Stubbings v Jams 2 Pty Ltd & Ors [2021] HCATrans 23 (12 February 2021)

Last Updated: 16 February 2021

[2021] HCATrans 023

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Melbourne No M81 of 2020

B e t w e e n -

JEFFREY WILLIAM STUBBINGS

Applicant

and

JAMS 2 PTY LTD (ACN 600 173 117)

First Respondent

CONTERRA PTY LTD (ACN 078 900 017)

Second Respondent

JANACO PTY LTD (ACN 006 209 105)

Third Respondent

Application for special leave to appeal

BELL J
STEWARD J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON FRIDAY, 12 FEBRUARY 2021, AT 9.39 AM

Copyright in the High Court of Australia
BELL J: Adopting the COVID convention, I will announce the appearances.

For the applicant, MR N.C. HUTLEY, SC appears with MR A.M. DINELLI and MR A. CHRISTOPHERSEN. (instructed by Garland Hawthorn Brahe Lawyers)

For the respondents, MR D.J. WILLIAMS, QC. (instructed by Christopher William Legal)

BELL J: Yes, Mr Hutley.

MR HUTLEY: Thank you, your Honour. Can I turn to the salient facts? The lenders’ evidence – the respondents’ evidence – was that they knew, or believed, that Mr Stubbings had no income or means of serving the loan. You will see that in paragraph 131(1) at application book 196, and that was based on the evidence given by Mr Jeruzalski which is at application book 28, lines 31 and following.

Indeed, Mr Jeruzalski gave evidence that if Mr Stubbings had any income, he would not have needed to borrow from them – that is application book 29, line 55. Mr Stubbings was unemployed, uneducated and earned money by mowing lawns and changing tap washers. He had no capacity to service or repay interest payments which, were there no default, were some $10,377 per month on loans at 10 per cent on the first mortgage and 18 per cent on the second mortgage on a capital sum of $1.19 million. I will not take your Honours to the references. Your Honours will take them.

The lenders’ agents had received valuations of the three properties at $1.59 million and was lending a principal of $1,192,000. The lenders knew that Mr Stubbings had only paid a token $100 deposit on the contract for sale – that is at paragraph 131(2) at application book 196. Without some external source of funds, repaying the principal and any interest would require the sale of all three properties. There was no external source of funds. Lenders knew that without an income, there was no way he would be able to refinance the loans with a bank, and that is, again, in that passage at application book 29, lines 59, and following.

So, despite knowing the borrower had no income to service the loan and that the consequence of default was that he would lose his home, they were content to lend in the knowledge that the money was secured on all Mr Stubbings’ properties – and thus his home – at application book 83, at about lines 30 and 49.

He was bound to lose all his assets, including his home, from the moment the loans were made. We submit that, as found, default was imminent from the moment of settlement of these loans, and that was obvious, because after all the known disbursements from the loan, there was merely $6,000 left to him – it included, of course, the first month’s loan. He scrabbled together the second month’s, and then failed.

STEWARD J: Is this really a visitation case?

MR HUTLEY: I am coming to that. It is certainly a visitation case, your Honour. But, secondly, there is a question of principle here, as in a sense with respect to all cases associated almost with unconscionability, because of particularly the importance of a system approach, and what is required for there to be, as it were, an unconscionable system. It is an issue which has been spoken about by the Court obviously in Kobelt, but because of the peculiar facts in Kobelt, did not really come to grips with the full implications of ‑ ‑ ‑

STEWARD J: So, your point of principle is to what extent can someone devise a system to immunise yourself from unconscionability claims?

MR HUTLEY: Yes, and is the act of doing so self‑fulfilling?

STEWARD J: Yes, I see.

MR HUTLEY: Because the act of doing so ‑ and I will come to it in this case ‑ has implications which betoken unconscionability.

BELL J: Mr Hutley, the Court of Appeal at application book 197, paragraph 132, having set out a number of matters bearing on Mr Jeruzalski’s knowledge, observed:

they may have been sufficient to justify the –

finding of unconscionability.

MR HUTLEY: Quite.

BELL J: The decisive matter in the Court of Appeal’s view turned on the ‑ ‑ ‑

MR HUTLEY: Certificates.

BELL J: ‑ ‑ ‑ independent legal and accounting advice.

MR HUTLEY: And can we say, the important point with which we agree is the central point was the accountant certificate, and that is what the court said at 133.

BELL J: Yes.

MR HUTLEY: They said:

We conclude that the certificates, especially the accountant’s certificate –

And the interesting thing about the accountant certificates, which I will take you to in a moment – and your Honours will see them at application book 145, I think, with a bit of luck. Can I take your Honours to that certificate?

Now, to appreciate the significance of this certificate ‑ and this was a certificate which was central to the system, and the system involved – and this appears from application book 20, paragraph 55 and 67 ‑ the sending of a pro forma certificate to an accountant, but only an accountant for the borrower, not an accountant to the sureties. And, in fact, the certificate was designed to ensure the accountant to the borrower did not advert to the position of the securities and that is apparent in the former certificate.

STEWARD J: Did you put it on the basis, in simple terms, if I may say that, that given what the solicitor knew about the economic circumstances here, that the certificate just beggared belief and should have a put a responsible solicitor on notice?

MR HUTLEY: Certainly that, with respect, your Honour. But secondly, the certificate was designed to allow to say that one was blind to the position of the sureties.

STEWARD J: Do you say that the test for unconscionability should be different for a solicitor in any way? Is there a higher standard?

MR HUTLEY: If the state of the law is – and I say that if because I accept the difficulty of the state of authorities is, as it were, that the conscience, societal conscience, if I can use that term, is offended ‑ societal conscience is not only culturally directed, such as in Kobelt, but it is in status and professionally directed. That is, the society will be more offended by conduct of a solicitor in certain categories than that of a person who has taken up the field of trade with no professional training and no role in the institutions of this country such as to be an officer of the court.

So, we do say that the position of a solicitor society would demand of a solicitor, as it were, an appreciation in designing a system that the system was not pregnant with and calculated to, as we say this system is, to be abused ‑ not only abused by it but abused by those who introduce loans to them.

If you have a system which says you have got to have a company; the company be a single purpose company essentially to buy a property; it will have nothing, as this company did; the company will deposit nothing for the loan – the real sting is in the sureties; that is what it is all about. And if one goes to this certificate, which was part of the system, at application book 144, paragraph 31, “I have been” ‑ every word of this is drafted by Mr Jeruzalski:

I have been instructed by THE VICTORIAN BOAT CLINIC PTY LTD . . . to explain the financial risks being assumed: –

by it, implicitly:

(a) by executing the security documents in respect of the financial accommodation to be provided by the Lender . . . in Item 1 ‑

And if your Honours could see item 1 on the next page, at about line 30, that is the debenture charge, effectively, over a $1 company:

(a) by executing the security documents –

et cetera:

(b) by the application of the said financial accommodation –

Et cetera, in 1, 2, 3. And 4:

I have been engaged by the Borrower in advising and have given this Certificate entirely independently of any other Borrower or Guarantor.

Now, that is, in effect, asking the accountant to ignore the position of the surety. And from the point of view of – if one looks at it as a commercial point of view, if you are getting a property as a company, on $100 down, and you are taking no risk on your.....capital beyond $100, and the whole risk is being taken as a surety, this is an invitation, as it were, to not talk about the war – to use an old joke – in the accountant.

And that is why his Honour was quite correct to suspect that Mr Jeruzalski knew that it was unlikely that they were getting independent advice, which their Honours in the Full Court said was what they described as a “bridge too far”. And your Honours will see that at paragraphs 133 and 134 in the reasons of the Court of Appeal at application book 198. That is where he says:

To characterise them as independent is perhaps a bridge too far.

His Honour had the advantage of looking at the whole system and seeing how it worked.

STEWARD J: But you rely upon findings by Justice Robson, for example, at paragraph 313, about the solicitor giving evidence with an “apparent smugness”?

MR HUTLEY: Yes.

STEWARD J: Yes. Is that dealt with by the Court of Appeal?

MR HUTLEY: No. The Court of Appeal ‑ and this is one of the ‑ ‑ ‑

STEWARD J: Do they just all deal with the finding at 271 that Mr Zourkas was not an honest man?

MR HUTLEY: No. Yes, I ‑ ‑ ‑

STEWARD J: And that the solicitor and Mr Zourkas had had dealings with each other on 30 to 40 occasions?

MR HUTLEY: Yes.

STEWARD J: Is that dealt with?

MR HUTLEY: Obviously, the court was aware of it, but not materially.

STEWARD J: All right.

MR HUTLEY: The trial judge saw – this is a classic case where the trial judge saw the entire ‑ he saw the witnesses. He had the acute ability to assess, as it were, the approach of this officer of the court, Mr Jeruzalski, to his scheme and the judge formed the view that it was all too smart by half. It was smug, and designed to enable him to say, “I knew nothing”.

But it inevitably meant he knew everything, everything which needed one to know to have a system which was pregnant with the risk of a taking advantage of what might be called people coming at the desperate end of the credit market ‑ the people who are so vulnerable, they are able to be brought in by this Mr Zourkas and, in effect, entered into loans which, on their face, are catastrophes.

In a sense, that is why we say it is more than a visitation case, your Honour. With respect to the Court of Appeal, they have laid down a charter, virtually to allow people to set up schemes which will put people in the hands of the types that my client was put in who, as your Honours will have seen, represented themselves on the suit. So, you can imagine what they do knowing that they are in this field and leave the lenders able to, in effect, wash their hands of it and say, I sent you off with a certificate. This Court has said, a certificate is not, as it were, a plenary indulgence. In essence, these certificates – and the accountant certificate, as we submit – were ones which were calculated to show that you did not want really proper advice to the individuals. We have referred to Elkofairi, in the Court of Appeal.

BELL J: Yes.

MR HUTLEY: And we, with respect, say that the Court of Appeal in Victoria distinguishes Elkofairi on a basis which really is not justified. The distinction your Honours will see is at paragraphs 121 to 123. But it is important to look at – that is at page 191 – Justice Beazley’s statement, which is set out from paragraph 120 on 190, and particularly the words at the top of 191. The distinction drawn by the Court of Appeal seems to be that the case was different, materially different. Here, in our respectful submission, stripped of incidental matters, it was not. It was very close to being identical.

It is important that Justice Beazley observed that there the alleged wrongdoer was not aware of all the aspects of disability. For example, there was no evidence, and there is no finding, that the wrongdoer was aware of Mrs Elkofairi’s inability to speak English, and the like, because she was removed from them in personal interaction. So, the vulnerability was, they were aware that she was putting at risk her home in circumstances where there was no apparent ability to support it. And to do that, knowing of that situation, was a taking of advantage. We say, that is essentially right.

There may be circumstances where one could overcome that. I do not for a moment – you could find out – a person says I am expecting a gift from my uncle, my uncle has told me he is going to give me money to clear me out, a thousand circumstances and commercial circumstances of that variety, but there was none of that. So, we say, to look at the status of these sorts of structures is, itself, a question of importance in the context of the unconscionability and is a perfect vehicle to do so.

BELL J: Yes.

MR HUTLEY: If the Court pleases.

BELL J: Thank you, Mr Hutley. Mr Williams.

MR WILLIAMS: May it please the Court. The Court of Appeal distinguished Elkofairi on a proper basis. The facts were different, and all of these cases must necessarily be determined having regard to all of the facts, indeed that is, and quite properly, the applicant’s main point, that it raises ‑ ‑ ‑

BELL J: Mr Williams, I am sorry to interrupt, but accepting that to be so, namely, that one can distinguish Elkofairi from the present case in some respects, but critical to drawing that distinction is the Court of Appeal’s approach to overturning the findings of the primary judge in relation to the inferences to be drawn from all the facts in light of the certificates of independent advice. Now, it is ground 3 of the application.

MR WILLIAMS: I will approach that in two ways, if I may.

BELL J: Yes.

MR WILLIAMS: One is to rebut the proposition in its terms that the Court of Appeal erred in the way that it approached that matter, but also to observe, if I may ‑ and perhaps I will put the second point first and deal with it and then come back to it in terms of your Honour’s questions ‑ ‑ ‑

BELL J: Yes, by all means.

MR WILLIAMS: ‑ ‑ ‑ but the second point to be made is that in Elkofairi there was an important distinction which does not turn on any finding by the judge in this case – the primary judge – and that distinction is that in Elkofairi there was no legal advice, and no accounting advice. There were no certificates of the kind that are in play here. So, that is an important distinction. So that even if the finding about knowledge was not disturbed by the Court of Appeal, the Court of Appeal’s decision, resting as it does on the significance of those two distinguishing features, is not disturbed.

Now, if I can come back to directly answer your Honour’s question as to the approach that the Court of Appeal took to that finding. The approach that the Court of Appeal took was based on – at least in part – looking at precisely what Mr Jeruzalski said in his evidence and observing that Mr Jeruzalski was not in fact saying that he actually knew, in the ordinary sense, what Mr Stubbings’ circumstances were.

Boiled down and read in the context of the whole passage, what Mr Jeruzalski was saying was that he assumed that Mr Stubbings could not satisfy a bank’s requirements – an ordinary lending bank’s requirements – about income. That can come about for a number of reasons: that there is not income; that there is income but it is not well documented, or the taxation records have not been filed – which is, in fact, the case with Mr Stubbings. We know that although Mr Stubbings had been employed earlier – not long earlier – he was years behind in the filing of his taxation returns. So, Mr Stubbings was not a complier with the tax obligations. There are many people like that who have businesses that are actually earning an income but where that income is not documented in such a way that one can set aside a mainstream bank that one has income.

The evidence of Mr Jeruzalski goes no further than to identify the sorts of people who typically come to non‑bank lenders to borrow at higher rates than banks offer. Why would they? Because they cannot satisfy the bank’s requirements. It does not follow from that that what Mr Jeruzalski was really saying was that he actually knew – in the sense of real knowledge of Mr Stubbings’ particular circumstances – that Mr Stubbings had no income. What he is really saying in context is, he does not know Mr Stubbings’ circumstances. That, of itself, is not enough to impute to him knowledge of those circumstances by reason of any of the Baden categories.

STEWARD J: What do you say about Mr Hutley’s point that the certificate did not address the position of a surety?

MR WILLIAMS: That, if I might say so, was an entirely new point not put to the trial judge nor the Court of Appeal and not advanced in written submissions, so I am dealing with it rather on the run. I have not analysed the certificate to that point.

STEWARD J: Do your best, Mr Williams. Do your best.

MR WILLIAMS: Of course, your Honour. The certificate is addressed to the lender. It is from the accountant saying that he has advised the borrower. The borrower, as you have heard, is a company with one director and one shareholder – it is Mr Stubbings. So, there can be no question that the borrower is the recipient of the advice even if it has not been given to him – sorry, that the surety – it is the recipient given advice even if it has not being given to him in his capacity as surety.

I do not know whether there was an accountant’s certificate in relation to him in that capacity or not. It is not a matter I have explored. But there is a legal route. He does get legal advice from Mr Kiatos. In order to understand his obligations as a surety, it is the legal advice, not the accountant’s advice that is critical, or at least like all of us in the legal profession might think that. So, he gets advice from Kiatos, who is a solicitor, and in respect of whom he subsequently reached a settlement out of court.

STEWARD J: Can I ask you this? In the context of, I think, a finding that the solicitor and Mr Zourkas had dealt with each other on 30 or 40 prior occasions, do you say the Court of Appeal dealt with Justice Robson’s finding that Mr Zourkas was a dishonest man?

MR WILLIAMS: It did not, but the trial judge did not find that Mr Jeruzalski knew Mr Zourkas to be a dishonest man, and Mr Jeruzalski did not know that then ‑ his clients believed that the ultimate parties to the mortgage are not imputed with that knowledge.

The judge had the advantage of hearing and delving into this transaction in enormous detail and into the dealings between Mr Zourkas and Mr Stubbings and he found in favour of Mr Stubbings on critical questions that enabled him to make a finding that Mr Stubbings’ evidence was true and Mr Zourkas’ evidence was false, and that led to a finding that Mr Zourkas was a dishonest person.

STEWARD J: Does the Court of the Appeal deal with ‑ ‑ ‑

MR WILLIAMS: There is no suggestion – I am sorry ‑ ‑ ‑

STEWARD J: Does the Court of Appeal deal with the finding by Justice Robson that the solicitor was apparently smug in giving evidence?

MR WILLIAMS: No, it did not, but it clearly had that evidence placed before it and the submission was made to the Court of Appeal that his Honour had made that finding – the Court was not unaware of it. But the fact that someone gives evidence in a way that appears to be smug, does not enable the evidence to rise above what it is. It was not put to Mr Jeruzalski that many of the matters that ultimately the judge found on were not put to Mr Jeruzalski, for example, that the system existed that contained all of these elements that Mr Zourkas was not independent, that the bridge too far finding that his Honour made – all of those matters were matters which, in my respectful submission, cannot be sheeted home to the lenders in this case, the respondents, because there is no basis to form the view that Mr Jeruzalski actually had knowledge.

In giving evidence in a way that is smug which – let us take it to mean that the judge thought that Mr Jeruzalski was comfortable in the position that he occupied and believed that his clients would be victorious because he had done all that needed to be done. Let us say that he felt in a comfortable position ‑ which, I might say, would be different from most people who give evidence ‑ but nonetheless, let us say that is how he gave the appearance and that is what the judge found. That does not enable a finding that he had knowledge that there is no basis to assume that he had. Simply thinking that he had a good system ‑ ‑ ‑

STEWARD J: The difficulty ‑ ‑ ‑

MR WILLIAMS: ‑ ‑ ‑ does not mean that he had reason to believe that Mr Stubbings was a person at a special disadvantage. I am sorry, your Honour.

STEWARD J: No, not at all. Video link makes it hard for you. I was just going to say one possible difficulty is that when the Court of Appeal puts the case at its highest for Mr Hutley’s client at 131, and then balances it against the certificate, in putting it at its highest it did not include the findings about Mr Zourkas, and about the demeanour in which the solicitor gave evidence.

MR WILLIAMS: Well, the demeanour is bound up in the court’s findings about what Mr Jeruzalski’s state of knowledge actually was ‑ ‑ ‑

STEWARD J: All right.

MR WILLIAMS: So that is a discrete point. As to Mr Zourkas’ dishonesty, the important factor is that the Court of Appeal rightly had already determined that Zourkas was not an agent of the lender, nor an agent of the lender’s agent, Mr Jeruzalski. It found that it was a bridge too far – sorry, it found that the judge’s comment or observation that it was a bridge too far to say that Zourkas was independent was not an appropriate observation in all of the circumstances, so it has dealt with that matter. In so doing, it has dealt with whether or not Zourkas’ dishonesty is a matter relevant to the equation of unconscionability. Because whether or not Zourkas is dishonest becomes unimportant if Zourkas is not somebody whose dishonesty is known to Mr Jeruzalski or who is otherwise an agent.

It may well be that dishonest people come forward on many occasions as acting for parties, advising parties, doing all sorts of things and get themselves involved in transactions, but it does not mean that the lender is responsible for every dishonest person that turns up at their doorstep unless they have reason to believe that that person is dishonest because then they may have reason to believe that the dishonesty will impact on the borrower. Without that reason to believe ‑ and the court said there is no reason to impute Zourkas or his conduct to the lenders ‑ then, in my respectful submission, the dishonesty finding is of no moment.

BELL J: Let that be assumed to be so for the present purposes. The system involving Mr Zourkas as it did in some 30 prior transactions involved a two‑dollar company with no assets to speak of, the significance of the security offered by the guarantor is obvious and everything depended in the Court of Appeal’s analysis on the certificates of independent, legal and particularly financial advice. That was part of the system that Mr Hutley seeks to challenge. That does not depend on sheeting home to Mr Zourkas – to Mr Jeruzalski knowledge of Mr Zourkas’ dishonesty.

MR WILLIAMS: I fully accept that, your Honour.

BELL J: But the point remains in relation to the weight that was given by the Court of Appeal to the certificates, taking into account the level of detail of the material in those certificates.

MR WILLIAMS: A couple of elements occur to me in response to that question if I may.

BELL J: Yes.

MR WILLIAMS: The first is that the certificate as part of the system is characterised by the trial judge – the seeking of both an accountant’s and a lawyer’s certificate is characterised by the trial judge as being part of an unsatisfactory scheme or plan that is to the detriment of the borrower by “immunising”, quote unquote, the lenders, and Mr Jeruzalski himself from the borrowers. Now, to characterise what are now highly frequent and routine requirements, of lenders, to have such certificates in that way, in my respectful submission, was ‑ if I can use the expression ‑ another bridge too far.

BELL J: Yes.

MR WILLIAMS: And the Court of Appeal was entitled to so find, and to characterise those matters as not being improper or part of any nefarious design, but as part of being ordinary and prudent lending practice. And, what is more, it is a lending practice which, although it may have the effect of in some circumstances giving a benefit to the lender in resisting allegations that the mortgage is unconscionable or unenforceable for some other reason, its primary purpose and the reason that in many cases it has that effect is that it ensures that the borrower has the benefit of legal and accounting advice.

So that is I think the key matter. There is nothing wrong in either principle or in this practice in the lender insisting as part of its lending system on the having of solicitor’s and accountant’s certificates. It should be regarded as a good thing, not a bad thing. Somehow or other doing the right thing is successfully characterised by our learned friends, and by the trial judge, as doing the wrong thing, or an element of a system which
involves doing the wrong thing, and that is quite an unfair characterisation. I had a second point – I have completely forgotten what it was.

BELL J: Do not worry, Mr Williams. But I rather think it is the – I appreciate the point that you make with respect to the certificates, but to the extent that Mr Hutley identifies a point of general principle, it relates to the concept of a system and to the significance in the context of this particular system of the certificates that form part of it.

MR WILLIAMS: Your Honour has reminded me of what my second point was.

BELL J: How astute of me.

MR WILLIAMS: In truth, this case is actually not about a point of principle at all. It is about a desire to deconstruct the accounting certificate or deconstruct the particular facts and circumstances of this case and to criticise, or overturn, the Court of Appeal’s balancing of factors in circumstances where the judge had really given no weight at all – in fact, he had give negative weight, effectively, by identifying that it was part of an improper system to the certificates.

The Court of Appeal, in my respectful submission, rightly said, no, that is not the right approach. You take those certificates into account on the opposite side of the ledger. They are matters which go against unconscionability. That is not the matter of which special leave is made, if I might respectfully say so. I have just got an orange light, but I see you have got a red one, I think.

BELL J: It is hard to tell, Mr Williams, but is there some further matter you want to put?

MR WILLIAMS: Not unless the Court wishes to raise one with me.

BELL J: No, thank you, Mr Williams. We do not need to – there is nothing further we wish to ask of you, Mr Williams ‑ ‑ ‑

MR WILLIAMS: If the Court pleases.

BELL J: ‑ ‑ ‑ and we do not need to hear from you further, Mr Hutley. There will be a grant of special leave in this matter. What is the estimated length, Mr Hutley?

MR HUTLEY: Your Honour, with full written submissions, one day would be, I think, adequate.

BELL J: Do you agree with that estimate, Mr Williams?

MR WILLIAMS: I do, your Honour.

BELL J: Yes, very well. I invite those who instruct you both to collect the directions respecting the timetable for the filing of submissions from the Registry and, as indicated, there will be a grant of special leave in the matter.

AT 10:15 AM THE MATTER WAS CONCLUDED