Australia: Further guidance as to the appropriateness of asset-based lending

This week's TGIF considers Bank of Queensland Limited v Banjanin & Ors [2017] QSC 209, where the Court considered a challenge to asset-based loans.

BACKGROUND

The first and second defendants (husband and wife) applied to the Bank to refinance an existing loan to complete construction of their luxury home. That loan, and two further loans, were approved.

There was also a loan to a company controlled by the first and second defendants so that it could acquire and hold a commercial property upon which sheds would be constructed. The first and second defendants guaranteed that loan.

The first and second defendants' main source of income was from buying, renovating and selling residential properties in respect of which they had been making profits since the 2005 financial year. The defendants otherwise earned a modest income from the first defendant's plumbing business.

The defendants proposed to pay down the loans from their property trading activities.

The loans fell into arrears and the Bank started taking steps to recover amounts owing and to enforce its securities in late 2011. It subsequently commenced proceedings to recover the outstanding debt and to obtain orders for possession.

DEFENDANTS' POSITION

The defendants main allegation was that the Bank acted unconscionably in approving the loans on the basis of the first and second defendants' property trading activities and in failing to properly consider whether the loans could be serviced based on the defendants' income.

The defendants made an allegation on the same basis that the loans were unjust transactions within the meaning on the National Credit Code.

COURT'S DECISION

The defendants led evidence from an expert accountant who criticised the Bank for failing to obtain personal and business income tax returns from 2006 onwards. The expert believed that, had the Bank obtained the 2007 tax returns for the first and second defendants, it would have realised that the defendants would not be able to afford a loan for any amount after paying their ordinary living expenses. The expert also could not see any evidence of the defendants providing information about their personal and business expenses to enable the Bank to ascertain whether those expenses could be covered by the defendants' after tax income. Overall, the expert concluded that the Bank did not have sufficient information to assess whether the defendants would be able to afford and service the loans.

The Bank also engaged an expert who gave evidence at the trial. He concluded that it was reasonable for the Bank to extend the loans to the defendants. The defendants had presented as successful, high net worth individuals. They were the type of client that a bank would seek as a long term client based on the information they had provided and their successful business and investment activities over time. Credit searches had been conducted and there was no adverse features noted. The Bank's decision to approve was also likely to have been influenced by the proposal for a debt reduction in the medium term. The transaction met the commercial requirements of the Bank and was within normal policy parameters. The two properties taken as security were more than sufficient to cover the loan amounts.

The Court preferred the evidence of the Bank's expert and found that "it is reasonable for a bank in an appropriate case to lend on the basis of the assets offered by way of security, rather than an assured income source for meeting repayments."

As for the allegation of unconscionability, there was no evidence that the defendants were at a "special disadvantage", which is the threshold requirement to establish the cause of action. The mere allegation that the loans from the Bank could be characterised as "asset-based lending" was not sufficient to support a finding that they were under a "special disadvantage" vis-à-vis the Bank. The Court referred to earlier authorities which made clear that it was necessary to show that there was some conduct on the part of the lender that was morally repugnant in order for a finding of unconscionable conduct to be made. The Court cited Allsop P in Tonto Homes Loans Australia Pty Ltd v Tavares [2011] NSWCA 389, who said that: "What is required is some degree of moral tainting in the transaction of a kind that permits the opprobrium of unconscionability to characterise the conduct of the party."

The Court reached a similar conclusion in relation to the defendants' allegation that the loans were unjust transactions within the meaning of the National Credit Code. The defendants failed to identify any relevant conduct on the part of the Bank that could be characterised as unjust. The Bank had granted the loans for the purposes sought by the defendants, based on the security that they had offered and in the anticipation that the loans would be paid down in the manner proposed by the defendants.

COMMENT

The decision confirms that asset-based lending will not, of itself, result in loans being set aside on the grounds of unconscionability or being characterised as "unjust transactions" under the National Credit Code. For a borrower to succeed in challenging a loan on these grounds, they must show that the lender has engaged in some form of morally objectionable conduct or that there is some relevant injustice.

While the cases make clear that asset-based lending is permissible in appropriate circumstances, this case serves a reminder that any decision to approve an asset-based loan must be transparent and justifiable.

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.

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