1. The Key Players

Role	Name
Appellant	Jeffrey William Stubbings
Respondents	Jams 2 Pty Ltd Conterra Pty Ltd Janaco Pty Ltd
Respondent's Agent	AJ Lawyers
Agent's Principal	Mr Jeruzalski
Intermediary	Me Zourkas

2. System of Conduct

Asset based lending is a practise where lenders provide credit on account of the assets provided as security for the loan. Traditionally, asset based lending has often been entered into by lenders without proper consideration of the borrower’s capacity to meet the terms of their respective loan agreements.

In the case of Stubbings v Jams 2 Pty Ltd [2022] HCA 6 (Jams), AJ Lawyers facilitated opportunities for their clients to act as lenders in transactions secured against borrower assets. However, this service of asset based lending was provided within the confines of a carefully crafted system:

System of Conduct	Application on the Facts
Loans were only provided to companies to negate the operation of the National Credit Code.	The Respondents made loans to Victorian Boat Clinic Pty Ltd (VBC), of which the Appellant was the sole director and shareholder.
Loans were secured by assets and personal guarantee(s).	The loans were secured against three properties owned by the Appellant. Furthermore, the Appellant provided a personal guarantee.
All interactions with borrowers were conducted by an intermediary.	The Appellant never had direct contact with AJ Lawyers. Rather, Mr Zourkas, acted as an intermediary at all times.
Borrowers were provided two distinct pro-forma certificates of independent advice respectively pertaining to financial and legal advice (the Certificates)	The Certificates contained boilerplate terms and recorded a knowingly false purpose of the loan.
The solicitors and accountants providing independent advice to borrowers were only renumerated if the transaction proceeded.	Upon presenting the Certificates Mr Zourkas handed the Appellant two business cards, one for a solicitor and one for an accountant.

3. The Appellant

The Appellant owned two properties in Narre Warren and each of these properties were secured by loans from CBA. After accounting for these mortgages, the Appellant’s net equity in both properties was worth roughly $530,000.

The Narre Warren properties were leased out whilst the Appellant lived in a rental premises in Boneo, repairing boats for the landlord of the rented premises. Following a falling out with the landlord, the Appellant ceased work and was required to vacate the rented premises.

At this time, the Appellant sought to secure further finance from ANZ to purchase a third property in Fingal in which he could live. However, due to the appellant’s ongoing unemployment, lack of a regular income, failure to file a tax return in several years and continued inability to pay rates his application was rejected.

In assessing the situation the High Court majority noted, “to say the least, the Appellant’s financial circumstances were bleak”.

4. The Transaction

Following his rejection from ANZ due to his perceived inability to meet further loan repayments, the Appellant was introduced to Mr Zourkas. In accordance with the System of Conduct described above, Mr Zourkas operated as an intermediary between AJ Lawyers and the Appellant.

AJ Lawyers arranged for the Respondents to provide loans totalling approximately $1.2 million to VBC secured over the two Narre Warren properties and the property in Fingal which the loan was being taken out to acquire.

Subsequently, Mr Zourkas met with the Appellant and provided him two sealed envelopes:

i. The first sealed envelope was labelled ‘Solicitor’ and contained the pro-forma certificate pertaining to independent legal advice; and

ii. The second sealed envelope was labelled ‘Accountant’ and contained the pro-forma certificate pertaining to independent financial advice.

Simultaneously, Mr Zourkas provided the Appellant a business card for a solicitor and a phone number for an accountant. In an earlier decision, the Victorian Supreme Court of Appeal observed that, in context, it was clear that the approval of the loans was conditional on the Appellant causing the Certificates to be signed and returned.

The Certificates confirmed that the Appellant had received requisite advice and that the purpose of the loan was to set up and expand the Appellant’s boat repair business. This precluded the application of the National Consumer Code. However, the recorded purpose conflicted with the evidence adduced that Mr Jeruzalski had established that the Fingal property was zoned “green wedge” and thus could not be used for commercial purposes.

Following the registration of the loans, the Appellant moved into the Fingal property with his son and did not conduct a boat repair business. VBC defaulted on the third month’s interest payments and the lenders commenced proceedings against the Appellant, with a view to enforcing the guarantee and their rights as mortgagees over the three properties.

5. Summary of litigation yoyo

Issue	Special disadvantage
Primary Judge	Assessed the Appellant to be “completely lost, totally unsophisticated, incompetent and vulnerable” leading to a determination that he laboured under a “special disadvantage”.
Court of Appeal	Special disadvantage of the Appellant was not disputed.
High Court	Special disadvantage of the Appellant was not disputed.

Issue	Knowledge
Primary Judge	Mr Jeruzalski understood the loans were a risky and dangerous undertaking for the Appellant in which the cost of default would be severe. Therefore, the deliberate failure to make inquiries regarding circumstances of the Appellant equated to wilful blindness.
Court of Appeal	Did not accept that Mr Jeruzalski had either actual or constructive knowledge of the Appellant’s desperate personal and financial circumstances. However, accepted that he proceeded on the assumption that the Appellant had no income.
High Court	Mr Jeruzalski, on behalf of the Respondents, had a lively appreciation that the Appellant’s loss would be suffered. Further, the system of conduct employed by AJ Lawyers amounted to wilful blindness.

Issue	Effect of Certificates
Primary Judge	The accountant and solicitor who were signatories to the Certificates of independent advice were not truly independent sources of advice.
Court of Appeal	No sufficient basis to infer that the Certificates did not truly reflect independent advice. Accordingly, Mr Jeruzalski was entitled to rely upon them and abstain from making further inquiries as to the Appellant’s circumstances.
High Court	The nature and inaccuracy of the Certificates used to distance the agent from evidence “point to the exploitative state of mind on the part of the lender”.

Issue	Held
Primary Judge	The loans were procured by unconscionable conduct and thus the mortgages should be discharged, and the loan agreements deemed unenforceable.
Court of Appeal	The evidence could not support a finding of unconscionable conduct attributable to the Respondents.
High Court	AJ Lawyers, as agents for the Respondents, knew exercising the mortgagee rights would be unconscionable. The execution of independent Certificates of advice was insufficient to negate that knowledge. Such knowledge was imputed onto the Respondent.

6. Key takeaways from the HCA decision

1.1. Special Disadvantage

As the existence of the Appellant’s special disadvantage was not contested the Court did not directly address the ambiguous jurisprudence regarding whether section 12CB of the ASIC Act requires the existence of a special disadvantage.

1.2. Systems of Conduct and Wilful Blindness

Fundamentally, the majority held that Mr Jeruzalski had sufficient appreciation of the Appellant’s disadvantage and the risk to him to support a finding of unconscionable conduct. The Respondents sought to rely on the system of conduct in place to demonstrate the absence of actual or constructive knowledge of the Appellant’s circumstances. Conversely, the Court determined that AJ Lawyers were wilfully blind by virtue of the system they deployed. Steward J pertinently noted that their systematic determination to avoid information regarding the circumstances of borrowers fell within the accepted ambit of the doctrine of wilful blindness:

“When a person deliberately refrains from making inquiries because he prefers not to have the result, when he wilfully shuts his eyes for fear that he may learn the truth, he may for some purposes be treated as having the knowledge which he deliberately abstained from acquiring”.

In this respect, it is critical that lenders review relevant practises to ensure necessary enquiries are made to identify potential findings of special disadvantage arising from the personal and financial circumstances of borrowers.

1.3. Certificates of independent advice are no longer an infallible shield

The Respondents sought to rely upon the Court of Appeal finding that the existence of Certificates of independent advice made it reasonable for Mr Jeruzalski to abstain from making further inquiries as to the appellants circumstances.

However, the majority took a dim view of the boilerplate nature of the Certificates, the knowingly inaccurate loan purpose recorded on them and the tainted circumstances in which the allegedly independent advice was provided. Specifically, the perceived compulsion that the Appellant use the specified independent advisors and that said advisors would not be paid unless the transaction proceeded.

Accordingly, it was determined that the Certificates of independent advice were “window dressing” which amounted to a “precautionary artifice designed to prevent an inference the Respondents were wilfully blind to the obvious danger to the Appellant”.

Conclusion

In such circumstances, there is to be no money for Jams.

Author, Oliver Keogh.

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