20 April 2022
In the recent case of Stubbings v Jams 2 Pty Ltd  HCA 6 (Stubbings), the High Court of Australia provided a helpful reminder that independent advice certificates are not a tool for lenders to bypass proper due diligence. It is crucial for lenders to remain vigilant when assessing potential borrowers and guarantors, especially where those borrowers and guarantors are not well-versed financially.
In this article, we provide an overview of the role independent advice certificates play in lending transactions and key takeaways from the Stubbings case.
It is common practice for lenders to request borrowers and guarantors to seek independent legal and financial advice before signing a loan or security agreement and to provide a signed solicitor’s certificate of independent legal advice and/or a financial advice certificate to the lender.
For a lender, these certificates can help evidence that the borrower and/or guarantor has received appropriate independent advice and that they understand the nature of the agreements they are entering into.
However, as reinforced by the High Court in the Stubbings case, these certificates alone will not protect a lender from a court’s ability to set aside a loan and/or security from findings of unconscionability of the lender. Whilst the certificates are an important piece of evidence should a dispute arise, it is ultimately the duty of the lender to ensure they have made appropriate enquiries and have accurate information regarding the borrower or guarantor’s personal and financial circumstances, their ability to repay the loan and their comprehension of the documentation and risks involved with the transaction.
In Stubbings, an individual sought an asset-based loan from a private lender to finance the purchase of a new property. The borrower’s existing two properties were used as security for the loan. The borrower was unemployed, had very few savings, and was financially illiterate. The loan was orchestrated through a deliberate and complicated system in which the borrower never communicated with the lender directly, but instead, was dealing with an intermediary and a law firm who effectively acted on behalf of the lender.
Despite the borrower’s poor financial situation, the loan was approved. Eventually, they defaulted on the loan and commenced proceedings against the lender, arguing that it had unconscionably exploited the disadvantage of their poor financial literacy and their absence of income to service the loan.
The lender contended that as it never dealt with the borrower directly, it had no actual knowledge of their financial situation and was therefore innocent of any wrongdoing. It also sought to rely on a certificate of independent legal advice and a certificate of independent financial advice signed by the borrower, arguing that these certificates established that the borrower had sought appropriate independent advice and was therefore adequately aware of its obligations.
The High Court rejected the lender’s assertions. In its judgement, the High Court reinforced some key elements around professional due diligence and independent advice certificates that lenders must be aware of when considering prospective borrowers:
Summing up, the key takeaways for lenders are:
How can we help?
Our national Finance team acts on loan and security transactions across Australia. We can help you review your current practices and procedures to ensure that they address the issues above. Contact us below or email us here for more information.
Authors: William Kontaxis & Amy Pun
The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.