Asset lending
107Of prime importance to the primary judge's reasoning were her Honour's conclusions that Provident failed to make any inquiries about the serviceability of the advances to Mrs Papa, was indifferent to her ability to fulfil her obligations under the loan agreements, and that Provident's principal concern was whether there was adequate security available in the event of default (Judgment [188] quoted in [59] above). In these circumstances, it is convenient to refer to the most important of the decisions touching on the issue of asset lending which is, in effect, what the primary judge found Provident to have undertaken.
108In Elkofairi v Permanent Trustee Co Ltd [2002] NSWCA 413; 11 BPR 20,841 the appellant and her husband gave a mortgage over their jointly-owned property to a financier in part to fund the husband's business activities. The appellant was in a special position of disadvantage but this was unknown to the financier. This Court found that the transaction was unjust under the Contracts Review Act in light of two significant features of the transaction. The first was that the loan was a substantial one, the security for which was the appellant's only asset, and the second was that the respondent knew that the appellant had no income or other assets and that repayment of interest was intended to be made by Mr Elkofairi. The absence in that case of any verification of Mr Elkofairi's income indicated that the financier was content to lend on the value of the security alone. That was not a case, like the present, where the financier required the borrower to obtain independent legal advice and to receive the borrower's assurance that that had occurred.
109In Perpetual Trustee Co Ltd v Khoshaba [2006] NSWCA 41; 14 BPR 26,639 the financier advanced money to pensioners whose daughter applied the funds to a pyramid investment scheme which collapsed. Spigelman CJ (with whom Handley AJA relevantly agreed) concluded as follows:
"82 I have set out above in the extract from his Honour's findings on the [Lender's] Guidelines issue each of the respects in which the Appellant failed to observe its own Guidelines. Of these failures the most significant, in my opinion, is the fact that the section of the standard form application about the purpose of the loan was left blank. This indicates that, as in Elkofairi supra at [79], the Appellant 'was content to lend on the value of the security'. In my opinion, that approach is entitled to significant weight in the determination of unjustness. (I note that nothing like this occurred in West where the purpose of the loan was known.)
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92 The conflicting considerations are finely balanced. Had the Appellant or its representatives made any inquiries about the purpose of the loan I would have allowed the appeal. I do not mean to suggest that the Appellant had to determine that the proposed investment was reasonable and capable of servicing the loan. It is the indifference, suggesting that the Appellant was content to proceed on the basis of enforcing the security, which I find determinative".
110Basten JA's judgment included the following:
"128 To engage in pure asset lending, namely to lend money without regard to the ability of the borrower to repay by instalments under the contract, in the knowledge that adequate security is available in the event of default, is to engage in a potentially fruitless enterprise, simply because there is no risk of loss. At least where the security is the sole residence of the borrower, there is a public interest in treating such contracts as unjust, at least in circumstances where the borrowers can be said to have demonstrated an inability reasonably to protect their own interests, for the purposes of, for example, s 9(2)(e) or (f). That does not mean that the Act will permit intervention merely where the borrower has been foolish, gullible or greedy. Something more is required: see Esanda Finance Corp Ltd v Tong (1997) 41 NSWLR 482 at 491 (Handley JA) cited with approval in Elkofairi (supra) at [77] by Beazley JA".
111In Kowalczuk v Accom Finance [2008] NSWCA 343; 77 NSWLR 205, a fraudster induced the appellant to mortgage his properties to provide funds for the fraudster to invest. Having said that it "can be accepted that pure asset lending ... is in at least some circumstances unjust within the meaning of the Contracts Review Act", Campbell JA (with whom Hodgson and McColl JJA agreed), concluded:
"99 I would accept that in some circumstances knowledge of a high degree of risk that there might be a default in payment of interest or principal so that a mortgagee sale would result, could be unjust lending, even though it could not be said that the lender knows that there will be default. However I do not accept that a lender is always bound to carry out a detailed investigation of the practicality of an intending borrower actually being able to carry through the plan the borrower says he or she has for repayment of the loan. In the present case, Kowalczuk stated to Accom that he proposed to pay the Berowra loan out through bank refinance, and the Haberfield loan through refinancing with FirstLoan (the same brokers through whom Kowalczuk was able successfully to refinance the Berowra loan) and there was no occasion for Accom to doubt that he would be able to do so. Thus, even if Mr Conti is right in saying that there can be pure asset lending if the lender knew that there was a high risk that the intended means of repayment might fail, in the present case Accom did not have knowledge of that type".
112In Fast Fix Loans Pty Ltd v Samardzic [2011] NSWCA 260 the respondents mortgaged their property to secure a loan to enable their son's company to purchase a development property at Forster. The primary judge found that the financier was aware that the company was in a precarious financial position and that there was a real likelihood that, as a consequence, there would be default in relation to the loan which the parents' property secured. The judgment of Allsop P (with whom Bathurst CJ and Campbell JA agreed) included the following:
"43 The complaint about 'asset lending' tended to raise a debate over semantics. 'Asset lending' is not a label or a legal frame of reference. It is a convenient expression, used in cases such as Perpetual Trustee Co Ltd v Khoshaba [2006] NSWCA 41; 14 BPR 26,639 and Spina to describe a form of lending where the lender has little, if any, regard for the capacity of the borrower to repay and rests satisfied with the security to protect itself. As Campbell JA made clear in Kowalczuk at [96]-[99], the conclusion of 'unjust' for the [purposes of the] Act, ss 7 and 9 depends on all the circumstances and not on labels. There is no reason why considerations such as those here cannot lead to the conclusion that a contract of guarantee is unjust if entered into by a lender who is uncaring of a guarantor's capacity to repay where there is a real and significant possibility of default by the borrower and the guarantor takes no benefit under the borrowing. This is particularly so in all the other circumstances of this case - most particularly the recognition by the appellant of the only two likely sources of repayment, one (successful refinancing) having a real risk to it. The appellant lent at a significant interest rate, reflecting the underlying commercial risk, appreciating the position the parents had been placed in, without any basis to consider that the parents appreciated the commercial risk or that they could afford to take that risk.
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50 ... Here, the relevant circumstances giving rise to the conclusion of unjustness and the granting of relief included the misapprehension by the parents that their obligations would cease after three months, the fact that the parents lacked the capacity to understand the deed of loan and mortgage and did not appreciate the significance of the interest rate even with the benefit of limited legal advice, that Milan (albeit not the appellant) was exerting considerable pressure upon the parents to enter the agreements immediately, that the appellant failed to make enquiries as to the financial circumstances of the parents in circumstances where the appellant appreciated the significant risk of the transaction, being one which it was not prepared to take at the significant rate of interest without the parents' 'clean' security".
113It is apparent from these authorities that it can be relevant in the determination of whether a contract is unjust, and whether relief should be granted against a financier, under the Contracts Review Act that the financier has shown no interest in the borrower's ability to service the loan. However the significance of that fact must be assessed in the context of all the circumstances surrounding the loan. In my opinion, of particular significance will be the financier's knowledge of the borrower's circumstances, the purpose of the loan and whether the borrower has obtained independent legal advice. Public interest does not necessarily require so-called asset lending to be proscribed, or even deterred. It may advance the interests of the parties to many transactions, and facilitate commerce generally, for financiers to be able to lend on a "low doc" basis without requiring the expenditure of time and effort in ascertaining and verifying the ability of borrowers to service loans. In any event, that exercise will often be difficult. For example if Provident had sought to undertake it in the present case, it would have had to make a difficult business judgment about the viability and prospects of the gymnasium business, a topic about which even well-informed minds could undoubtedly have differed. Financiers should not be required to make such assessments if they do not wish to do so. If, instead, a financier is satisfied that a borrower is able to make the decision for him or herself or has received appropriate advice, the public interest reflected in the Contracts Review Act will ordinarily have been satisfied.