Australia: Banking & Finance Update – June 2006

Last Updated: 14 July 2006


  • ACN v ABN
  • The Lo Doc / No Doc Roller Coaster


Should legal agreements contain a company’s ACN or ABN? Surprisingly, the choice can have quite wide ranging consequences.


First, a bit of history.

ACNs or Australian Company Numbers were introduced to the Corporations Act many years ago. The purpose was to give a unique identifier number to each company. A company can even simply have as its name its ACN.

ABNs or Australian Business Numbers came along with the introduction of GST on 1 July 2000. The ABN for most companies is the ACN plus a two digit prefix.

A single company could have more than one ABN. A separate ABN may be held in respect of the enterprises it conducts, such as:

  • in its own right;
  • pursuant to a GST joint venture;
  • in its capacity as trustee of a discretionary or unit trust.

What have lawyers been doing about it?

Many pro forma legal documents now provide the option for inserting the ABN or the ACN. However, the use of an ABN could unintentionally reduce or limit the operation of a legal agreement.

Let’s consider Joe Traders Pty Limited which has an ABN for itself and also an ABN for the discretionary trust under which its main business is conducted. If Joe Traders is described in a legal agreement using the ABN for the company, arguments could arise as to whether the other party will have any recourse to the trust assets. This would be so despite a general clause saying that Joe Trader enters the contract in its own right and as trustee of any trust of which it is trustee. The argument could arise because the specific use of a specific ABN may override general catch all provisions.

An even more awkward situation could arise if the ABN for the discretionary trust was used. Discretionary trusts do not comprise a separate legal entity, and so arguments could arise as to whether the trustee is a party to the transaction.

One would hope that in the ordinary course, courts will prevent parties avoiding commercial obligations by use of this type of argument. However, a party could gain valuable time while arguing the point, particularly when it is a novel point which has not previously been considered by the courts.

Suggested rule

It is essential whenever preparing a legal contract (whether it takes the form of formal deed, an agreement, or an exchange of letters) to use ACNs and not ABNs. An ABN is only appropriate on tax invoices.
By Jon Denovan, Sydney.


Recent cases have rung alarm bells for lenders and brokers involved in Lo Doc, No Doc, High LVR, and security loans.

I am continually challenged to provide guidance in the development and distribution of these products. Just where do particular products sit on the risk Richter Scale?

Product descriptors

First, let’s agree on some definitions.



Lo Doc

Lender assesses serviceability based on limited evidence of income.

No Doc

Lender assesses serviceability but requires no evidence of income.

Security lend

Lender makes no assessment of ability to repay and relies simply on the security.

Lenders and intermediaries are at risk

Let’s get something very clear – both the lenders who design the products and the brokers who sell them need to manage the risks associated with these products.

The risks for lenders are obvious – the lender may not recover the whole of the principal sum and interest. The risks for brokers are less obvious, but they are still very real. Consumers may claim that brokers failed to properly advise them concerning the risks and obligations, or that they permitted borrowers to enter transactions which overcommitted them.

Brokers could quickly find themselves in front of tribunals being liable for all the loss encountered by borrowers.

Getting the broker role correct

One important strategy for brokers is to ensure that their duty of care to the borrower is clearly spelt out. There needs to be an express contract which clearly specifies that the broker is either acting as:

  • Execution only – the borrowers know which loan and product they want, and simply want the broker to do the leg work to facilitate the application and obtain the approval;
  • Choice – the broker presents a range of products and lenders, but borrowers decide which one is right for them;
  • Advice – the broker provides advice to the borrower as to which lender and product is suitable for the borrower, and possibly recommends refinancing or provides budget coaching;
  • Manager/Lender – the intermediary is selling a product either as agent for a bank (like a lender’s roving sales force) or as a principal (for example a branded product under a mortgage management program).Brokers and lenders will still have an obligation to borrowers even where they say they are merely selling a loan or acting as an execution only broker. This is because there will still be an obligation not to mislead or deceive the customer, and the customer will still have a right to vary or escape from the contract if the customer can establish the transaction is unconscionable.

So what should lenders and brokers do?

At the very least when marketing these types of products, lenders and brokers should provide a prominent warning to borrowers. The warning should not be hidden in the "small print" of long legal documents. The borrower’s attention needs to be clearly and forcefully brought to the fact that no assessment or a limited assessment of the borrower’s ability to repay has been made, and that the borrower should obtain independent legal and financial advice on the product.

Stop now and consider whether your business does this every time. If not, you are at risk.

Court’s attitude to these products

There has been several cases over the last few years which make it clear that where the security is the borrower’s home, security lends are likely to be found unconscionable. The courts have said that it will be unjust for lenders to allow borrowers to put themselves into a position where they might lose their residence simply because the lender chooses not to enquire as to income.

Once the transaction is found unjust, the lender may lose both the ability to recover the loan and the right to enforce any security. The concepts apply equally to UCCC regulated and UCCC unregulated loans.

If the borrowers obtain independent legal or financial advice or both, there will be a reduced likelihood of these types of loans being found unconscionable, but advice does not provide a universal solution.

In a recent case ((Perpetual Trustee Co Ltd v Khoshaba 2006 NSWCA 41), the court found that it was unjust for a lender to be solely focused on the loan security as being the means by which a loan, secured against the family home, would be repaid. The loan was not regulated by the UCCC. The court found that the mortgage originator:

  • had failed to ascertain the loan purpose; and
  • had failed to verify that the income attributed to the loan applicants in the loan application was correct.

The failings by the mortgage originator were sheeted home to the lender. The court concluded that both these failings indicated that the lender was not concerned with whether the borrowers could afford to repay the loan. This was despite the fact that there was some evidence of income but that evidence was not properly verified

Similarly, in Small v Grey 2004 NSWSC 97, parents mortgaged their home to provide a deposit for their children to purchase a home. There was significant discrepancy in the information obtained about one of the parents’ income. This was sufficient for the court to conclude that the lender was lending only on the basis that they were well secured – that is, they had no reason to be confident that the borrowers could service the loan. Here of course the parents had no material interest in the transaction and this added to the unconscionability. The mortgage was struck down.

What conclusions can be drawn?

The following conclusions are reached after reading many cases and reviewing lending practices. They are not drawn just from the two cases mentioned above.

  1. UCCC and non-UCCC regulated loans are broadly equally at risk of being successfully challenged as unjust.
  2. Loans secured by homes (as distinct from investment properties) are much more likely to found unjust. Courts do not like people losing their home.
  3. There is no nothing wrong with low doc, no doc, high LVR, or security lending per se. What is unacceptable is lending blindly without proper regard to the purpose of the loan, and the risks being undertaken by the borrower. No-one is suggesting that a security loan made to a sophisticated investor is likely to be found unjust. Nor is it likely that any other product will be found unjust if the borrower properly understands the risks, and there is no element of misleading conduct.
  4. It’s important that these types of products are available, otherwise those who need access to credit of this kind will be forced to use non mainstream lenders and pay higher interest rates. However, lenders and intermediaries in making these products available and marketing them need to be careful about applying formulas or "one size fits all" procedures. Each transaction needs to be individually assessed, otherwise there is a significant risk that a court will find that the lender and the broker acted recklessly with a predominant aim to sell product rather than act fairly.

By Jon Denovan, Sydney.


Jon Denovan

t (02) 9931 4927



Simon Wallace

t (03) 9252 2521


Peter Grotjan

t (03) 9617 8538


This publication is provided to clients and correspondents for their information on a complimentary basis. It represents a brief summary of the law applicable as at the date of publication and should not be relied on as a definitive or complete statement of the relevant laws.

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