Introduction

In Valcorp Australia Pty Ltd v Angas Securities Limited [2012] FCAFC 22, following a valuer's appeal of the primary judge's finding that the lenders were responsible for 25 per cent of the loss, the Full Federal Court increased the extent of the lenders' contributory negligence to 50 per cent on the basis that the lenders failed to undertake proper enquiries with regards to the borrowers' ability to service the loan.

Facts

In November 2007, three associated lenders specialising in non-conventional loans, Angas Securities Limited, Barker Mortgages Pty Ltd and KWS Capital Pty Ltd (the lenders), advanced a total amount of $2.88 million to Mr and Ms Opie (the borrowers). The loan was secured by a mortgage over the borrowers' apartment in Glenelg, South Australia. Prior to advancing the funds to the borrowers, the lenders retained Valcorp Australia Pty Ltd (the valuer) to value the property. The property was valued by Valcorp at $3.6 million with a reduced value of $3.2 million in the event of a forced sale. Following default by the borrowers, the property was sold for $1.75 million. The lenders sued the valuer for misleading and deceptive conduct in contravention of s 52 of the Trade Practices Act 1974 (Cth).

Decision

The trial judge found that the valuation had been conducted negligently and that the valuer had contravened s 52 of the Trade Practices Act 1974 (Cth). Indeed, by failing to identify Glenelg as a separate market and by placing reliance on sales which were not comparable sales, the valuer had conducted its valuation below the standard of a reasonably competent valuer.

In addition, the trial judge determined that the lenders were guilty of contributory negligence for having failed to conduct a proper assessment of serviceability of the loan, contrary to guidelines found in their operations manuals and declarations found in their prospectuses to investors. The trial judge found that there was not enough evidence that the borrowers had the capacity to service the loan in November 2007. Indeed, the information received from the borrowers only reinforced the need to make further inquiries. The fact that the borrowers went into default almost immediately after the advancement of the monies was a strong indication that the borrowers did not have the ability to repay the loan at the time of the advancement of the monies. Accordingly, the trial judge found that the lenders were 25 per cent responsible for their loss.

The valuer appealed to the Full Federal Court on the question of contributory negligence.

The Full Federal Court found that the lenders were guilty of contributory negligence to the extent of 50 per cent. In the Court's view, the conduct of the lenders departed from the standards of a reasonably prudent lender. This departure was, according to the Court, at least as serious as the valuer's departure from the standards of a reasonably competent valuer. Consequently, the Full Federal Court found that the trial judge was wrong to differ apportionment in a case were all parties were equally responsible for the loss.

Impact

Lenders should ensure that they adequately assess the capacity of borrowers to service loans. A failure to assess serviceability might result in a finding of contributory negligence against the lender.

In addition, riskier lending practices (for example, lending money to borrowers who fall into the sub-prime category) may not affect the obligation on lenders to investigate the capacity of borrowers to service the loans. A claim by a lender that its focus is on security rather than loan serviceability will not necessarily excuse the lender from failing to investigate the ability of a borrower to service a loan.

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