In a 5 – 0 decision the High Court allowed an appeal from the Victorian Supreme Court in Stubbings v Jams 2 Pty Ltd [2022] HCA 6 and the operation of certificates of independent advice and unconscionable conduct.  The lead judgment is that of Kiefel CJ, Keane and Gleeson with separate opinions by Gordon and Steward.

FACTS

The facts

The appellant owned two houses in Narre Warren, both mortgaged to Commonwealth Bank with weekley repayments of between $260 and $280 per week. The appellant did not live in either house.  He lived at rental premises at Boneo, where he worked repairing boats for the owner of the property [7].

The Appellant fell out with the owner,  ceased work and, needing to move house, sought to purchase another property on the Mornington Peninsua [7].

At the relevant time the appellant:

• was unemployed
• had no regular income
• had not filed tax returns in several years and
• was in arrears on rates payments in respect of the two Narre Warren properties [8]

After a home loan application to ANZ was rejected for lack of financial records, the appellant was introduced to Mr Zourkas [8] who described himself as a “consultant”, in the business of introducing potential borrowers to Ajzensztat Jeruzalski & Co (“AJ Lawyers”) [9]. The service AJ Lawyers provided to clients was to facilitate the making of secured loans by those clients [9].

The primary judge found that Zourkas played an “important and essential” role in these transactions, in that his involvement ensured that AJ Lawyers never dealt directly with the borrower or guarantor, such as the appellant [9]

When the appellant and Zourkas met on a number of occasions in 2015:

• at the first meeting, the appellant said that he “wanted to buy a little house” to live in, to which Mr Zourkas responded that “there would not be a problem going bigger and getting something with land”  O which resulted in the appellant finding a five?acre property with two houses on it in Fingal, available for $900,000.
• at another meeting, Zourkas told the appellant that he could borrow a sum sufficient to pay out the existing mortgages over the Narre Warren properties, purchase the Fingal property, and have approximately $53,000 remaining to go towards the first three months’ interest on the loan [10] .
•  Zourkas advised the appellant that he could then sell the Narre Warren properties, reducing the loan to approximately $400,000, which the appellant could then refinance with a bank at a lower interest rate [10]

The calculation was that:

• two Narre Warren properties and the Fingal property would secure the appellant’s obligations as guarantor
• the existing debt to Commonwealth Bank secured on the Narre Warren properties totalled approximately $240,000.
• on the basis that the two properties had a market value of $770,000, the appellant’s equity was thus worth about $530,000 [11].

On 30 June 2015, the appellant signed a contract to purchase the Fingal property for $900,000 with the deposit of $90,000 payable on 7 July 2015. The appellant only ever paid $100 towards it [12].

In late July or early August 2015, Zourkas introduced the appellant to Mr Jeruzalski, a partner at AJ Lawyers [13]

On 10 August 2015, AJ Lawyers arranged to have the two Narre Warren properties and the Fingal property valued as security for the loan. Together, the properties were valued at $1,570,000 [13].

AJ Lawyers  provided two letters of offer, on behalf of their clients, including the respondents, to provide first and second mortgage finance with each offer conditional on the appellant acting as guarantor and the three properties  security for the guarantee [13].

AJ Lawyers, and Jeruzalski in particular, acted for the respondents in these transactions [14].  Their Honours noted that on that basis, Jeruzalski’s state of mind and his conduct can be sheeted home to the respondents.

The first mortgage loan was:

• for a sum of $1,059,000
• at an interest rate of 10 per cent per annum;  and
• a default rate of 17 per cent per annum [15].

The second mortgage loan was:

• for a sum of $133,500
• at an interest rate of 18 per cent per annum; and
• a default rate of 25 per cent per annum [15].

In line with AJ Lawyers’ standard practice:

• the first loan was capped at two thirds of the combined property valuations to avoid a higher loan to security ratio that might be considered too risky for the lender.
• the second loan was required to pay:
  • Zourkas’ consultancy fees,
  • loan procuration fees,
  • the respondents’ legal costs as mortgagees, and
  • the costs and expenses of purchasing the Fingal property [15].

At a meeting with Zourkas the appellant:

• accepted the offers on 21 or 22 August 2015, signing on his own behalf and on behalf of the company.
• also signed a “mandate” at  Zourkas’ request, which contained an agreement to pay Zourkas’ consultancy fee, even if the loans did not proceed, which was secured by a charge over the Narre Warren properties [16].

 The fee  of $27,000 was not written on the document at the time the appellant signed it [16].

Around this time, the price for the Fingal property was renegotiated to $815,100 & the appellant signed a contract of sale on 27 August 2015 [17]. 

Although the appellant had no income, Zourkas assured him that he would “not have a problem in obtaining finance”.

The deposit on the Fingal property was $81,510, of which $5,100 was described as having already been paid. However, the appellant gave evidence at trial that he had “no idea” where the reference to a payment of $5,100 came from [17].

On 19 September 2015, Zourkas presented the appellant with two letters, dated 16 and 17 September 2015, which:

• indicated that AJ Lawyers had been “instructed to approve” the two loans.
• enclosed documents for execution by the appellant and the company including:
  • a certificate of “Independent Financial Advice”, to be signed by an accountant, and
  • a certificate of “Independent Legal Advice”, to be signed by a lawyer[18].

The certificates were of critical importance to the decision of the Court of Appeal and were a significant focus of argument in the High Court [19].

The certificate of independent legal advice, under the heading “Acknowledgement by Guarantor”, had the following list of questions for the appellant was to answer by writing in the right hand column :

“1. Have you received copies of the documents described under the heading ‘Security Documents’ below?

2. Have you been given an opportunity to read those Security Documents?

3. Have the Security Documents been fully explained to you by your solicitor?

4. Do you understand the effects of the Security Documents and the consequences to you if the Borrower defaults on its obligations to the Lender?

5. In particular, do you understand that if the Borrower fails to pay all of the moneys due to the Borrower to the Lender then the Lender will be entitled to call on you as Guarantor to recover the moneys due to it?

6. Was this Acknowledgement read and signed by you BEFORE you signed the Security Documents?

…

I confirm the accuracy of the answers to the above questions and acknowledge that the Lender will be relying on these answers in respect of giving the loan to THE VICTORIAN BOAT CLINIC PTY LTD.” [19]

The certificate of independent financial advice required an independent accountant to sign and attest to the following:

“1 I have been instructed by THE VICTORIAN BOAT CLINIC PTY LTD ACN 601 712 172 to explain the financial risks being assumed:-

(a) by executing the security documents in respect of the financial accommodation to be provided by the Lender which security documents are referred to in Item 1 of the Schedule below (‘the Security’);

(b) by the application of the said financial accommodation for the purposes referred to in Item 2 of the Schedule below.

2 Before the Security was executed by the Borrower, I explained the financial risk being assumed by executing the Security and by the application of the aforesaid financial accommodation in the manner stated in Item 2 of the Schedule.

3 To the best of my knowledge and belief and in my opinion the Borrower appears to understand the nature and extent of the financial risk which the Security places and the nature and extent of the financial risk which will be assumed by the application of the aforesaid financial accommodation in the manner stated in Item [2] of the Schedule.

4 I have been engaged by the Borrower in advising and have given this Certificate entirely independently of any other Borrower or Guarantor.

5 The Loan herein is required for business purposes.”

The primary judge found that Zourkas presented the appellant:

• the certificates in two sealed envelopes (one labelled “Accountant”, the other labelled “Solicitor”),
• a business card for a solicitor, Mr Kiatos,
• a phone number for an accountant, Mr Topalides.

and told the appellant to “take these documents, get them signed and bring them back” [21].

The Court of Appeal observed that it was clear from context that approval of the loans was conditional on the two certificates being duly signed and returned [21].

The appellant visited both Kiatos and Topalides on the same day.

Kiatos:

• (and not the appellant) completed and signed the certificate of independent legal advice, writing in answers to the list of questions directed to the appellant as guarantor [22].
• signed the certificate, both as witness to the appellant’s signature and to confirm that he had explained the content, nature and effect of the loans to the appellant, including the consequences of default [22]

The appellant signed an acknowledgment on behalf of the company confirming the accuracy of those answers and that he had received independent legal advice.

Topalides:

• signed the certificate of independent financial advice.
• in completing the certificate, Topalides stated that the purpose of the borrowings was to “Set up & Expand the business”. The primary judge noted Jeruzalski’s evidence that he understood the purpose of the loan to be a “business loan … mainly concerned with boat repairs” but this evidence sat awkwardly with Jeruzalski’s evidence in cross examination that, around the time of issuing the letters of offer dated 16 and 17 September 2015, he telephoned the council and made inquiries which informed him that the Fingal property was zoned “green wedge”, meaning that it could not be used for commercial purposes.

The court noted that  Jeruzalski’s evidence that:

• on instructions from the respondents, all loans in the course of his practice were made subject to the condition that they were not for personal, domestic or household purposes.
• he insisted on this condition to avoid loans being governed by the National Credit Code (“the Code”).
• this practice was reflected in a deed signed by the appellant, on his own behalf and on behalf of the company, whereby he variously agreed that the first mortgage loan was “for business purposes”, “not for personal, domestic or household purposes”, “not to purchase, renovate or improve the residential property for investment purposes” and not to “refinance credit that [had] been provided wholly or predominantly to purchase, renovate or improve residential property for investment purposes”.

The true purpose of the loan was identified by the Court of Appeal as being “to enable [the appellant] to purchase, in his own name, a property as a home” [23]

The Fingal property was purchased on 30 September 2015 and once the fees and payments had been made, the appellant was left with a sum of $6,959 [24]. He subsequently moved into the Fingal property with his son & never carried on any boat repair business [24].

The first month’s interest was paid in advance by the funds received from the second loan,

The second month’s interest was paid by the appellant selling some assets .

On 30 December 2015, the company (“VBC”) defaulted on the third month’s interest payments & the respondents commenced proceedings against the appellant, seeking to enforce the guarantee and their rights as mortgagees of the two Narre Warren properties and the Fingal property [25].

Reasons of The primary judge

The primary judge:

• found that the appellant laboured under circumstances of “special disadvantage”.
• described the appellant’s financial position as “bleak” with the Narre Warren properties being the appellant’s only assets of any value
• found that the appellant was “unsophisticated, naïve and had little financial nous”
• observed that the appellant’s demeanour at trial – at which he represented himself – indicated that he was “completely lost, totally unsophisticated, incompetent and vulnerable” [26].
• found that Jeruzalski “[did] not seek or want any further information about the guarantor or his or her personal or financial circumstances” [27].
• found that Jeruzalski knew that the loans were “a risky and dangerous undertaking for [the appellant]” because of
  • the high interest rates,
  • the risk to the appellant of the cost of forced sales, and
  • the consequential impact of a default upon the appellant [28].
• concluded that Mr Jeruzalski “knowingly and deliberately failed to make any inquiries about [the appellant] and whether Mr Zourkas had misled him about [the appellant’s] ability to service the loans, about [the appellant’s] understanding of the loans, or about [the appellant’s] financial nous and vulnerability”.
• inferred that Jeruzalski’s ostensible indifference to the appellant’s financial circumstances reflected a concern on his part that proof of his knowledge of such matters “would in some way undermine his clients’ ability to recover their loans”.
• did not accept that Kiatos and Topalides were truly independent sources of advice for the appellant [29].
• concluded that these findings demonstrated a:
  • “high level of moral obloquy”and
  • “wilful blindness” as to the appellant’s financial and personal circumstances [30]  
• found that the loans were procured by unconscionable conduct, and ordered that the mortgages be discharged, and the loan agreement be declared unenforceable [30].

Reasons of the Court of Appeal

The Court of Appeal:

• concluded that the primary judge’s reasons reflected an adverse view of asset?based lending “as a concept” which “overwhelmed … his determination of the unconscionability issue” [32]
• was not satisfied that Jeruzalski had either actual or constructive knowledge of the appellant’s desperate personal and financial circumstances [31] .
• considered that Jeruzalski was entitled to rely on the certificates of independent advice as showing that the appellant had consulted a solicitor and an accountant, and as to the truth of those matters [32]
• viewed the certificates as making it reasonable for Jeruzalski to refrain from any further inquiry as to the appellant’s circumstances;
• noted that, absent the certificates, there may have been sufficient knowledge on Jeruzalski’s part to “justify the serious finding that it was unconscionable for him to abstain from inquiry in all the circumstances”
• there was no sufficient basis in the evidence for an inference that the certificates did not reflect truly independent advice [32]
• accepted that at the time Jeruzalski approved the loans on behalf of the respondents:
  • he knew that the appellant and the company had paid only a nominal amount as a deposit on the Fingal property;
  • the proceeds of the loans would be applied by the appellant as explained to him by Zourkas;
  • any remaining sum available to the appellant after such application of funds would be “very small”
• accepted that Jeruzalski proceeded on the assumption “that [the appellant] and the company had ‘no income’, in the sense that they did not have sufficient income to service interest under the loans for between six and 12 months” [33]
  

DECISION

Kiefel, Gleeson and Keane

Their Honour’s stated that it was evident that, as Jeruzalski must have known, the statement of the purpose of the loan in the certificate did not reflect reality [22] .

In relation to the submissions before their Honours:,

• the appellant:
  • conceded that asset based lending is not necessarily unconscionable in itself, and
  • focussed upon the circumstances of the system of asset based lending employed by:
    • the respondents and
    • AJ Lawyers [34] .
  •  submitted that the Court of Appeal attributed unwarranted significance to the certificates of independent advice.
  • argued that the primary judge was entitled to infer that Jeruzalski knew it was unlikely that the appellant had received truly independent advice.
  • argued that the Court of Appeal failed to have due regard to the findings made and inferences drawn by the primary judge as to Jeruzalski’s appreciation of the dangers confronting the appellant in taking the loans, particularly since the primary judge had relied on his impressions of the witnesses in making these findings [35].
• the respondents:
  • emphasised the appellant’s concession that asset based lending, in and of itself, is not unconscionable,
  • submitted that the facts attending the making of the loans exclusively by reference to the security value of the appellant’s assets were not significant as to a finding of unconscionability.
  • said that the Court of Appeal was right to hold that Jeruzalski was entitled to rely on the certificates as conveying that the nature and consequences of the loans had been sufficiently explained to the appellant 
  • supported the conclusion of the Court of Appeal that it was permissible for Jeruzalski deliberately to abstain from further inquiries precisely because he had the “comfort” of the certificates [36].
  • argued that the only significant finding of the primary judge that was disregarded by the Court of Appeal was the finding to the effect that the certificates were not truly independent
  • said that the Court of Appeal was justified in taking this course on the basis that there was no evidence to support the primary judge’s inference [36].

Their Honours commenced their analysis, not surprisingly., with the most recent consideration of equitable claims involving special disadvantage of  Kakavas v Crown Melbourne Ltd  where the Court stated, [38]:

“[E]quitable 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.”

and  Commercial Bank of Australia Ltd v Amadio  where the High Court held that unconscionability involves: a relationship that places one party at a “special disadvantage” and unconscientious exploitation by the stronger party of the weaker party’s disadvantage [39].

Their Honours made clear that each of these considerations should not be addressed separately as if they were separate elements of a cause of action in tort and extracted a statement from  Jenyns v Public Curator (Qld) regarding the application of  equitable principles relating to unconscionable conduct where the process:

“calls for a precise examination of the particular facts, a scrutiny of the exact relations established between the parties and a consideration of the mental capacities, processes and idiosyncrasies of the [vulnerable party]. Such cases do not depend upon legal categories susceptible of clear definition and giving rise to definite issues of fact readily formulated which, when found, automatically determine the validity of the disposition. Indeed no better illustration could be found of Lord Stowell’s generalisation concerning the administration of equity: ‘A court of law works its way to short issues, and confines its views to them. A court of equity takes a more comprehensive view, and looks to every connected circumstance that ought to influence its determination upon the real justice of the case’.” (citation omitted)

Their Honours stated that “special disadvantage” means something that “seriously affects the ability of the innocent party to make a judgment as to his [or her] own best interests” [40]. It may be inferred from “poverty or need of any kind, sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation is necessary”. It is usually a combination of circumstances that establishes an entitlement to equitable relief [40].

In considering the facts their Honours noted that the appellant:

• was incapable of understanding the risks involved in the transaction
• was unable to perform simple calculations, such as 10 per cent of $130,000 .
• had bleak financial circumstances were [41] .

Their Honour’s stated that:

• the outcome of this appeal  turnsed on the extent of Jeruzalski’s knowledge of the appellant’s circumstances and whether he exploited that disadvantage so that the respondents’ attempt to enforce their rights under the loans and mortgages was unconscionable [42]. 
• the dangerous nature of the loans, obvious to Jeruzalski but not to the appellant, was central to the question whether the appellant’s special disadvantage had been exploited by the respondents [43].
• for a court of equity, the question is whether Jeruzalski’s appreciation of the appellant’s special disadvantage was such as to amount to an exploitation of that disadvantage [44].

Their Honours  found that a case for relief against an unconscionable attempt to enforce legal rights is established in this case because Jeruzalski  had sufficient appreciation of:

• the appellant’s vulnerability,
• the disaster awaiting him under the mortgages,

that Jeruzalski’s conduct in procuring the execution of the mortgages was unconscientious [46].

Their Honours stated that the certificates contained nothing to suggest that the appellant had actually turned his attention to the difference between the cost of his existing borrowings with Commonwealth Bank and the proposed loans, or to how he would service the proposed loans [48].

The artificiality of the certificates was apparent from the absence of:

• even the most general reference to the existence and terms of the company’s business plan; 
•   how the Fingal property zoning problem might be resolved [48].

Their Honours described the certificates as window dressing because:

• of the bland boilerplate language of the certificates
•  the statement therein of the purpose of the loan (which Jeruzalski must have known to be inaccurate),
• of the commercially unnecessary interposition of the company as borrower, which was a step calculated to prevent or impede scrutiny of the fairness of the transaction under the Code.
• it was designed to prevent an inference that the respondents were wilfully blind to the obvious danger to the appellant [49].

More importantly the certificates did not negate Jeruzalski’s actual appreciation of the dangerous nature of the loans and the appellant’s vulnerability to exploitation by the respondents [49]. Their Honours went further and stated that the deployment of such artifices in a context where the lender or its agent deliberately distances itself from evidence that confirms the dangerous nature of the transaction for the borrower or its guarantor is evidence pointing to an exploitative state of mind on the part of the lender [49].

Their Honour stated that  Jeruzalski, on behalf of the respondents, appreciated that while the loans were a dangerous transaction from the appellant’s point of view the prospect of obtaining the profit by the taking of the appellant’s equity by way of interest payments made the exploitation of the appellant’s disadvantages good business for the respondents [51]. Jeruzalski, on behalf of the respondents, took the opportunity to exploit the appellant’s lack of business acumen and meagre financial resources to deprive him of his equity in the Narre Warren properties.

Their Honours held that Jeruzalski’s conduct on behalf of the respondents amounted to the unconscientious exploitation of the appellant’s special disadvantage [52].

Gordon

Gordon J wrote a seperate judgment because she regarded the respondent lenders’ system of conduct as being contrary to s 12CB of the Australian Securities and Investments Commission Act 2001 (Cth) (“the ASIC Act“). 

Her Honour set out the principles as:

• Section 12CB(1)(a) prohibits persons from engaging “in conduct that is, in all the circumstances, unconscionable”, in connection with, relevantly, the supply of financial services in trade or commerce.
• Section 12CB(4)(b) makes clear that the prohibition in s 12CB(1) can apply “to a system of conduct or pattern of behaviour, whether or not a particular individual is identified as having been disadvantaged by the conduct or behaviour”
• “A ‘system’ connotes an internal method of working;
• a ‘pattern’ connotes the external observation of events”.
• “special disadvantage of an individual is not a necessary component of the prohibition” [55].
• “Unconscionable” is not defined in the ASIC Act.
• the statutory conception of unconscionability is more broad?ranging than the equitable principles [56] .
• Section 12CB of the ASIC Act, like equity, requires a focus on all the circumstances with the  court taking into account each of the considerations identified in s 12CC to the extent that they apply.
• the assessment of whether conduct is unconscionable within the meaning of s 12CB involves the evaluation of facts by reference to the values and norms recognised by the statute, and thus, as it has been said, a normative standard of conscience which is permeated with accepted and acceptable community standards [57].
• s 12CC considerations assist in evaluating whether the conduct in question is “outside societal norms of acceptable commercial behaviour [so] as to warrant condemnation as conduct that is offensive to conscience [58]
• a court should take the serious step of denouncing conduct as unconscionable only when it is satisfied that the conduct is “offensive to a conscience informed by a sense of what is right and proper according to values which can be recognised by the court to prevail within contemporary Australian society”[58] .

Her Honour stated that Jeruzalski’s system was the lenders’ system [60] which was:

• using the same pro forma documents.
• only make loans to companies, ostensibly for business purposes, to avoid the operation of the National Credit Code (Cth) 
• requiring the loans to be guaranteed by an individual, with the guarantee secured by a mortgage over real property held by the guarantor. He would not make loans that were covered by the National Credit Code.
• offering short-term, interest-only loans
• charging a high interest rate on a loan secured by a first mortgage [62]
• before suggesting to his clients that they lend money, Jeruzalski obtained a valuation of the proposed security, which was normally provided by the intermediary seeking the loan on behalf of the borrower. The maximum loan?to?value ratio for a loan secured by a first mortgage was typically two-thirds [63].
• assuming that anyone seeking a loan from one of his clients had no income, because if they did they would not need to come to him [64] .
• the loans were “unbankable”, the personal and financial circumstances of anyone seeking a loan would not be able to access funds from a traditional financial lender [64].
• he did not require application forms from borrowers [66].
• he did not “seek income particulars” or “look at the income of the [borrower]” [66].
• he had no interest in the ability of the borrower (the company) or the guarantor (the individual) to service the loan [66]
• he was only concerned with the sufficiency of the security to meet repayment of capital and accrued interest [66].
• he checked that proposed guarantors and directors of proposed borrowers were not bankrupt, but otherwise “[gave] no weight to the ability of the borrower or guarantor to repay the loan, other than from the mortgaged security” [66].
• he did not run credit checks [67]
• he did not make any inquiries into whether borrowers (or guarantors) had any assets other than the proffered security [67].
• he did not  ask what the actual purpose of the loan was [67].
• he treated the asset position of the borrower (the company) as irrelevant [68].
• if the borrower  defaulted, Jeruzalski’s practice was to seek judgment against the guarantor and execute on the mortgage given over the guarantor’s real property [68].
• he would not make loans to people who approached him directly [69].
• he communicated with borrowers and guarantors exclusively through intermediaries, who assisted him in arranging for loan documentation to be executed [69].
• any details he needed to know about the borrower and the guarantor  were obtained from the intermediary.
• he did not keep file notes of his conversations with intermediaries, except in relation to title particulars [70].
• he did not meet, interview or negotiate with prospective borrowers or guarantors [70].
• he deliberately avoided knowledge of borrowers’ and guarantors’ personal and financial circumstances[70].
• if  Jeruzalski considered that the security was satisfactory, he would approach one or more of his clients to ascertain whether they were interested in making a loan [71].
• Jeruzalski prepared pro forma documents, which were given to the borrower and guarantor by an intermediary [71].
• the relevant documents included a deed certifying that the loan was “for business purposes”, a “certificate of independent legal advice” in respect of the guarantor and a “certificate of independent financial advice”  [71]
• the pro forma deed  was drafted to address and avoid the application of the National Credit Code [72].
• the certificate of independent financial advice, to be signed by an accountant, was addressed to the lenders in respect of the debenture charge granted by the borrower but contained no substantive information about the borrower, the guarantor or the transaction. It did not require the accountant to sight any financial documents [74].
• as Jeruzalski’s practice was to enforce against the guarantor and the guarantor’s mortgaged property he treated the asset position of the borrower (the company) as irrelevant [75].
• facilitated the making of interest-only loans to companies (avoiding the operation of the National Credit Code), where the loans were guaranteed by persons who he assumed had no income and were otherwise unbankable whilst deliberately avoiding any knowledge that might enliven the court’s equitable or statutory jurisdiction to set aside unconscionable transactions [80].
• assumed that some borrowers and guarantors would be vulnerable in a sense capable of enlivening that jurisdiction [80]

Her Honour stated that an interest-only, asset-based, 12-month loan of around $1 million at a high rate of interest will always be, at the very least, an extremely risky product for a person who has no income and is unbankable [65] and that Jeruzalski was aware that a loan of this kind could be “a dangerous product in the hands of the wrong person”.

Her Honour stated that

• “[c]onduct can be unconscionable even where the innocent party is a willing participant; the question is how that willingness or intention was produced” (emphasis in original)
• “a system of conduct or pattern of behaviour may be unconscionable, even though not every individual affected by the conduct or behaviour is or has been disadvantaged by the conduct or behaviour”
• there does not need to be loss or disadvantage for a system to be unconscionable [76].
• it can be significant that:
  • the conduct targeted a group to take advantage of their likely, although not certain, vulnerability or,
  • that the lenders recognised a likely  vulnerability and yet designed a system of lending against a guarantor’s property and deliberately avoiding information as to the guarantor’s financial or personal circumstances in order to “immunise” themselves from knowledge of the vulnerability [77].
• the assessment of whether conduct is unconscionable within the meaning of s 12CB involves the evaluation of the conduct by reference to a normative standard of conscience which is permeated with accepted and acceptable community standards [79]
• the lenders’ system was not designed to, prevent the lenders acting unconscionably contrary to s 12CB of the ASIC Act.  It was designed to do the opposite – to hide from the lenders any information which might later be said to make the loan, the guarantee or the taking of security unconscionable [80].
• the system sought to “immunise” the lenders from claims by borrowers or guarantors to set aside loans as unconscionable by studiously avoiding any inquiry about why or in what circumstances the individual guarantor provided their property as security despite the loan being a dangerous product in the wrong hands and wreak significant damage on the guarantor [80]. 
• that Jeruzalski’s system used “unfair tactics ” and lacked good faith [82]
• developing and applying a system that seeks to avoid the application of statutory and general law protections is contrary to s 12CB of the ASIC Act. [82]
• the system was also characterised by a lack of transparency which was exacerbated by the certificates of independent advice which were crafted  to avoid any meaningful disclosure [83].

Her Honour stated that the lenders’ system of conduct was outside the societal norms of acceptable behaviour so as to warrant condemnation as offensive to conscience and is unconscionable contrary to s 12CB(1) of the ASIC Act. [84]

Her Honour stated that Jeruzalski:

• knew of the appellant’s vulnerability and that the transaction would inevitably be disastrous for him but he exploited that disadvantage [91]. 
• had no reason to think that the appellant received that assistance or explanation  but deliberately did not make any inquiries or provide the appellant with the advice and explanations that were necessary. 
• deliberately avoided making inquiries about the appellant’s personal and financial circumstances in order to avoid acquiring any knowledge that might enliven the court’s equitable or statutory jurisdiction to set aside the loan on the grounds of unconscionability [91].
• refused to meet the appellant,  and avoided finding out anything about the dealings between the appellant and an intermediary [92]

Neither certificate was adequate as:

• the certificate of independent legal advice did not state that the appellant had received financial advice.
• the certificate of independent financial advice:
  • stated that advice had been given to VBC, independently of any guarantor, in relation to the debenture charge to be executed by it.
  • did not require the accountant to sight any financial documents.
  • did not refer to the mortgage security.
• they did not state that the appellant had been given any financial advice as guarantor.
• they did not stated that the appellant turned his attention to or had had his attention drawn to the improvidence of the transaction and the inevitable and disastrous consequences for him.
• they  contained no information regarding the “business”, VBC’s or the appellant’s financial position, the substance of the advice given or the purpose of the borrowing except for the handwritten words “Set up & Expand the business” [93].

Her Honour found that the lenders’ conduct (through Jeruzalski) amounted to unconscientious taking advantage of the appellant’s special disadvantage which was contrary to the prohibition in s 12CB of the ASIC Act and unconscionable in equity [94].

Steward

His Honour set out the facts which did not differ materially from that set out by Keiffel, Keanne and Gleeson [96] – [110], [125] – [152]

His Honour described the system of conduct as having the following features:

• it used asset-based loans secured by mortgages.
• under these loans, the lender was concerned with the quality of the assets that can be pledged, or mortgaged, to secure repayment [111] 
• the lender, once satisfied with the borrower’s security, otherwise has no interest in, and makes no enquiries about, the borrower’s capacity to service the loan [111]
• it imposed an obligation to pay interest at rates that appeared to be greater than that which might be obtained in a subsequent refinancing with a bank [114].
• to buttress the “system of conduct” and to reduce the possibility that loans made to potentially impecunious land owners might be set aside, AJ Lawyers only ever organised loans to companies  to avoid the National Credit Code contained in Sch 1 to the National Consumer Credit Protection Act 2009  [115].
• as lending to potentially impecunious individuals raised the risk that equity might intervene to inhibit the enforcement of the loans Jeruzalski organised on behalf of AJ Lawyers’ clients [116]
•  AJ Lawyers took deliberate steps, in the case of the appellant, to ensure that it did not ascertain any information about VBC’s actual financial capacity to service the loans made to it or about the appellant’s economic capacity to guarantee the performance of the loans [117].
• AJ Lawyers used Zourkas, as the intermediary, to deal exclusively with the appellant & deliberate steps were taken to ensure that AJ Lawyers did not obtain any information about the appellant’s financial circumstances and, further, to ensure that the firm was not informed of the representations and inducements made by Zourkas to the appellant [117].
• the system required the procurement of two certificates – one from a solicitor and one from an accountant drafted by Mr Jeruzalski [118].
• the “system of conduct” was designed to  enrich AJ Lawyers,  Zourkas, Kiatos and Topalides  by obliging the appellant to pay AJ Lawyers and the individuals consultancy, procuration and other fees. For the most part, these fees were funded out of the loan proceeds [124].

His Honour stated that the appeal ultimately turned upon the narrow issue of, at [155]:

whether the Court of Appeal was correct in concluding that the Legal Certificate and the Financial Certificate not only precluded a finding of wilful blindness on the part of AJ Lawyers but also, as a result, effectively immunised its failure to make enquiries about the circumstances of the appellant from a conclusion, which might otherwise have been available, that there had been unconscionable conduct.

and cited the appropriate principles from the decision of Kiefel CJ, Bell, Gageler, Keane and Edelman JJ in Thorne v Kennedy as, at [155]:

“A conclusion of unconscionable conduct requires the innocent party to be subject to a special disadvantage ‘which seriously affects the ability of the innocent party to make a judgment as to [the innocent party’s] own best interests’. The other party must also unconscientiously take advantage of that special disadvantage. This has been variously described as requiring ‘victimisation’, ‘unconscientious conduct’, or ‘exploitation’. Before there can be a finding of unconscientious taking of advantage, it is also generally necessary that the other party knew or ought to have known of the existence and effect of the special disadvantage.” (footnotes omitted)

HIs Honour stated that he disadvantage must be “special”. This refers not to any mere difference in bargaining power, but to an inability to make a judgment by the innocent party as to her or his best interests, which inability is known, or ought to be known, by the other party.  In this case the appellant’s disadvantage was special because the appellant’s company was about to borrow over $1 million on terms which obliged it to pay at least six months of interest (over $10,000 per month absent default) in circumstances where it was assumed that the appellant, as guarantor, had no income [159]

Lending such a substantial sum of money exposed the appellant to very great danger which gave rise to a need to make enquiries about the actual extent of that danger and to warn the appellant accordingly [159]

Jeruzalski’s actual knowledge of the appellant was:

• a suspecion that the appellant had no income
• kowledge that acting as a guarantor of the loans was a risky and dangerous matter for the appellant.
• a general appreciation of the appellant’s plan to sell the Narre Warren properties and to refinance the outstanding debt
• a mistaken belief that the appellant intended to conduct a business at the Fingal property.
• a reliance on the contents of the Legal Certificate and the Financial Certificate, both of which he had drafted [160]

His Honour did not find that Jeruzalski did not have  knowledge of:

• the dealings that Zourkas, Kiatos or Topalides had with the appellant.
• the appellant’s history, education and experience. In such circumstances it was for the appellant to demonstrate that Jeruzalski, as agent for the respondents, knew or ought to have known about the existence and effect of the appellant’s special disadvantage [160].

Jeruzalski’s suspicion that the appellant had no income and his knowledge that the transaction was for the appellant “risky and dangerous” was sufficient, in and of itself, to establish the “possibility” that he was in a position of special disadvantage [162]. 

If enquiries had been made Jeruzalski would have discovered that:

•  the appellant had no or very little income,
• VBC was no more than a shell company,
• by reason of the terms of each loan, VBC was bound to default, with the consequence that all three properties the appellant owned would need to be sold.
• the transactions from the perspective of the appellant were not merely risky and dangerous but entirely uncommercial and could not in any way have advanced his interests.
• the appellant had fundamentally misunderstood the transaction, whether by reason of Zourkas’ conduct or for some other reason, and
•  Topalides had given VBC and the appellant no financial advice at all.
• the appellant’s willingness to enter into what was, for him, such a disastrous arrangement was only explicable because he was in a position of vulnerability, such that he was unable to make a judgment as to what was in his best interests [162].

In the alternative his Honour held that AJ Lawyers was also wilfully blind by reason of the deployment of its “system of conduct” [165].

As with Gordon J’s analysis his Honour considered the system of conduct and said it could not be doubted that the p;oint of the system was to to avoid discovering the truth about the financial state of VBC and the appellant’s inability as guarantor to service the payment of interest on each loan. That was facilitated through the use of an intermediary to deal with the appellant [167].

His Honour found the arrangement also rewarded the other parties to the “system of conduct” by: ensuring the appellant’s equity in the Narre Warren properties would ultimately be used to pay fees to AJ Lawyers, Zourkas, Kiatos and Topalides, and interest to the respondents [169].

His Honour stated that the  Certificates  were defective because:

•  it said nothing at all about VBC’s or the appellant’s capacity to service the loans [171].
• it did not address the suspicion held by Jeruzalski and it did nothing to reverse his conclusion that the transaction was risky and dangerous for the appellant [171].
• the Financial Certificate  stated that the advice was given to VBC and  made no reference to the appellant receiving any advice in his capacity as guarantor. According  the appellant never received any independent advice about the financial risks he was assuming [172].
• the Certificate did not address VBC’s or the appellant’s ability to service the loans or the dangerous nature of the transaction from the appellant’s perspective.
• the somewhat glib reference in it to the “financial risk” to be “assumed” falls far short of any written record of the warning or explanation that was needed [172]

His Honour found that the Court of Appeal erred in deciding that Jeruzalski was entitled to rely on the Certificates and not make enquiries about the appellant’s personal and financial circumstances [173].

Neither Certificate:

• provided Mr Jeruzalski with any comfort or assurance that VBC or the appellant would be able to service the loans and not default.
• could have led Jeruzalski to believe that the guarantee, from the perspective of the appellant, had ceased to be risky or dangerous.
• had the effect of validating the system used by AJ Lawyers on the facts of this case [173]

ISSUE

The plurality of Kiefel CJ, Keanne and Gleeson upheld the appeal on the grounds of equitable unconscionability and made it clear that for all of the steps taken to limit the respondent’s actual knowledge of the appellant’s state of affairs it had an appreciation that there was a real likelihood that the appellant would lose  equity in his properties.  Their Honours analysis supported Robson, at first instance’s analysis as to the special disability that the appellant was suffering under and the predatory nature of the loan as structured. In their analysis of Jeruzalski’s conduct and extraordinary steps to avoid contact with the appellant give rise to inferences which lead to a finding of unconsicientous behaviour.   Their Honour’s considered the certificates to be mere artifaces and were not impressed by the Court of Appeal’s reliance on the certificates.  Given the detailed analysis of how the certificates in this case operate by the High Court it is suprising that the Court of Appeal was so prepared to rely on this issue.

It is important to note that a certificate of independent legal or financial advice does not ‘immunise’ a lender from a finding of unconscionable conduct where it does not provide any advice, avoids difficult issues and can be seen as part of a structure of evasion and side stepping of technical requirements. 

Gordon J focused on a breach of the statutory unconscionability and a breach of section 12CB of the ASIC Act.  The analysis is thorough and it may be influential however the focus of the High Court is upon equitable uconscionability.