The Facts

Unemployed man takes out secured loan to buy new home

A case in the High Court in 2022 revolved around whether or not a complex loan arrangement amounted to unconscionable conduct and predatory lending.

Mr S owned two houses in suburban Melbourne, both of them mortgaged to the Commonwealth Bank.

Despite being unemployed, with no regular income, and having fallen behind on rates payments for his existing properties, Mr S decided to buy a rural property just outside Melbourne.

Mr S's application for a home loan with ANZ was rejected. However, he was subsequently introduced by a consultant to a lawyer who acted as an agent for private lenders, who provided finance to those who were unable to get a loan from a bank.

The loan from the lenders was made to a company owned by Mr S. The company had no assets and had never traded. The loan was structured this way because the lender wanted to give the appearance that the loan was for business purposes, thereby avoiding the application of the National Credit Code.

Mr S acted as guarantor for the loan.

His guarantee was secured by mortgages over his two existing properties and the rural property he was buying.

Borrower receives complex asset-based loan

The loan arrangement between Mr S and the lenders was asset-based. In other words, the loan was made exclusively based on Mr S's three properties being security for the loan, without regard to whether or not Mr S had the ability otherwise to repay the loan.

This type of lending can make it easier for a borrower to obtain finance, because a lender is assured that there is adequate security available in the event of default.

Mr S obtains certificates of independent financial and legal advice

The lenders required Mr S to obtain a certificate of independent financial advice and a certificate of independent legal advice.

The lenders gave Mr S sealed envelopes containing the certificates and told him to have them signed, specifying the lawyer and the accountant he should contact for this purpose. Mr S did so.

Lenders seek to enforce mortgages while borrower condemns predatory lending practices

After Mr S bought the rural property and moved into it, he quickly fell behind on his loan repayments.

The lenders commenced proceedings against Mr S in the Supreme Court of Victoria to enforce the guarantee and to seek possession, as mortgagees, of Mr S's home.

Mr S responded by arguing that due to the predatory lending conduct of the lenders, it would be unconscionable for them to insist on their rights under the mortgages.

The trial judge ruled in favour of Mr S.

The lenders appealed to the Court of Appeal, which found in their favour, overruling the trial judge's decision.

Mr S then appealed to the High Court.

CASE A

The case for Mr S

CASE B

The case for the lenders

I was in a vulnerable position and the lenders exploited that. I was unemployed, had no income and had limited financial literacy to understand the commercial implications of the loan arrangement.
The loan arrangement was incredibly complex and risky. There was no way that I could have realistically serviced these loans.
The "independent advice" certificates were a sham. I was not given any meaningful explanation of the risks I was taking on.
The lenders deliberately avoided finding out about my true financial situation. They did not want or seek any further information about my personal or financial circumstances or my capacity to repay the loan.
Given the above, the lenders' conduct was unconscionable and amounts to predatory lending. They should not be allowed to enforce the mortgages against me.

We operate a system of asset-based lending, which is an established business practice. There is nothing inherently wrong with this type of lending, as Mr S himself has acknowledged. Making a loan to Mr S exclusively by reference to the security value of his assets is therefore not unconscionable.
Mr S signed all the necessary paperwork, including certificates of independent legal and financial advice. We were entitled to rely on these as evidence that the nature and consequences of the loans had been sufficiently explained to Mr S and that he understood the transaction.
Because we had the certificates, we weren't required to make further inquiries.
Given the above, we did nothing unconscionable that should prevent us from enforcing the mortgages against Mr S.

Clayton Davis
Insolvency
Stacks Davis

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"It was predatory lending because they knew I had no way of repaying the loan." Which case won?

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