In Provident Capital Ltd v Papa [2013] NSWCA 36 the New South Wales Court of Appeal overturned the first instance decision of the Supreme Court and found that a loan was not unconscionable simply because it was "asset lending". Delivering the leading judgment, Marfarlan JA stated that public policy does not necessarily require that asset lending be prohibited, or even deterred.
What is Asset Lending?
Asset lending was the term employed by the Court of Appeal in Perpetual Trustee Company Limited v Albert and Rose Khoshaba [2006] NSWCA 41 to describe a loan provided on the strength of security property alone, without regard to the ability of the borrower to make repayments.
In that decision the Court set aside the loan contract as it was "unjust" within the meaning of the Contracts Review Act. In the Khoshaba judgment Justice Basten stated that where a loan amounted to asset lending:
In Papa the Court of Appeal has taken the significant step of limiting the extent to which borrowers are able to rely on an allegation of asset lending to avoid their obligations under loan contracts.
Background
In April 2007, Mrs Papa mortgaged her home to Provident as security for a loan of $700,000.00. There was a further advance of $125,000.00 a year later.
Before proceeding with the loans Provident required Mrs Papa to obtain legal advice as to her obligations under the loan agreement and it obtained statutory declarations from that such advice had been provided.
The loan was obtained primarily to assist her son, Mr Bortolin, in his gymnasium business. The business subsequently failed, and Provident brought proceedings to enforce the mortgage against Mrs Papa.
In the proceedings Mrs Papa sought an order that the loan agreements be set aside under the Contracts Review Act on grounds that they were unjust. Mrs Papa also cross-claimed against her solicitor, claiming he had not properly advised her in relation to the loans.
At first instance, the Supreme Court upheld Mrs Papa's claim against Provident, finding that the loan agreements were unjust, and that Provident's conduct amounted to 'asset lending'. The Court dismissed Mrs Papa's cross-claim against her solicitor.
Both Provident and Mrs Papa appealed the decision.
The Appeal
The Court of Appeal held that the loan agreements were not unjust as:
Provident had required Mrs Papa's assurance, by signed declaration, that she was able to service the loan.Provident had undertaken credit checks of Mrs Papa.Provident had required Mrs Papa to obtain independent legal advice she confirmed that she had done so.
In these circumstances, Provident had taken steps to consider Mrs Papa's ability to repay and was not solely reliant on its security.
The Court of Appeal also held that the solicitor had been negligent in his advice to Mrs Papa. In making this finding the Court of Appeal noted that it was not Provident's fault that the solicitor provided negligent advice and that it was entitled to proceed with the loan on the basis that the advice was adequate.
Comments on asset lending
In his judgment, Macfarlan JA commented that 'asset lending' may, in some circumstances, be entirely acceptable:
His Honour further stated that if a lender is satisfied that the borrower is able to make an informed decision in relation to a loan agreement, the public interest test will ordinarily be satisfied. A lender is not required to go behind the purpose of the loan and assess whether a borrower's proposed purpose is a viable commercial decision.
Implications for lenders and resolution of disputes with customers
Since Khoshaba defaulting borrowers have been quick to blame lenders where they have been unable to meet repayments. Papa provides a very timely counterpoint to the proposition that it is the lender's responsibility to ensure that a borrower has the means to meet repayment obligations.
The decision also highlights the importance of requiring a borrower to obtain legal advice and obtaining declarations that such advice has been obtained.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
