In Provident Capital Ltd v Papa  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
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  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:
"...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..."
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
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
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
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
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 Court of Appeal held that the loan agreements were not
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
In these circumstances, Provident had taken steps to consider
Mrs Papa's ability to repay and was not solely reliant on its
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
Comments on asset lending
In his judgment, Macfarlan JA commented that 'asset
lending' may, in some circumstances, be entirely
"[asset lending] 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."
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
Implications for lenders and resolution of disputes with
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.
Kemp Strang has received acknowledgements for the quality of
our work in the most recent editions of Chambers & Partners,
Best Lawyers and IFLR1000.
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