Lenders can have their loans and security declared void if the transaction is found unjust or unconscionable as graphically demonstrated by a recent NSW Supreme Court decision.
The lender claimed possession of properties owned by a husband and wife provided as security for a loan to assist their children. The parents had previously provided guarantees for their children’s loans. However, in this case the loan was documented on the basis that the parents were the primary borrowers.
The court was not satisfied the lender took sufficient steps to ensure the defendants understood their legal obligations, and so the court found that the contract was unjust pursuant to section 9 of the Contracts Review Act 1980 (NSW).
The court had specific regard to the borrowers’ age, pensioner status, limited business background, illiteracy, and limited education.
The court also considered that the lender did not act responsibly in determining if the loan was suitable for the borrowers. In particular the lender:
- did not undertake sufficient identity checks;
- did not clarify the parents’ employment which was listed only as ‘self-employment’ in the documentation. The lender did not obtain their ABNs or ask about their occupations, even though their occupation was left blank in some documents;
- did not make enquiries regarding the borrowers’ capacity to repay given their age;
- knew the $910,000 loan would not satisfy the borrowers’ specified purpose which was to purchase a property for $500,000 and to refinance $490,000 (totalling $990,000 plus costs);
- knew the property was not being purchased as an investment which could produce income to assist meeting loan commitments.
The court also held that the lender acted unconscionably under the general law. The parents’ special disadvantages (age, language, education, economic background and financial position) were known or ought to have been known by the lender. The lender was criticised for not following their internal guidelines to investigate matters requiring further examination.
This case serves as a reminder to lenders that:
- any party to a transaction who is really a guarantor (ie is not obtaining the benefit of the loan proceeds) should not be categorised and documented as a borrower;
- any party to a transaction who is at a special disadvantage must be treated with extra caution and diligence;
- when conducting enquiries lenders must take note of, and investigate any discrepancies that arise;
- a court will require that a lender follow its own internal guidelines – so anything you write down as a policy or procedure, you must be prepared to follow.