MCL 102 Pty Ltd v Yuen

IN THE COUNTY COURT OF VICTORIA

AT MELBOURNE

COMMERCIAL DIVISION

Revised
Not Restricted
Suitable for Publication

BANKING AND FINANCE LIST

Case No. CI-20-02612

MCL 102 PTY LTD (ACN 638 966 800)	Plaintiff
v
THEODORA YUEN	Defendant

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JUDGE:	HIS HONOUR JUDGE COSGRAVE
WHERE HELD:	Melbourne
DATE OF HEARING:	28 February 2022, 1, 2, 3 and 8 March 2022
DATE OF JUDGMENT:	28 April 2022
CASE MAY BE CITED AS:	MCL 102 Pty Ltd v Yuen
MEDIUM NEUTRAL CITATION:	[2022] VCC 545

REASONS FOR JUDGMENT
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Subject:RECOVERY OF DEBT – EQUITABLE RELIEF
Catchwords: Asset-based lending – Special disadvantage – Certificates of advice – Independent legal and financial advice – Misleading and deceptive conduct – Unconscionable conduct – Actual or constructive knowledge
Legislation Cited: Australian Securities and Investments Commission Act 2001 (Cth); Competition and Consumer Law Act 2010 (Cth); Corporations Act 2001 (Cth); National Consumer Credit Protection Act 2009 (Cth)
Cases Cited:Baden v Société Générale pour Favouriser le Développment du Commerce et de l’Industrie en France SA [1993] 1 WLR 509; Banco Exterior Internacional v Mann [1995] 1 AII ER 936; Certane CT Pty Ltd v Whight [2021] QSC 77; Commonwealth Bank of Australia v Iloska & Anor [2018] VCC 144; Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; Hoysin Pty Ltd v Corelli [2021] VCC 1197; Jams 2 Pty Ltd v Stubbings [2020] VSCA 200; McIvor v Westpac Banking Corporation [2012] QSC 404; Micarone v Perpetual Trustees Australia Limited (1999) 75 SASR 1; Nibar Investments Pty Ltd v Manikad Pty Ltd [2014] NSWSC 920; Paciocco v Australia and New Zealand Banking Group Limited [2015] FCAFC 50; Secure Funding Pty Ltd v Moon [2012] QSC 244; Stubbings v Jams 2 Pty Ltd [2022] HCA 6; Violet Home Loans Pty Ltd v Schmidt [2013] VSCA 56

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr C. Salpigtidis	Summer Lawyers
For the Defendant	Mr G.J. Moloney	Self-represented

HIS HONOUR:

Introduction
1The main issues in this case are whether the plaintiff (“MCL”) is entitled to recover a debt from the defendant (“Yuen”) and to obtain possession of the property which Yuen owns, being Unit 302, 632 Doncaster Road, Doncaster in the State of Victoria (“the property”). Alternatively, MCL seeks to be subrogated to the rights of the Australia and New Zealand Banking Group Limited (“ANZ”) under a mortgage previously held by the ANZ over the property. MCL’s advance to Yuen and Friseur Pty Ltd (“Friseur”), a company of which Yuen is the sole director, secretary and shareholder, discharged that mortgage.

Background
2Friseur was incorporated on 25 August 2015 and was deregistered on 17 January 2021. The company conducted business from The Pines Shopping Centre in Reynolds Road, Doncaster East (“The Pines”). The company provided hairdressing and other like services to the public as well as retailing hair care and related products. Yuen operated the business through the company.
3Yuen is a trained hairdresser. She worked at a salon which previously operated from the premises at The Pines. This earlier business was a franchise from Hairhouse Warehouse. It was operated for about one year before it failed and the franchisor closed the business. Soon after, Yuen offered to resume the business and she entered into a business management agreement with the franchisor. According to Yuen, the franchisor agreed that, after a satisfactory 12 month trial period, the franchisor would sell her a franchise to the business for $100,000. Ultimately, although Yuen paid fees to the franchisor for about three and a half years, the franchisor never offered her a franchise.
4On about 13 April 2016, Friseur applied for and obtained finance from the ANZ. It obtained a business loan, an overdraft facility and a credit card. Yuen’s intention was for the overdraft to assist with working capital and the business loan to enable her to buy the franchise.
5In December 2018, the franchisor changed the locks on Friseur’s premises and locked Yuen out of the business. The franchisor shut down the hairdressing salon but continued the retailing business in order to clear as much stock as possible.
6Yuen said that the franchisor ceased operating the business in about mid-March 2019 and another unrelated business began operating from the premises.
7On 4 March 2019, the Australian Taxation Office (“ATO”) issued a director’s penalty notice to Yuen for Friseur’s failure to pay superannuation guarantee contributions.
8On 26 March 2019, the solicitors, Thomson Geer, sent Friseur a notice of demand on behalf of the ANZ seeking payment in the sum of $125,334.07.
9On 30 April 2019, the ATO issued a demand to Friseur seeking payment of $140,375.45.
10In about March 2019, a friend of Yuen’s arranged for her to meet Scott Casey (“Casey”) the third party in the proceeding. By this time, Yuen was in serious financial difficulty. Friseur had substantial debts and was no longer running any business. The ATO was pursuing Yuen personally. Yuen had only limited work. From about April until June 2019 she rented a chair at a colleague’s salon for about $80 a week. This enabled Yuen to generate some income.
11During June 2019, Casey arranged for Yuen to obtain a short-term loan from MA SOF 32 Pty Ltd (“SOF”). Yuen said that Casey told her he had arranged a loan from Bendigo Bank but it could not be finalised as quickly as she needed. She had to take the loan from SOF for a few months. The SOF loan had a six month duration according to the documentation but Casey told Yuen that he expected the Bendigo Bank loan to be ready in less than six months.[1]
[1] Further Amended Defence and Counterclaim dated 3 March 2022, 4(c)(iii).
12On 26 June 2019, Casey took Yuen to the office of a solicitor, George Schifter (“Schifter”), in order for Yuen, as a director of Friseur and a guarantor of its obligations to SOF, to obtain independent legal advice about the loan and security documentation she was to sign. Schifter said that he explained the documents to Yuen and he completed certificates of advice. Yuen signed all the documents and Schifter sent the executed copies to SOF’s solicitors.
13On 28 June 2019, SOF advanced $275,000, which after retaining prepaid interest for six months, loan establishment fees, broker’s fee and other costs, resulted in a nett advance of $234,422. From this amount, the plaintiff paid $128,458.24 to the ANZ to discharge Friseur’s indebtedness to the bank.
14Under the terms of the loan, Friseur was to repay the principal on 25 December 2019. It failed to do so. Friseur never obtained a replacement loan from Bendigo Bank or any other financial institution. SOF made demand upon Friseur and Yuen. Neither of them paid the outstanding debt.
15Yuen remains in possession of the property.
16By deed on 20 May 2020, SOF assigned to MCL its interest in the loan and also transferred to it the mortgage it had obtained from Yuen over the property.
17On 26 May 2020, the mortgage over the property was transferred and registered in the name of MCL.
18By deed of variation on 2 November 2020, the assignment was varied to make explicit that it included equitable rights and rights of subrogation. Yuen admitted receiving notice of the varied assignment.

Representation
19For most of the proceeding, Yuen has been self-represented. The court gratefully acknowledges the assistance rendered by Mr Maloney of Counsel who agreed to act pro bono for Yuen at the trial. Mr Maloney made what was a difficult trial significantly more manageable. Rather than running all the various points which Yuen had raised, Mr Maloney sought to focus his client’s attention on a limited number of issues.
High Court Judgment
20I heard final submissions in this case on 8 March 2022. Both parties referred to and relied upon the decision of the Victorian Court of Appeal in Jams 2 Pty Ltd v Stubbings[2]. On 16 March 2022, the High Court handed down a judgment in which it unanimously overturned the decision of the Victorian Court.[3] Accordingly, I contacted the parties and gave them the opportunity to file further written submissions which took account of the new development created by the High Court judgment.
[2] [2020] VSCA 200.
[3] See Stubbings v Jams 2 Pty Ltd [2022] HCA 6.
21In its judgment all members of the court accepted that the respondent financier exploited the appellant’s position of special disadvantage.
22Stubbings owned two houses in Narre Warren. They were leased to family members and were mortgaged in favour of the Commonwealth Bank of Australia to secure loans of about $240,000. Stubbings repaired boats and lived at premises rented from his employer in Boneo. He had no other assets of significant value. Stubbings fell out with his employer and landlord and had to move. He wanted to buy a property on the Mornington Peninsula. Around the time of seeking the loan, Stubbings was largely unemployed and had no regular income. He had not filed a tax return for several years and was in arrears regarding the rates payable on the Narre Warren properties. Stubbings was unsuccessful in obtaining a bank loan. He later met Mr Zourkas who was a consultant in the business of introducing prospective borrowers to the firm Ajzensztat Jeruzalski & Co (“AJ Lawyers”). This firm provided a service to borrowers like Stubbings to facilitate the making of secured loans by their clients. AJ Lawyers arranged loans exclusively on the basis of the value of the assets securing the loan, without regard to the borrower’s ability to repay by instalments under the contract in the knowledge that adequate security was available in the event of default.
23Stubbings told Zourkas that he wanted to buy a small house using his equity of approximately $530,000 in the Narre Warren properties. Zourkas told him that there would not be a problem buying a property with some extra land. Ultimately, Stubbings bought a five acre property at Fingal for $900,000.
24Zourkas approached Myer Jeruzalski (“Jeruzalski”) of AJ Lawyers for a loan. Jeruzalski arranged for clients of the firm to lend about $1.059 million to Victorian Boat Clinic Pty Ltd (“VBC”), a company with no assets or business of which Stubbings was sole director and shareholder. Stubbings acted as guarantor.
25Zourkas gave Stubbings two certificates, one to be signed by a solicitor and the other by an accountant. Zourkas also gave Stubbings a business card of a solicitor and the phone number for an accountant. Stubbings arranged to meet the suggested individuals and got both certificates signed. The accountant wrote in his document that the purpose of the borrowing was to set up and expand the business – notwithstanding VBC did not, and had not, conducted any business and Stubbings had told Zourkas that he had wanted to buy a home. Stubbings made two interest payments, one of which was pre-paid and then defaulted. The financiers sought to enforce their rights as mortgagee against the properties Stubbings owned.
26At first instance, Robson J found that Stubbings’s financial position was bleak and he was unsophisticated, naive and had little financial nous. He said that at trial, Stubbings showed himself to be “completely lost, totally unsophisticated, incompetent and vulnerable”. His Honour found that Jeruzalski:
·did not require application forms from borrowers;
·did not run credit checks on borrowers;
·did not enquire about assets other than the proffered security;
·did not ask about the intended purpose of the loan;
·assumed that anyone seeking a loan through AJ Lawyers had no income and could not obtain a loan from a traditional lender;
·knew the loan could cause severe damage to Stubbings if VBC defaulted;
·knew there was an inconsistency between the stated business purpose of the loan and the zoning of the Fingal land which did not permit business activity;
·made no enquiries about the capacity of Stubbings to repay the loan; and
·knowingly and deliberately failed to make enquiries about Stubbings and whether Zourkas had misled him about his ability to service the loan and his understanding of the loan.

27Robson J found that Stubbings was under a special disadvantage. Due to his lack of sophistication and poor knowledge of business, Stubbings did not understand his rights and obligations under the loan documentation. Further, the trial judge did not accept that the solicitor and accountant advising Stubbings were independent advisors.
28His Honour concluded that the respondents’ conduct showed moral obloquy and wilful blindness about the financial and personal circumstances of Stubbings. That being so, he found that Jeruzalski acted unconscionably towards Stubbings.
29The Court of Appeal allowed the financiers’ appeal and stated that asset-based lending was not necessarily unconscionable, especially where independent certificates from lawyers and/or accountants were obtained. The court was not satisfied that Jeruzalski knew of matters which put him on notice about Stubbings’s true position. The court held that Jeruzalski was entitled to rely upon the certificates for the purposes of showing that Stubbings obtained advice and the truth of the matters set out in the certificate.
30In the High Court, the judges found that the financiers’ conduct was unconscionable under general law. Gordon J also found the conduct unconscionable under the ASIC Act. The plurality, comprising Kiefel CJ, Keane and Gleeson JJ, said that equitable relief was appropriate to prevent Stubbings’s victimisation. They said that his lack of commercial understanding coupled with his inability to repay the loan from his own income or assets, meant that default, and the consequential loss of his equity in the Narre Warren properties, was inevitable. This judgment accepted the various findings made by the trial judge including that Stubbings was incapable of understanding the risks involved in the transaction and unable to perform simple calculations.
31The plurality did not accept that Jeruzalski was exonerated due to the certificates from the lawyer and accountant. The judges found that the certificates could be treated in the context as part of the artifice designed to prevent an inference that the respondents were wilfully blind to the obvious danger which the lending arrangements presented for Stubbings.
32Gordon J expressed the view that the certificates were framed in such a way as to avoid meaningful disclosure.
33Steward J commented that the certificates referred to advice given to the borrower VBC but there was no mention of advice to Stubbings as guarantor. For His Honour, the critical issue was whether, given Jeruzalski’s suspicion that Stubbings had no income, there was a need to give him assistance in the form of a warning about the potential danger of entering the loan arrangement with the financiers. His Honour said that Stubbings suffered from a disadvantage because he was impecunious and never received any relevant warning or explanation.
34When examining the financiers’ conduct under the ASIC Act, Justice Gordon determined that the system of conduct adopted in relation to the provision of loans was unconscionable. In reaching that view, Her Honour referred to a number of factors:
(a)Jeruzalski’s assumption that the loans were “unbankable” – that is anyone seeking a loan from one of his clients had no income or else they would access funds from a traditional lender;
(b)Jeruzalski’s acknowledgment that a loan of this kind was a dangerous product in the hands of the wrong person;
(c)Jeruzalski’s deliberate decision not to seek information about borrowers and guarantors. This included not conducting credit checks, not requiring application forms and not asking the actual purpose of the loan;
(d)Jeruzalski’s refusal to lend money to borrowers who approached AJ Lawyers directly;
(e)insisting in the standard loan documentation that any loan was for business purposes; and
(f)the certificates did not provide meaningful disclosure to lenders, borrowers or guarantors.

Her Honour found that the adoption and implementation of such a system warranted condemnation as offensive to conscience.

Issues
35At the commencement of the trial, Yuen raised four primary issues:
(a)   the agency issue – whether Casey, a finance broker, was the agent of Yuen or SOF when making representations to Yuen. Yuen alleged that Casey advised her that:
·     he would arrange for her to obtain a loan from a company called Magnolia Capital;
·     although the loan was for Yuen’s personal use, the loan would need to be made by SOF to Yuen’s company, Friseur;
·     within six months of getting the loan from SOF, the loan would be converted into a mainstream facility in an agreement with Bendigo Bank (“the representation”);

(b)   the legal advice issue – this included whether Yuen was vulnerable, whether she was provided with independent legal advice and whether the lender was entitled to rely upon the solicitor’s certificates provided by Schifter;
(c)   the Credit Code issue – this concerned whether or not the agreement between MCP and Yuen was a “credit contract” within the definition of the National Consumer Credit Protection Act 2009 (Cth) (“the Code”). This point included consideration of whether:
·        Yuen made a business purpose declaration;
· Yuen was a “debtor” as defined in the Code; and
·the purposes of the credit provided was for personal, domestic or household purposes;

(d)   the unconscionability issue – whether MCL’s conduct was unconscionable in all the circumstances.
36As the trial progressed, the range of issues narrowed. As a result, by the end of the trial, the plaintiff and defendant submitted to the court an agreed list of issues for the court to determine as follows:
(a)   Was Yuen vulnerable as alleged?
(b)   Did Casey make the representation and if so, did Yuen rely upon it?
(c)   Did Yuen receive sufficient legal advice so as to understand the purport and effect of the transactions with MCL?
(d) Did SOF engage in misleading and deceptive conduct under section 12DA of the Australian Securities and Investments Commission Act 2001 (Cth) (“ASIC Act”)?
(e) Was the agreement between MCL, Friseur and Yuen procured by unconscionable conduct under section 21 of the Australian Consumer Law (“ACL”), section 12CB of the ASIC Act or the common law? This includes:
(i)an examination of all the circumstances of the case including the conduct of the parties;
(ii)whether there was a duty upon SOF to investigate or verify information provided by the borrower;
(iii)whether SOF had actual or constructive knowledge pursuant to the “Baden Scale”;
(iv)whether SOF’s conduct was so far outside societal norms of acceptable commercial behaviour as to warrant condemnation as conduct that was offensive to conscience; and
(v)whether any knowledge, actual or constructive, on the part of SOF was negated by the solicitor’s certificates, or, put another way, was SOF entitled to rely upon the solicitor’s certificates.

(f) If the mortgage and guarantee are set aside, is Yuen required to make restitution to MCL as a condition of the relief sought by repaying the principal advanced under the loan agreement secured by the mortgage?

Was Ms Yuen vulnerable as alleged?
37Yuen submitted that she was in a vulnerable position at the time Friseur and she entered the loan and security agreements with SOF. This arose from the following:

(a)   she completed only year 11 at high school;
(b)   thereafter, she completed a trade course in hairdressing in 1989;
(c)   she had no training in accounting or finance; and
(d)   after the franchisor closed the hairdressing business in March 2019, she did some freelance work but had lost most of her customers. When the virus pandemic struck and Melbourne was placed in lockdown by the State Government, she could no longer work. Later, when the lockdown lifted, she earned some money by renting a chair at a colleague’s hairdressing salon.
38In 2019, Yuen was in serious financial difficulty. The franchisor closed down the business which she had run for more than three years. The ATO sent a director’s penalty notice to Yuen regarding unpaid superannuation payments due to employees of the business. The ANZ sent a notice of demand to Friseur.
39Yuen wanted to lodge a notice of dispute with the Small Business Commissioner in connection with the conduct of the franchisor. Yuen believed that the franchisor had failed to honour its promise to grant her a franchise. Also, she had problems paying the suppliers to the former business Friseur conducted at The Pines before Yuen was locked out.
40In the circumstances, Yuen said that she was in a position of substantial vulnerability when Casey introduced the option of taking the short-term loan from SOF.
41SOF and MCL are both members of the Magnolia Capital group of companies and are related. SOF made the initial loan which was ultimately arranged by the CEO, Mitchell Atkins (“Atkins”), and his staff. After the loan went into default, the usual practice was to pay out investors and assign the outstanding rights to another company - in this case, MCL as specified by Atkins. Atkins is a director of both SOF and MCL.
42MCL denied that Yuen was vulnerable. MCL noted that:
(a)Yuen completed a hairdressing course in 1989 and thereafter worked in a salon and later ran her own salon for about eight years up until 2000. She then returned to working as an employee and became employed at the Hairhouse Warehouse business at The Pines.
(b)She worked for two different franchisees before the franchisor closed the business in 2015. As noted above, she approached the franchisor soon after and commenced operating the business under a business management agreement with the franchisor from about September 2015.
(c)She managed the business for about three and a half years. She engaged the hairdressing staff for the salon and the retail staff for the shop.
(d)She obtained financial accommodation from the ANZ in the sum of about $150,000 and provided security in the form of a mortgage over the property.
(e)During the period 1 October to 31 December 2015 the business, under her management, turned over $148,622.
(f)The business was successful for a number of years with a turnover exceeding half a million dollars per annum.
(g)Yuen was prudent in her approach to business. She obtained legal advice before entering into the transactions with Hairhouse Warehouse. At that time, the nature of the documents was explained to her.

Analysis
43I do not consider that Yuen was in a position of vulnerability at the time she entered the loan and security agreements with SOF. While her formal education stopped at the end of year 11, Yuen was an intelligent and mature woman. There was no suggestion that she was other than fluent in spoken English and able to read written English. Apart from her hairdressing skills, she had proven business acumen – she ran her own business for a total period of around 11-12 years. This suggests a level of basic competence and business ability. Plainly, Yuen’s business operations were sufficiently profitable to meet her statutory and other obligations as she continued to trade successfully for a significant period of time.
44I do not doubt that her financial position in 2019 was less than optimal. She was locked out of her business in December 2018 and she had only limited work after that time. But she knew she had the debt to the ANZ and the ATO. She understood the reality of her position, having arranged a payment plan with the ATO. Her experience was such that she knew what a mortgage was. As the sole director, sole shareholder and governing mind of Friseur, she controlled the company’s fate and, directly or indirectly, as guarantor was responsible for Friseur meeting its obligations to certain third parties.
45While I accept that Yuen was in a difficult financial position in the first half of 2019, she still had her technical skill and experience and had the capacity to re-establish herself as a hairdresser, whether independently or as an employee. The interest on the SOF loan was paid for six months and Yuen was able, if she chose, to focus on her work.
46Significantly, I note Yuen’s claim did not allege that SOF knew of any alleged vulnerability. On the facts, this was a sound approach to adopt. Atkins and his employees had no direct contact with Yuen. Atkins dealt with Casey who was Yuen’s finance broker and agent. The financier’s solicitors, Summer Lawyers, had no direct contact with Yuen. They dealt only with her solicitor, Schifter.
47I note that even if I am wrong about Yuen and she was in a position of special disadvantage, her solicitor gave her detailed advice about the proposed loan from SOF, including his view that she should not proceed with the transaction due to the risk and potentially brutal consequences.

Did Casey make the representation, and if so, did Ms Yuen rely on the representation?
48As noted in paragraph 35(a) above, Yuen alleged that Casey advised her that:
·he could arrange a loan from a private lender, Magnolia Capital;
·although the loan was for her personal use, the loan would need to be made to a company which he would have to incorporate; and
·within six months of obtaining the loan from Magnolia Capital, the loan would convert into one with a mainstream financier, namely Bendigo Bank.

49Yuen says that she trusted Casey to help her and agreed to his plan. She was keen to borrow from a recognised major bank and not a private lender. To that extent, I accept that Yuen relied upon the representation in agreeing to enter into the arrangement with SOF.

Did Yuen receive sufficient legal advice such that she understood the purport and effect of the transactions?
50There is a conflict in the evidence between Yuen and her solicitor Schifter. Where their evidence diverges, I prefer the evidence of Schifter. I do this for several reasons.
51First, I note that counsel for Yuen submitted that I should accept Yuen as a credible witness.[4] It was said that she gave evidence in a reasonably clear and forthright manner and made appropriate admissions or concessions in her cross-examination. While I accept that much of Yuen’s evidence was truthful and that she did make admissions against her interest in cross-examination, I do not believe that all her evidence was equally reliable.
[4] The Defendant’s Final Submissions, [3]-[4].
52Secondly, Schifter is an experienced solicitor who understood his role and responsibilities and sought to conscientiously discharge his duties to Yuen as his client.
53Thirdly, Schifter presented as a reliable and credible witness who gave careful and considered answers to the questions asked of him.
54Fourthly, Schifter had notes about his dealings with Yuen in relation to the loan and security documents with SOF. The notes were made on the same day as the events in question. The notes supported the oral evidence which Schifter gave in court.
55Fifthly, in material respects Yuen supported significant aspects of Schifter’s evidence. For example, Schifter produced a file note of his interaction with Yuen and Casey on 26 June 2019 when they came to his office to obtain legal advice and sign the loan and security documentation. The file note read as follows:
“YUEN MADE NIGHT – AFTER
DORIS LEFT OFFICE 26/6/19

PRELIM NOTES OF CONFERENCE WITH DORIS YUEN AND ADVICE GIVEN
1. DORIS + SCOTT GAVE DETAILED BACKGROUND OF DORIS
CIRCUMSTANCES AND REASON FOR REFINANCING
(PARTICULARLY WITH A NON-BANK LENDER LIKE “MAGNOLIA”
2. ADVd’ DORIS THAT A LOAN WITH MAGNOLIA IS NOT A PREFERRED OPTION
(EXPRESSED THIS ADVICE TO DORIS FIRMLY …) (MAG IS BRUTAL)
3. SHE WAS DETERMINED TO PROCEED AND THAT IT WAS JUST A STEP
BEFORE REFINANCING WITH BENDIGO BANK! - SCOTT HAS SAID HE HAS
ALREADY ARRANGED WITH BENDIGO
4. I ADVISED HER THAT SHE SHOULD HAVE/COULD APPROACH HER BANK
AND TRY FOR AN ALTERNATIVE LOAN
5. I GAVE V VERY DETAILED ADVICE ON THE TERMS OF THE MAGNOLIA LOAN
AND IF DEFAULT THE CONSEQUENCES WERE SEVERE eg. fees interest increase
etc.
6. SPENT CONSIDERABLE TIME EXPLAINING ALL THE DOCTS FOR THE
FACILITY . . . CARE!!!
V.V DETAILED EXPLANATIONS GIVEN.
7 NB I ENSURED SCOTT C WAS NOT PRESENT FOR MY ADVICE TO DORIS &
EXECUTION OF DOCTS ALSO I REPEATED MY OBSERVATIONS THAT I MADE
EARLIER WHEN SCOTT WAS PRESENT HELPING WITH BACKGROUND TO THE
REASON DORIS WAS REFINANCING.
NB I gave Doris a complete copy of the executed Documents plus a separate copy of my Certificate of Legal Advice.”
Yuen agreed with points one to five inclusive of the notes. She acknowledged that Schifter said those things which he claimed to have said. The only significant elements of disagreement were that:
(a)Yuen said Schifter did not explain the terms of the loan in a very detailed way. But she agreed that he did explain the amount she was to borrow, the interest rate of 11.95% and the 23.9% interest rate after six months if she defaulted. Yuen said she understood these things and also understood that she was giving security over her property as she had done with the ANZ. She agreed that Schifter made plain, and that she understood, the effect of the mortgage; and
(b)Casey was present for much of the time including when Schifter explained the default interest rate and at the time Schifter and Yuen signed the documents.

56Finally, there was no dispute that Yuen and Casey arrived at Schifter’s office around midday and did not leave until after 5.00pm. Nor was there any suggestion that Schifter left Yuen waiting for hours in reception or that he sent her away to return later in the day. The scenario at Schifter’s office was the antithesis of one in which a hapless client is taken into a room where documents are set out on a table and the client is simply directed to quickly sign each document at the place that is marked with a yellow sticker. The agreed evidence about the lengthy period of time spent at Schifter’s office supports Schifter’s position that he gave Yuen detailed explanations and advice about the substance and effect of the loan and security documents which she signed.
57Apart from this, Yuen also agreed in relation to her dealings with Schifter that:
·he explained the terms of the loan;
·Schedule D, the debtor’s advice declaration, was true and she signed it;
·Schedule F, the guarantor’s advice declaration was true and she signed it;
·the Solicitor’s Certificate 2 was true and correct except that Schifter expressed his view that she should not enter into the loan with SOF. She signed a certification that the information in the Solicitor’s Certificate 2 was true and correct; and
·she signed the form of acknowledgement given by a borrower or surety to the certifying solicitor and those matters were true and correct.

Analysis
58I find that SOF required that Friseur and Yuen obtain independent legal advice before it made any loan. I accept that Schifter was independent of the financier. Schifter said that he knew of Casey through a prior transaction but he was not a close business associate. Nor was he Casey’s uncle as one of the documents suggested.
59I accept Schifter’s evidence that:
·he examined the loan and security documents the night before the meeting with Yuen and again during the morning before she and Casey arrived on 26 June 2019;
·he made notes and highlighted parts of the documents;
·he went through the documents in detail with Yuen to explain their effect. He did this with all the relevant documents but did not go through the memorandum of common provisions line by line;
·he told Yuen that if she was having difficulty with the ANZ loan due, for example, to financial stress, she should first approach the ANZ. He told Yuen that there were lenders other than Magnolia Capital and that she should not go on with the loan from that company;
·he told her that the consequences of defaulting on the loan would be quite brutal due, amongst other things, to the default rate and the additional costs and charges;
·he sought to conduct his advisory work with Yuen alone and not in the presence of Casey (although he acknowledged that Casey did put his head in his office from time to time); and
·he explained to Yuen the guarantee and its potential impact upon her.

60Schifter said he read to Yuen the declarations and certificates the two of them were to sign.
61I note further that there was no challenge of substance either to Schifter’s evidence about the certificates he signed regarding the legal advice he gave Yuen or to his contention that he read to Yuen the declarations and certifications which he and Yuen signed.
62I am comfortably satisfied that Yuen knew and understood the substance of the obligations which she and Friseur assumed in entering the loan and security arrangements with SOF and that she understood the general nature and effect of the transaction.
63Even if some aspects of the legal advice were inadequate (which I do not accept), there was no suggestion that SOF knew this. Moreover, there is authority that a financier in the position of SOF is entitled to assume, unless it is put on notice to the contrary, that the legal advice Schifter gave Frisuer and Yuen was independent and appropriate. In McIvor v Westpac Banking Corporation,[5] Applegarth J dealt with a case where a mother, who had provided security for advances made for her son’s business, sought to prevent the bank from realising its security when the son failed to meet his financial obligations to the bank. His Honour made a number of pertinent observations:[6]
(a)   where a party is informed that independent legal advice was obtained by the other party, it is not obliged to interrogate the advisor and the party advised to ensure that the advice was not only given but that it was understood;
(b)   it would be strange if the certificate of advice, which prima facie established that advice had been given and which was not in any way impugned by other information provided to the financier, would merely constitute a starting point for further enquiries whereby the financier effectively asked the solicitor whether he really gave the advice;
(c)   except where a party is put on notice that the advice has not been given or has not been given properly or has not been understood, a party seeking to enforce a contract is entitled to rely upon the certificate;[7]
(d)   the bank was entitled to assume that the relevant solicitor would act honestly and give proper advice to the security provider;[8]
(e)   if a prospective surety deals with a bank through a solicitor, the bank is entitled to assume that the solicitor has given the surety appropriate advice. Even if there is a possibility the solicitor has a conflict of interest, the bank is not obliged to advise the solicitor of his or her professional duties;
(f)    the extent of the solicitor’s advice is a matter for the solicitor’s professional judgment. The financier generally has no involvement in determining the nature and extent of the advice given.
[5] [2012] QSC 404.
[6] Ibid, [93] – [95].
[7]Propositions (a) – (c) were made in the context of setting aside a mortgage under the Contract Review      Act 1980 (NSW).
[8]See the comments to similar effect made by Lord Bingham MR as he then was in Banco Exterior Internacional v Mann [1995] 1 AII ER 936, 950.
64These principles are consistent with those set out in the decision of the Full Court of the South Australian Supreme Court in Micarone v Perpetual Trustees Australia Limited.[9] There, Debelle and Wicks JJ said:
“it is not unconscionable for a lender to enforce the financial obligations of a loan agreement if the borrower has received competent independent and disinterested advice…If the lender is provided with a certificate from a solicitor stating that the debtor has been independently advised, the lender is entitled to rely on it. In the absence of actual knowledge to the contrary, the lender is entitled to assume that the solicitor has acted competently and has given proper advice[10]…...The lender may rely on the certificates even if, unknown to it, the advice given by the solicitor is not competent or is given in an inappropriate manner.”[11] (citations omitted)
[9] (1999) 75 SASR 1.
[10]The cases supporting the proposition include two decisions of Hayne J when sitting as a judge of the Victorian Supreme Court.
[11] (1999) 75 SASR 1, [655].

Did SOF engage in misleading and deceptive conduct pursuant to section 12DA of the ASIC Act?
65While this was said to be an issue, Yuen in her final submissions stated that the allegations regarding misleading and deceptive conduct were not pressed.[12] Accordingly, I need not deal with this issue.
[12] The Defendant’s Final Submissions, [64].

Was the agreement procured by unconscionable conduct pursuant to section 21 of the ACL, section 12CB of the ASIC Act or the common law?
66In setting out my reasons, on this part of the case, I will address in passing the sub-issues raised by the parties in paragraph 36(e) above. I will deal first with unconscionability at general law.
67Because the unconscionability argument was a major aspect of Yuen’s Defence and Counterclaim, she bore the onus of establishing its constituent elements.

Summary of Yuen’s position
68Yuen alleged in her Further Amended Defence and Counterclaim[13] that the agreement with SOF should be set aside because it was procured through conduct which was unconscionable as set out in section 21 of the ACL, section 12CB of the ASIC Act and at common law. Yuen relied on several particulars to support the allegation: SOF advanced the funds on the basis of asset-based lending whereby the lender relied upon the defendant’s only asset, a property, for repayment; SOF knew or should have known Yuen did not receive sufficient independent legal or financial advice before entering into the agreement; SOF knew or should have known that the intended primary purpose of the loan was to mitigate Yuen’s personal financial distress; the circumstances in which Casey referred Yuen to SOF; Yuen had little or no financial literacy regarding the commercial arrangements involved in, or consequences of engaging in non-bank lending.
[13] [25(b)].
69Yuen raised a number of points in her submissions about unconscionability.
70She submitted that section 12CB(3)(a) of the ASIC Act removed from the court’s consideration any factor which was not reasonably foreseeable at the time of the alleged contravention in June 2019 when SOF entered the transaction with Friseur and Yuen.
71Yuen argued that the court should find that:
·Friseur’s business at The Pines closed well before June 2019;
·Friseur and Yuen had not operated the business since the franchisor locked her out on 5 December 2018;
·after the closure of the business in December 2018, Friseur had no other business income or assets; and

·the ANZ business banking statements from September 2018 to May 2019 reflected this state of affairs.

72As part of her case Yuen contended that Atkins’s interpretation of the ANZ business loan statements from September 2018 onwards was implausible and reflected an attempt to avoid the obvious inferences which flowed from the statements.
73Yuen argued that by June 2019, it was reasonably foreseeable to a lender which made prudent enquiries directly with a borrower and not the agent, that Friseur had not been running the business since early December 2018 and that the franchisor had shut down the whole business in March 2019. In the circumstances, it was reasonably foreseeable for any prudent lender that, if Friseur no longer had the capacity to service the loan when repayment was due in December 2019 and the refinance with Bendigo Bank did not occur, then the only way to recover the loan was to enforce the mortgage over the property.
74Yuen made submissions about why she was vulnerable at the time of making the loan and security agreements with SOF. This was said to be relevant to the relative strengths of the parties’ bargaining positions. Yuen said that her special disadvantage was that she could not properly safeguard her own best interests. As a result, she failed to ensure that her property was not at risk of being lost.
75Yuen’s argument required that she establish that Schifter did not redress any imbalance in the factors working against her. Presumably this is why Yuen said she did not receive detailed or adequate legal advice from Schifter.
76Further, Yuen said that she did not obtain any independent financial advice from an accountant or financial expert regarding the appropriateness of entering the arrangements with SOF and her capacity to refinance the loan at the repayment date.
77She said that SOF had stipulated that Friseur should obtain independent financial advice regarding the financial implications of accepting the offer in the indicative loan summary. However, SOF did not insist upon this requirement being fulfilled after Casey told Atkins that Yuen’s accountant was away. Yuen argued that SOF failed to insist upon the accountant’s certificate because it was content to rely upon the mortgage security over the property.
78Yuen complained also about the magnitude of the interest, fees and charges payable to SOF under the loan and security documents.

Summary of MCL’s position
79MCL took issue with a number of the propositions advanced by Yuen.
80MCL disputed that Yuen was in a position of special disadvantage or vulnerability regarding the financier.
81MCL said that it was entitled to deal with Yuen’s agent and not her directly. In so acting, MCL asked Casey for information, for example, the provision of bank statements. MCL accepted and worked with the statements which Casey produced. If Casey did not produce all the available statements or misrepresented the situation to Yuen, that was not something for which MCL could properly be held responsible. Courts should be aware that the use by financiers of solicitor’s and/or accountant’s certificates was introduced at least partly to avoid a situation where financiers dealt directly with borrowers. The rationale was that, if there were no direct dealings and borrowers obtained advice from independent third parties, then it was more difficult to impugn a loan transaction on the basis that the financier had acted inappropriately in some way towards a borrower. Moreover, the financier was creating a situation in which a borrower was required to get advice from a person independent of the lender. This was designed, at least partly, to improve the position of borrowers.
82Atkins said that an MCL employee, James Collins, told him that he had rung the phone number for the Hairhouse Warehouse business at The Pines, presumably in order to ascertain that it was correct and to confirm that the business was there. Atkins accepted what he was told and did not verify the information himself. Given that the Magnolia Capital Group has over 1 billion dollars in its loan book, has made and continues to make many loans, Atkins’s approach was understandable.
83As regards Schifter, MCL contended that it was entitled to rely upon his certificates and to assume that he performed his role as a solicitor in an appropriate professional manner.

Analysis
84The court needs to consider all the circumstances of the case to determine whether, and to what extent, SOF acted unconscionably in its dealings with Yuen.
85This case has arisen in a context where Yuen says that SOF has engaged in asset-based lending and that such lending is unconscionable in this particular case. In Jams 2 Pty Ltd v Stubbings[14], the Court of Appeal described asset-based lending as involving lending on the value of the assets securing the loan without any consideration of the borrower’s ability to repay the loan from their own income or other assets. The lender undertakes no credit risk analysis other than a calculation of the ratio of the loan amount to the value of the security. The lender makes the loan without regard to the ability of the borrower to repay by instalments under the contract in the knowledge that adequate security is available in the event of default.
[14] [2020] VSCA 200.
86In the present case, Yuen was in financial difficulty due to the loss of her business and the money owed by both Friseur and her to the ANZ and the ATO. Through her finance broker, Casey, she made an application to Magnolia Capital for a short-term loan. Friseur applied as the borrower and was supported by Yuen as guarantor. Yuen signed the indicative loan summary, both as a director of Friseur and as a guarantor. The loan was stated to be a “business working capital debt facility”. Part of the indicative loan summary document stated:
“By signing this Indicative Offer, each Borrower and Guarantor makes the following declarations:
1.   We hereby accept the terms and conditions as set out in this Indicative Offer;
2.   If there is an Introducer/Broker we acknowledge that they will act as our agent;
3.   We confirm that the loan proceeds are for business purposes.”
87The standard terms and conditions annexed contained Clause 6, which read as follows:
“6.   Independent Legal and Financial Advice
·      You must obtain independent legal advice on the formal loan documents drafted by our solicitor.
·      You must provide the full details of your solicitor so that our solicitor can email to your solicitors the formal loan documents.
·      You must obtain independent financial advice on the financial implications of this Offer and the Formal Loan Documents drafted by our solicitor. On the execution of the Formal Loan Documents you warrant to the Lender that you have the financial capacity to repay the loan.
·      Our solicitor reserves the right on our behalf to object to the use of any solicitor chosen by you if in our solicitors (sic) view, your solicitor is unsuitable for advising on the formal loan documents.
·      You must pay the legal costs associated with the independent legal and financial advice you obtain on the Formal Loan Documents.”
88On 25 June 2019, Summer Lawyers, the solicitors for Magnolia Capital, sent to Schifter the mortgage and other security documents which Friseur and Yuen had to sign. The covering letter noted that it was a requirement of the lender that each debtor obtain legal advice on the security documents from a current practising Australian legal practitioner before executing the documents. It stated that in circumstances where a debtor is a third party guarantor or a mortgagor and someone who gains no benefit from entering into the security documents, it was essential that the legal advice be independent and provided by a solicitor independently of any other debtor, and that such advice not be given in the presence of any other debtor.
89In due course, Schifter notified Summer Lawyers that the documents had been signed. This included the mortgage over the property and Schedules A, D, E, F, G and Schedule 2. These documents were important. Schedule A summarised the essential terms of the transaction including the parties, the principal amount, the interest rate and the date for repayment. Of particular importance were three special conditions concerning the repayment of the secured money. I shall consider these conditions in greater detail later.
90In Schedule D, in a statement witnessed by Schifter, Yuen acknowledged that:
·        she understood the terms of the mortgage and her liability, both financial and legal thereunder;
·        she had the opportunity of obtaining, and did obtain, legal advice from an independent Australian legal practitioner prior to executing the document as to the legal effect of the mortgage and her obligations under it; and
·        she understood that the provision of the mortgage would have a financial impact upon her if the mortgage were enforced by the lender.
91In Schedule E, Schifter certified that:
·        Yuen was the sole director and company secretary of Friseur and the person who executed the mortgage;
·        he had explained to Yuen the nature and effect of the mortgage to be executed by her and each of its terms, and the legal effect of the mortgage and its terms;
·        Yuen had told him that she read and understood the effect of the mortgage and its terms, and understood the financial risks to her of signing the mortgage; and
·        Yuen told him that she had signed the mortgage of her own free will.
92By signing Schedule F in front of Schifter, Yuen acknowledged that:
·        she understood the terms of the guarantee referred to in the mortgage and her liability, both financial and legal thereunder;
·        she had freely and voluntarily executed the guarantee without undue influence or pressure from any third party;
·        she had the opportunity of obtaining, and did obtain, legal advice from an independent Australian legal practitioner before executing the guarantee about the legal effect of the guarantee and her obligations thereunder; and
·        she had considered and understood that the provision of the guarantee would have a financial impact upon her if the guarantee were enforced by the lender.
93In Schedule G, Schifter certified that:
·        he was satisfied that Yuen, as the person named in the guarantee and the person who executed the guarantee, was the same person;
·        he had explained to Yuen the nature and effect of the guarantee to be executed by her and each of its terms and the legal effect of the guarantee and its terms;
·        Yuen had told him that she had read and understood the effect of the guarantee and its terms, and understood the financial risks to her of signing the guarantee; and
·        Yuen had told him that she signed the guarantee of her own free will.
94As Magnolia Capital is based in New South Wales and Summer Lawyers are similarly based in New South Wales, the documents which the solicitors forwarded to Schifter were in a form commonly used in New South Wales. Being a Victorian practitioner, Schifter deemed it prudent that there should also be a solicitor’s certificate in the form commonly used in Victoria where the person signing is a guarantor, surety or mortgagor of the principal borrower. This was the Schedule 2 document referred to.
95Having detailed the various documents with which he was provided in connection with this transaction, Schifter certified that he had explained to Yuen:
·        the general nature and effect of the documents required to be signed by her;
·        that if the borrower defaulted in payment or in other obligations, Yuen as guarantor would be liable to make good the default which could involve all amounts owed by the borrower, together with substantial arrears of interest; and
·        the giving of the guarantee involved considerable risk, including the risk of losing any security property and other assets, and required careful thought.
96Schifter certified that Yuen stated to him that she understood the general nature and effect of the documents and the obligations and risks involved in signing the documents. Schifter said it appeared to him that Yuen had the understanding she claimed.
97For her part, in the section headed “Client’s Certificate”, Yuen certified that:
·        she had been handed a copy of the certificate;
·        she had read the certificate;
·        she was the client named in the documentation; and
·        the above information set out was true.
98The existence and terms of the schedules are relevant because of the law regarding a financier’s ability to rely upon such documents as part of the general context in which the loan takes place. It is apparent from cases such as Stubbings v Jams 2 Pty Ltd[15], that asset-based lending of itself is not invariably unconscionable. More is required for a borrower to impugn the loan agreement or security – the whole of the circumstances of each case must be considered to arrive at a finding that the particular transaction was unconscionable.[16]
[15] [2022] HCA 6.
[16]Ibid [34] per Kiefel CJ, Keane and Gleeson JJ; cf [152] per Steward J.
99Relevant matters to take into account include whether the borrower or guarantor:
·        had independent legal or financial advice;
·        was a director or shareholder of the borrowing entity; and
·        derived any benefit from the funds borrowed.
100As discussed earlier, I have found that Schifter, the solicitor, gave Yuen extensive advice about the nature and effect of the transactions she was entering into and the documentation she was signing. This included the grant of the mortgage over her property and the potential effect on Yuen of being a guarantor. To a degree, the advice received from Schifter repeated advice Yuen had received earlier when she obtained the loan from the ANZ and granted the bank security over her property. In addition, Schifter had actually advised Yuen that it was not a good idea to borrow from a non-bank lender like Magnolia Capital because, in the event of breach, the consequences in terms of interest rate, costs and expenses operated brutally against a guarantor.
101Yuen was the sole director and shareholder of Friseur.
102Yuen derived a benefit, directly and indirectly, from the loan funds provided by SOF. The Cheque Directions document, which Yuen signed, authorised Summer Lawyers to deduct from the advance an establishment fee, six months interest in the sum of $16,931, and a valuation fee of $847. After deducting a loan documentation fee payable to Summer Lawyers, the amount advanced was $234,422.
103The PEXA Settlement Completion Document showed that the nett proceeds of the loan were disbursed as follows:
·        the ANZ loan payouts for its two loans were $85,047.67 and $43,090.62 respectively;
·        Casey received $79,750;
·        Yuen herself received $24,142.25.
104Here, the repayment of the ANZ loans was a benefit to Friseur as the borrower and Yuen as the guarantor, because both the loan and mortgage were discharged. Further, Yuen discharged her obligations to Casey by paying him money which she owed. The final element of the loan advance was the money received into Yuen’s personal bank account to use as she wished.
105An important element of Yuen’s defence is that Magnolia Capital failed to make sufficiently detailed enquiries about the financial position of Friseur and herself to be satisfied that the borrower and guarantor had the capacity to repay the loan and honour the obligations under the loan and security arrangements.
106In my view, SOF did not act unconscionably towards Friseur and Yuen in entering the loan and security agreement. Overall, I am satisfied that SOF acted in a reasonable manner towards Friseur and Yuen and did not seek to improperly exploit an obvious vulnerability or act in a way which was “offensive to a conscience informed by a sense of what is right and proper according to values which can be recognised by the court to prevail within contemporary Australian society”.[17] Further, there was no suggestion that SOF exercised undue influence over Friseur or Yuen, exhibited bad faith or acted in a predatory manner.
[17]       Jams 2 Pty Ltd v Stubbings [2020] VSCA 200, [90].
107Context is all important when questions of unconscionable conduct arise. There are a number of significant matters in the present case which militate against Yuen’s position.
108First, the loan from SOF was only ever intended to be short-term in nature. It was made in a situation where, based on what Casey said, SOF, Yuen and Schifter all expected that SOF would simply provide Friseur with temporary funding until Bendigo Bank refinanced the debt. The application form to Magnolia Capital which Yuen signed said that the loan repayment strategy was to refinance through Bendigo Bank.
109Atkins said that Casey told him the loan was to refinance the ANZ debt, get some business working capital and that it would be a three month loan because he had Bendigo Bank ready to go. Atkins told Casey that, in order to have a bit of breathing space, the loan would be for six months.[18]
[18]       T 72.
110Schifter understood from Casey that the SOF facility was just short-term because he had arranged a facility with Bendigo Bank which could not be put in place for a couple of months. Schifter said it was made clear to him that the Bendigo Bank loan would be put in place and drawn down within three months.[19]
[19]       T 146.
111The application form and the indicative loan summary were supported by the actual terms of Schedule A which included the following special conditions:
“1. The Debtors warrant to the Lender that they will repay the Secured Money due under this Mortgage by refinance of the Land and if a refinance is unsuccessful then a sale of the Land.
2. The Debtors undertake and agree to refinance the Secured Money by the Final Repayment Date with time being of the essence. If the Debtors have not refinanced or otherwise paid out the Secured Money by the Final Repayment Date (which the Debtors acknowledge is an Event of Default under this Mortgage) they undertake and agree to:
(a)     provide the Lender an agency agreement for the sale of the Land with a real estate agent approved by the Lender and on terms agreeable to the Lender by not later than the Final Repayment Date;
(b)     provide the Lender unconditional and unrestrictive authority to discuss the sale of the Land with the agent including the setting of any reserve price in the case of auction;
(c)     hold an auction sale of the Land by not later than the Final Repayment date + 5 weeks, being 29 January 2020.
(d)     provide the Lender and its solicitors Summer Lawyers, a copy of an approved executed unconditional contract for the sale of the Land including any special conditions by not later than the Final Repayment date + 5 weeks, being 29 January 2020.
(e)     release any deposit received on payment of the sale of the Land directly to the Lender or its solicitors immediately upon receipt of any such deposit.
(f)   complete the contract for the sale of the Land not more than 3 months after the Final Repayment Date, being 25 March 2020, failing which the Debtors agree to provide the Lender vacant possession of the Land.
3. The Debtors agree to provide the Lender a declaration made by a registered chartered practising accountant, confirming their ability to refinance the Secured Money in accordance with Special Condition 1 above.”
112The special conditions were entirely consistent with the expectation of a temporary loan pending the refinance with Bendigo Bank. Yuen accepted the terms of the agreement with SOF (including the special conditions) because she expected that Bendigo Bank would provide the refinancing which she and Friseur required. The fact that Bendigo Bank did not ultimately refinance her debt had nothing to do with any conduct by SOF.

113Secondly, as noted previously, before entering into the agreement with SOF, Yuen as the director of Friseur and as a guarantor, received independent advice from Schifter. This drew her attention to the nature and effect of the transaction and the potential consequences which might flow if SOF called upon the guarantee and the security. Yuen was aware of the risk to the property.
114Thirdly, SOF and Atkins acted reasonably in connection with the transaction. Atkins himself had a role in assessing the application for loan. He said that, based on the searches conducted, enquiries made and documents examined, Friseur raised no red flags. The Facebook, Instagram and LinkedIn accounts of the business were all active. The creditors watch report which SOF obtained showed that Friseur had a credit score of 687. This was fairly low risk where the applicable scale ranged from 0 to 850 - the former number represented high risk and the latter number low risk. The report also showed that the principal place of business for Friseur was the shop at The Pines and there were only trade enquiries about the company. There were no statutory demands or legal proceedings noted and the ANZ correspondence came from a personal banker at the Doncaster Westfield branch of the ANZ and not from the bank’s recoveries or workouts sections (CB 348-354). This suggested that there were no major compliance issues with the ANZ loan.
115The loan to valuation ratio in relation to the loan was about 55%. This was not a high ratio. Atkins believed it was quite achievable for Yuen to refinance the loan. Atkins’s view was correct about this. In around February 2020, Prime Capital offered to lend Friseur $350,000 for 12 months at an annual interest rate of 6.95% where no event of default occurred. This was markedly less than the 11.95% interest rate charged by SOF.
116In relation to the bank statements, I accept that SOF sought statements, and when it received only a limited number rather than the full complement applicable to all the accounts which Friseur had, it did not pursue Friseur for further statements. To that extent, SOF could have been more insistent or demanding. However, it was not obliged to so act. When a financier receives an apparently regular loan application, it is a matter of discretion as to what enquiries the financier makes to verify the contents of the application. In the present case, the interest was prepaid for the six month term of the loan, so serviceability was not the critical issue it might be in other cases. Atkins pointed out that the bank statements which Casey supplied concerned the overdraft account. He said that the absence of day to day transactions on that account meant nothing in isolation because companies did not invariably use overdraft accounts for funding operations in the usual and ordinary course of business. He said that the overdraft account was often reserved for special payments or particular circumstances.
117After Friseur ceased running its business from The Pines, Yuen did not inform the ANZ or ASIC. This meant that, even if Friseur had supplied more bank statements to SOF they would still have shown The Pines as the business address of Friseur. Similarly, Yuen’s contravention of section 146 of the Corporations Act 2001 (Cth) meant that the ASIC records continued to show that The Pines was the principal place of business for Friseur.
118Yuen sought to make much of SOF’s failure to insist upon Yuen getting independent financial advice on the financial implications of the SOF offer and the failure to produce a declaration by a chartered practising accountant confirming Friseur’s ability to refinance the secured money borrowed from SOF. Yuen contended that the lender’s failure to insist upon compliance with Special Condition 3 of the offer constituted a proper basis to impugn SOF’s conduct. Yuen said that had the condition been insisted upon, then the settlement would probably not have proceeded.[20]
[20]       Defendant’s Outline of Submissions, [55].
119The facts concerning Special Condition 3 require some examination.[21]
[21]       See paragraph 111 above.
120On 26 June 2019, after Yuen signed the various loan and security documents at her solicitor’s office, Schifter emailed the executed documents to Summer Lawyers between about 4.07pm and 4.42pm. At 6.18pm that day Affie Mansouri (“Mansouri”) of Summer Lawyers emailed Schifter to advise that some matters were outstanding as follows:
“The Debtors to provide the Lender a declaration made by a registered chartered practicing (sic) accountant, confirming their ability to refinance the Secured Money in accordance with Special Condition 1 in schedule A”
In an email he sent to Casey and Yuen at 6.38pm that day, Schifter said that, having regard to the terms of Special Condition 1 and 2, Special Condition 3 (which was the subject of comment in Mansouri’s email) was pointless. Although he gave no detailed oral evidence on the point, I assume that Schifter adopted this view because the two preceding special conditions provided for refinancing of the loan, or alternatively, the sale of Yuen’s property.
121Schifter said that he spoke to Casey about Mansouri’s email. Schifter took notes of the conversation. According to Schifter, Casey told him that he had negotiated with Magnolia Capital to give the accountant’s letter in seven days as the accountant was away at his daughter’s wedding.
122Atkins said in his evidence that Casey spoke to him about the condition precedent. He said that Casey told him that everything was in order but the accountant was away. Casey said that the document would be provided as soon as the accountant was back. Atkins said that although the declaration was something Magnolia Capital wanted, he agreed to accept the declaration upon the accountant’s return to work.
123At about 8.02pm on 26 June 2019, Schifter sent another email to Summer Lawyers in which he said that he had been advised that Atkins had agreed that SOF would accept an undertaking to procure the accountant’s declaration within seven days.
124Friseur and Yuen did not provide the accountant’s declaration within seven days or at all. In his evidence, Atkins said that the failure to produce the declaration constituted a non-monetary breach of the parties’ agreement. However, instead of immediately calling in the loan, Akins allowed the loan to run its course.
125Yuen sought to use the failure by Friseur and herself to honour the commitment regarding the declaration to attack SOF. As Lyons J said in a different but related context in Secure Funding Pty Ltd v Moon:[22]
“It would be remarkable if a lender owed a duty to a borrower to investigate an untrue statement about the borrower’s income, for which statement the borrower was dishonestly responsible.”[23]
In my view, the same principle applies to this case albeit the context is different. In theory, assuming Casey told Yuen about it, she decided whether or not to provide the bank documents relating to the account. It is not appropriate that Magnolia Capital be penalised for granting an indulgence at the borrower’s request and then not insisting upon production of the declaration. Moreover, Yuen said that around this time, she was extremely worried and upset and just wanted to resolve the situation. Whether it was to meet Yuen’s wishes or for some other reason, SOF advanced the loan funds on 28 June 2019. Thus, given the monies were paid over two days after receipt of the signed documents and before the seven days passed for the satisfaction of the undertaking, there was no utility in insisting upon the declaration.
[22] [2012] QSC 244.
[23] Ibid, [44].
126Again, while SOF might have insisted upon the production of the declaration and withheld funds until it was produced, it did not do so. As Woodward J said in Hoysin Pty Ltd v Corelli,[24] where a financier’s due diligence on a prospective borrower was insufficient and possibly a little naive, that would not generally amount to conduct which was so far outside societal norms of acceptable commercial behaviour as to warrant condemnation as unconscionable.[25]
[24] [2021] VCC 1197.
[25] Ibid, [107].
127Again in Hoysin Pty Ltd v Corelli,[26] Woodward J addressed a submission by a defendant that the onus was always on the financier to make proper enquiries relevant to the assessment of the loan. His Honour said that the statutory standard of unconscionability did not extend that far. While His Honour agreed that a lender’s conduct was to be tested against the Baden[27] categories of knowledge, that was different from imposing a positive obligation to make proper enquires or to actively detect fraud. His Honour agreed with the lender’s counsel that, whether the borrower could repay the loan when due from its own assets or income was not relevant when the two short-term loans were granted on the basis that they would be refinanced. [28]
[26] Ibid.
[27]   Baden v Société Générale pour Favouriser le Développment du Commerce et de l’Industrie en France SA [1993] 1 WLR 509.
[28]       Hoysin Pty Ltd v Corelli [2021] VCC 1197, [101(a)].
128I find that the financier did not act unconscionably towards Yuen in relation to the loan. In summary:
·I do not accept that Yuen was in a position of special disadvantage or vulnerability at the time she entered the loan arrangement. She had enough education and business experience to be aware of her own best interests. Her financial position at the time was difficult but her financial future was not necessarily bleak. Previously she had shown initiative and ability to work as a successful hairdresser. Yuen gave no evidence about why she could not do so again.[29]
·There was no proper plea that SOF or MCL knew or should have known of Yuen’s special disadvantage or vulnerability and impermissibly exploited it.
·Unlike in Stubbings’s case, there was no suggestion that the advisor Schifter was not independent. I consider that he plainly was and that he discharged his duties carefully and thoroughly.
·There was no proper basis to find that Atkins or his staff knew or should have known that the stated purpose of the loan was false or that they deliberately failed to make enquiries. The solicitors conducted searches and sought documents.
·Yuen was far more commercially able and astute then Stubbings.
·Yuen, unlike Stubbings, received an explicit warning not to contract with SOF and also received a detailed explanation about the documents she was signing and the possible consequences of default. Yuen appreciated the risks and potential ramifications for her and the property.
·Yuen did not plead or put that MCL knew there were issues regarding the solicitor’s certificate.
[29]I accept that the unanticipated virus from China would have affected Yuen and millions of others around the world in 2020 – 2021 but this was unknown at the time the loan was made.

Examination of all the circumstances of the case including the conduct of the parties
129There are several other aspects of the parties’ behaviour which I consider relevant.
130There was no evidence that SOF or Atkins knew of Yuen’s personal financial situation in June 2019 or that the main purpose of the loan was to alleviate her distress. While approximately $128,000 was paid to the ANZ in order to discharge the debt and security granted to the bank, more than half the funds were applied for other purposes.
131It is not unusual for a person such as Yuen to guarantee the financial obligations of a company which they control as sole director and shareholder.
132The interest rate, especially the default rate of nearly 24%, is not of itself unconscionable within section 12CB of the ASIC Act.[30]
[30] Paciocco v Australia and New Zealand Banking Group Limited [2015] FCAFC 50, [335].
133The lender did undertake a due diligence exercise and insisted that Friseur and Yuen obtain independent advice about the transaction.
134Casey appears to have deceived both the financier and the borrower/guarantor. He misled Yuen about the availability of the Bendigo Bank refinance proposal and persuaded her to borrow more than the amount owed to the ANZ. Casey misled SOF about the purpose of the loan and the prospect of a refinancing by Bendigo Bank.
135The parties expressly contemplated the repayment of the loan and included specific terms in their agreement about the issues.

Was there a duty upon SOF to investigate or verify information provided by the borrower?
136The authorities support the view that a financier such as SOF has no such duty.[31] Here, SOF made various enquiries on social media sites and government sites for information about Yuen and Friseur. The enquires revealed that Friseur’s social media accounts were still operative and that there were no statutory demands or obvious default issues either with the ANZ loan or other debtors. The information obtained through the enquiries generated no red flags. Given the application form said that the loan application was by a company and was for business purposes, the financier was entitled to accept the information as true. Further, the application included a certificate by an independent solicitor acting for the applicant and declarations by the applicant which also gave comfort to SOF.
[31]Secure Funding Pty Ltd v Moon & Anor [2012] QSC 244, [44] and Micarone v Perpetual Trustees Australia Limited (1999) 75 SASR 1, [624] – [625].
137To the extent that any information supplied by a prospective borrower was inconsistent or implausible or evidenced a likely inability to either repay or refinance the loan, a financier’s conduct in ignoring the same might be relevant as part of the synthesised assessment which is required.[32] However, in the present case, I do not consider that SOF acted with wilful blindness to avoid finding out information about Yuen.

[32] Violet Home Loans Pty Ltd v Schmidt [2013] VSCA 56, [59].

Did SOF have actual knowledge or constructive knowledge pursuant to the “Baden Scale”?
138In Baden v Société Générale pour Favouriser le Développment du Commerce et de l’Industrie en France SA,[33] Peter Gibson J formulated categories of knowledge which a person might have:[34]
·actual knowledge;
·wilfully shutting one’s eyes to the obvious;
·wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make;
·knowledge of circumstances which would indicate the facts to an honest and reasonable person; and
·knowledge of circumstances which would put an honest and reasonable person on enquiry.
[33] [1993] 1 WLR 509.
[34] Jams 2 Pty Ltd v Stubbings [2020] VSCA 200, [128 - 129].

139In Farah Constructions Pty Ltd v Say-Dee Pty Ltd,[35] the High Court accepted that the third Baden category of knowledge was a species of “actual knowledge, as understood both at common law and in equity”.[36] The fourth and fifth Baden categories of knowledge represent constructive knowledge.[37]
[35] (2007) 230 CLR 89.
[36] Ibid, [174].
[37] Ibid.
140In this case, I am not satisfied that Atkins or his staff at SOF knew of matters which should have put them on enquiry or that they recklessly and wilfully failed to make enquiries which an honest and reasonable person would have made.
141I accept Atkins’s evidence about the enquires made and his state of knowledge. He had no actual knowledge and did not wilfully or recklessly shut his eyes to the obvious or fail to make enquiries that an honest and reasonable person would make. The information revealed to SOF through its enquiries did not raise red flags.
142I note that there is some doubt about the phone call a SOF employee claimed to have made to the premises of Hairhouse Warehouse at The Pines in June 2019. Because the employee was not called to give evidence, it was not clear whether he did not make the call or whether he did make it and misunderstood what he was told. Given that Atkins is plainly keen to avoid troublesome loans which give rise to litigation by borrowers, with the attendant wasted time and cost and the diversion of Magnolia Capital’s resources into unproductive activities, I doubt the employee would “invent” the phone call. This would entail risking Atkins’s ire in the future if the borrower sued. Atkins did not strike me as a person who would receive news of actual or impending litigation with quiet resignation. I expect he would demand explanations and accountability. In this instance, I consider human error a more likely explanation than deliberate deceit or wilful indifference to the borrower’s position.

Was SOF’s conduct “so far outside societal norms of acceptable commercial behaviour as to warrant condemnation as conduct that is offensive to conscience”?
143Yuen plainly understood spoken English and was fluent in the language. She could read and write English and completed year 11 of secondary school. She had experience in business, having run her own business for 11-12 years. She understood the nature and effect of the borrowing transaction – partly, it repeated the substance of an earlier secure loan obtained for Friseur from the ANZ; partly she received detailed advice from her solicitor Schifter. Crucially, Schifter gave unchallenged evidence that he told Yuen both that she should not take up the loan with SOF and that there could be potentially brutal consequences for her if Friseur defaulted.
144The main disadvantage Yuen had was her financial position at the time. However, because SOF dealt with Casey as Yuen’s financial broker and agent and not Yuen directly, SOF was not aware of Yuen’s financial plight at the time.
145However, there is a difference between the position Yuen in fact faced in June 2019 and the situation which Casey and, to a degree, Yuen promoted at the time. By this, I refer to the evidence of Schifter. He said that when Casey initially contacted him to act for Yuen, Casey told Schifter that Yuen generated an income of about $2,000 per week from hairdressing. Schifter said that when he met Casey and Yuen at his office on 26 June 2019, and they were giving him the background to the transaction with Magnolia Capital, the comment about her income was repeated. Significantly, Schifter had no recollection of Yuen contradicting or challenging Casey about the comment at the time. Nor did Yuen give evidence at the trial contradicting Schifter’s evidence on this point. Schifter said that Yuen was comfortable with the Bendigo Bank loan which was expected. Schifter also said that he thought if Yuen were making $2,000 per week, she should be able to afford the bank interest. This made him wonder about what difficulty Yuen was having with the ANZ loan. Schifter did not know the background to that issue. He said that he assumed the problem related more to the franchisor taking back the hairdressing franchise business.
146Although simple factual comparisons between competing scenarios is said to be a flawed method for decisively determining unconscionability, it is worth noting some aspects of the High Court Decision in Stubbings v Jams 2 Pty Ltd.[38] The following matters were referred to in the High Court judgment:
·there was no commercial need to impose a company in the loan transaction;
·Jeruzalski suspected that the so called independent lawyer and accountant did not give independent advice to Stubbings;
·Jeruzalski exploited Stubbings’s lack of business acumen;
·Jeruzalski assumed the borrowing company and Stubbings had no income sufficient to pay interest for 6-12 months;

·Jeruzalski did not run credit checks on the borrower – it was enough for the borrower to be a corporation;
·Jeruzalski did not ask about the assets of the borrower or guarantor beyond the asset offered as security;
·Jeruzalski’s practice was not to ask about the actual purpose of the loan.
[38] [2022] HCA 6.

147In the present case:
·Friseur already existed and had borrowed money from the ANZ. It was not created at the insistence of SOF as an artificial shielding mechanism to avoid the operation of the Code;
·Schifter did provide Yuen with independent advice. Among other things, Schifter said that Yuen should not go through with the loan from SOF;
·SOF did not obviously exploit a lack of business acumen by Yuen – she had extensive history running her own business;
·SOF was not concerned with the income generated by Friseur or Yuen because the interest accruing on the short-term loan was prepaid;
·SOF did run credit checks on Friseur and Yuen;
·the loan application forms required by SOF did ask about assets beyond the security given for the loan; and
·the SOF loan application documents required the identification of the purpose of the loan.

148In the circumstances, SOF’s conduct was not so far outside the societal norms of acceptable commercial behaviour as to be condemned as unconscionable.
149I have referred earlier to the judgment of Gordon J regarding the defective system of conduct in Stubbings’s case. The differences between that case and the system in the present case are such that Magnolia Capital cannot be said to have contravened section 12CB of the ASIC Act. The various deficiencies which Her Honour identified either do not exist at all for Magnolia Capital or do so only to a significantly lesser degree. As a result, I find that Magnolia Capital has not acted unconscionably as that term is understood in section 12CB of the ASIC Act.

If the mortgage and guarantee are set aside, is Yuen required to make restitution to MCL as a condition of the relief sought by repaying the principal advanced under the loan agreement secured by the mortgage?
150Had I found that Yuen made good her defence and counterclaim and ordered the setting aside of the mortgage and guarantee, I accept that Yuen would be obliged to repay the principal sum advanced by SOF of $275,000. Unless Yuen did this, she would receive a substantial windfall. Not only would she be free of the mortgage and guarantee obligations binding Friseur and herself, she would also retain the monies for which the mortgage and guarantee were security. Cases such as Certane CT Pty Ltd v Whight[39] and Nibar Investments Pty Ltd v Manikad Pty Ltd[40] make clear that, while equitable defences can operate to discharge security given by or on behalf of vulnerable borrowers and guarantors whose circumstances were improperly exploited, such relief can be given on the condition that the borrower who enjoyed the full benefit of the advance repaid the advance or made restitution.
[39] [2021] QSC 77.
[40] [2014] NSWSC 920.
151I note in passing that, as a further alternative, if I were wrong about the conditional nature of the relief discussed in paragraph 150 above, the doctrine of subrogation would apply in the present case. Because SOF paid approximately $128,000 to ANZ to discharge the ANZ mortgage, even on a worst case for the plaintiff, it would nonetheless be entitled to be subrogated to the rights of the ANZ in relation to that indebtedness.[41]
[41] See the discussion in Commonwealth Bank of Australia v Iloska & Anor [2018] VCC 144, [56]-[73].

Conclusion
152For the reasons set out I find that the defendant’s Defence and Counterclaim is not made out and that the plaintiff is entitled to judgment.
153I direct the parties to confer about the form of final order and costs in an effort to agree upon orders giving effect to this judgment. If they cannot agree, then by 4.00pm on 9 May 2022, each party is to file with my chambers and serve a written submission setting out the orders sought and the reasons therefor. The submissions are not to exceed five A4 pages, a minimum 12 point typeface, and 40mm margins on either side of the page. By 4.00pm on 12 May 2022, each party may file a reply submission limited to no more than three A4 pages. In addition, the parties can file submissions by 4.00pm on 9 May 2022 regarding the conduct of the third party proceeding.

[2022] VCC 545

28 April 2022