South Wales Supreme Court against Mrs Donnelly. It sought for possession of the security property and judgment for the debt.

Decision at Trial

Mrs Donnelly alleged that the Bank had engaged in conduct that was unconscionable under equitable principles. This argument was based on the Bank’s purported failure to inform Mrs Donnelly that deterioration in the value of the Australian Dollar against the Hong Kong Dollar would adversely affect her interests under the loan facility.

The trial judge rejected her defences and entered judgement for the Bank against Mrs Donnelly in the sum of $879,685.55. The judge also made orders for possession of the security property. In short, the court held that the Bank had not acted unconscionably. 

Mrs Donnelly appealed this decision.

Decision on Appeal

Defence on appeal

Mrs Donnelly relied on the following to support her defence on appeal:

• the loan facility documents were signed at the ‘urging and direction’ of a representative of the Bank;
• the Bank’s representative failed to inform her that a deterioration in the value of the Australian Dollar against the Hong Kong Dollar would cause an increase in her indebtedness;
• no independent financial or legal advice was offered before signing the facility;
• an indemnity that Mrs Donnelly signed was not the subject of any ‘explanation as to its meaning or relevance’;
• the Bank’s representative misrepresented to her that the currency of the loan could only be changed with her consent.

The principles of unconscionable conduct

Macfarlan JA stated the authoritative principles of unconscionable conduct expounded in Kakavas v Crown Melbourne Ltd [2013] HCA 25:

“ … equitable intervention does not relieve a plaintiff from the consequences of improvident transactions conducted in the ordinary and undistinguished course of a lawful business. A plaintiff who voluntarily engages in risky business has never been able to call upon equitable principles to be redeemed from the coming home of risks inherent in the business. The plaintiff must be able to point to conduct on the part of the defendant, beyond the ordinary conduct of the business, which makes it just to require the defendant to restore the plaintiff to his or her previous position.”

The Court’s findings

The evidence suggested Mrs Donnelly did not have a perfectly clear understanding of the terms of the facility agreement. However, the Court of Appeal found that this was an insufficient basis for a claim of unconscionable conduct. As the above extract shows, a plaintiff has to point to some conduct on the part of the defendant which goes “beyond the ordinary conduct of business”. In this case, Mrs Donnelley’s allegations and evidence did not satisfy this requirement.

Also, the Court of Appeal found that the Bank had taken reasonable steps to inform Mrs Donnelly of the risk a depreciation of the Australian Dollar posed to her indebtedness to the Bank. The evidence presented by the Bank included the Bank’s usual practice of explaining the effect of exchange rate fluctuations to potential borrowers.

In addition, the Bank’s failure to recommend that Mrs Donnelly obtain independent legal advice was not unconscionable in the circumstances. In fact Mrs Donnelly’s personally chose not to seek such advice. The court also noted that Mrs Donnelly was sophisticated in her commercial dealings. She had entered the facility for the purpose of currency gains. As a result, all this contributed to a rejection of her defence.

Mrs Donnelly’s appeal was dismissed with costs.

Related articles

Misleading and Deceptive Conduct Alleged Against BankWest

Bank Wins Despite Claims of Fraud & Unconscionable Conduct

Unconscionable Conduct: Can a Lender Protect Itself?

This publication is provided for your general information and interest only. It is not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. You must seek specific advice tailored to your circumstances.

The post Courts Won’t Assist Borrowers with Imprudent Transactions appeared first on Elliott May.

In Dowdle v Pay Now For Business Pty Ltd & Anor [2012] 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.

Facts

The first defendant (Pay Now For Business) sent a letter of offer to Mrs Dowdle (the Plaintiff) for a loan of $50,000 to be secured by her property. The funds from this loan were however to be used by Mrs Dowdle’s husband. Mrs Dowdle accepted this offer.

However, the lender sent a subsequent letter of offer to Mrs Dowdle’s husband. This was done without advising her that the initial offer had been withdrawn. She subsequently signed a new guarantee and mortgage. This made her liable for the loan to her husband of $50,000 as well as all of her husband’s existing debts to the lender. She did not understand the effect of the transaction at the time she signed the guarantee and mortgage. Instead she was under the belief that the documents related to the original letter of offer sent to her.

The court needed to decide whether the failure by the lender to advise Mrs Dowdle of the change in structure of the transaction amounted to misleading and deceptive conduct.

Decision

Misleading and deceptive conduct

Mrs Dowdle relied on three grounds to set aside the guarantee and mortgage. The lender:

1. should have appreciated that Mrs Dowdle might have received insufficient explanation regarding the effect of the transactions from Mr Dowdle. It took no steps itself to provide such an explanation to her. Also the lender didn’t provide sufficient information to the independent solicitor and financial adviser. Therefore they could not provide the necessary explanation to her;
2. knew that Mrs Dowdle was in a situation of special disadvantage in relation to the transactions. So she could not make a judgment as to what was in her interests. The lender took unfair advantage of its superior position by entering into the transactions;
3. obtained the benefit of the guarantee and mortgage by conduct that was misleading and deceptive or was unconscionable conduct (with reference to the Trade Practices Act and the ASIC Act)

Cases referenced

In her analysis of Mrs Dowdle’s claims, Justice Mullins referred to several important cases:

Goodwin v National Bank of Australasia Ltd (1968)

The lender relied on Goodwin v National Bank of Australasia Ltd (1968) to support its assertion that a lender is under no obligation to disclose information to a surety of a customer in respect of the customer’s present and future indebtedness to the lender. Justice Mullins accepted that this case was still authoritative. But noted that its application could be impacted in the event of unconscionable or misleading and deceptive conduct.

Commercial Bank of Australia Ltd v Amadio (1983)

Justice Mullins held that the general principle outlined in Goodwin could be rebutted where there is evidence of misleading or deceptive conduct following the authority of Commercial Bank of Australia Ltd v Amadio (1983). Mr and Mrs Amadio were elderly migrants with limited English skills. Their son asked them to mortgage their property in favour of the bank. The bank manager went to Mr and Mrs Amadio’s home to have them sign the mortgage. Mr and Mrs Amadio did not read the document. And the bank manager did not explain the mortgage because he was under the belief that the son had explained the transaction to them. Importantly, Mrs and Mrs Amadio were under a false belief as to the liability they were securing.

The majority of the High Court held that the mortgage should be set aside unconditionally. It concluded Mr and Mrs Amadio were under a ‘special disability’ when executing the mortgage. And that such special disability was evident to the bank

Garcia v National Bank of Australasia Ltd (1968)

To determine whether the lender’s conduct was unconscionable, Justice Mullins cited Garcia v National Bank of Australasia Ltd (1968). This case concerned a similar transaction involving a husband and wife. The husband had amassed a significant amount of debt to the bank arising from multiple business ventures. The husband and wife separated and divorced after the agreements with the bank were entered into. The majority of the High Court identified that for conduct to be classified as unconscionable, the circumstances would have to be that the: 

1. surety (wife) did not understand the effect of the transaction;
2. transaction was voluntary (in the sense that the wife obtained no benefit from the contract);
3. lender appreciates that the husband may not have fully explained the effect of the transaction to the wife; and
4. lender did not itself take steps to explain the transaction to the wife.

Trust and confidence in husband

Justice Mullins noted that even though Mr and Mrs Dowdle were separated at the time she signed the guarantee and mortgage, they were still married. And it was because of this that she entered into the agreement. Mrs Dowdle did not understand the effect of the transaction at the time she signed the guarantee and the mortgage because she was operating under the belief that she was signing documents consistent with the original offer sent to her. The transaction was voluntary as she was to obtain no benefit, with all funds being directed to her husband. The first defendant knew that the Dowdles were married. And should have inferred that Mrs Dowdle reposed trust and confidence in her husband. Also that Mr Dowdle might not have adequately explained the transaction to her.

The lender asked Mr Dowdle to arrange for independent legal advice to be given to Mrs Dowdle. However, the legal advice process was undermined by the lender failing to notify Mrs Dowdle of changes to the transaction. Also, the lender was unable to rely on a clause in the contract excluding any obligation on it to disclose to Mrs Dowdle anything relating to the affairs or transactions of her husband because its unconscionable conduct had ‘tainted’ the entire transaction.

Unconscionable conduct

Mrs Dowdle was accordingly able to establish unconscionable conduct based on the principles outlined in Garcia. Although there were no facts alleged in her case to support a conclusion that she was under a ‘special disability’ as per Amadio.

It was for Justice Mullins to decide whether the mortgage and guarantee should be set aside in their entirety. In Amadio, Justice Dean held that a mortgage should be set aside where unconscionable conduct has tainted the transaction. But only to the extent that it imposed a liability in excess of the liability intended to be undertaken. Because Mrs Dowdle was willing to mortgage her property to secure the $50,000 loan, the transaction was not set aside in its entirety. Rather, the operation of the guarantee was modified so that it reflected Mrs Dowdle’s intended undertaking to guarantee an amount of $50,000.

This publication is provided for your information and interest only. It is not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. You must seek specific advice tailored to your circumstances.

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