A husband inherited land and the wife funded the building of their family home by selling her a property purchased in her name only. The husband and wife were registered as co-owners of the beach property and later it was put in her name only as an asset protection strategy. The wife gave two guarantees to secure loans granted to her husband for his businesses and their family trust for investment purposes and the wife also gave a mortgage over the beach property and another property in her name only. The wife did not receive independent legal advice and signed a waiver of the opportunity to do so. The wife claimed she was a volunteer who did not understand the nature and effect of the guarantees. The court found that the wife was not under any misunderstanding and knew the guarantee was for $773,000 and whilst the wife was not advised that she might be made bankrupt if the amount payable under the guarantee was not paid, the bank did advise the wife that she could be asked to sell her secured property and repay the loan. The court also found no unconscionable conduct on the basis of the wife being in a position of special disadvantage because the bank had no reason to know of any misunderstanding by the wife as to her mortgage securing more than $150,000 or any misunderstanding as to her husband’s business affairs and a previous technical default by the trust company in failing to provide financials. The wife’s case was dismissed. The wife appealed.
Wife’s equity principle
The court said:
At its heart, the equity identified in Yerkey v Jones protects against vulnerability arising from the spousal relationship. It ensures a banking institution provides full information so as to protect a vulnerable person from pressure arising from the very nature of the relationship. The equity is not dependent upon the bank having notice of unconscionable dealing between spouses.
The court noted that whilst the wife gave evidence that she did not know the difference between a mortgage and a guarantee, and thought they were the one thing, she knew the relevant guarantee secured a loan of $773,000. The wife also knew that if the outstanding sum was not repaid she could be asked to repay it and the secured property could be sold. The wife knew that both the Mudjimba Beach property and her Cotton Tree unit were “on the line”. The wife agreed she had been told by the bank that this could be the worst case scenario if she signed the guarantee. The court found that these factual findings supported the lower court’s finding as to no material misunderstanding as to the guarantees and mortgages.
The Court of Appeal noted that whilst the bank did not expressly advise the wife that in the event of a shortfall from the sale of those properties she could be made personally bankrupt, there was no obligation on the bank to do so. It added nothing to the wife’s understanding of the nature and effect of the transaction, which was that she was liable to repay the entire sum in the event of default. Similarly, there was no obligation to tell the wife the mortgage over the Cotton Tree unit was not limited to $150,000. The wife knew her liability to repay was for the total sum of the loan ….and that the bank could recover that sum from the wife, including through selling the mortgaged properties, and that the wife knew this as a consequence of an explanation given to her by the bank. The Court of Appeal found no misunderstanding as to the purport and effect of the transaction. The Court of Appeal also noted that the trial judge assumed the wife was a volunteer and this was not only consistent with the fact that the benefit to the wife was not of such a direct nature as to preclude her from being a volunteer but also in her favour. The court also noted that the trial judge found that the bank had adequately explained the transaction to the wife and so expressly determined this on the basis that the bank carried the onus of proof.
Unconscionability – special disadvantage
The court noted that relief on this ground depends upon establishing a special disadvantage and that this was sufficiently evident to the bank. The court said:
The equity requires proof of a predatory state of mind by the creditor. Inadvertence or indifference is insufficient.
The court found that the failure by the bank to inform the wife of a technical breach by the trust company of financial position did not place the wife at special disadvantage because the loan occurred before the breach, the wife herself abandoned her case that the bank had failed to inform her of material financial information and there was no suggestion that the husband did not provide up to date financial in relation to the loan in question.
The Court of Appeal dismissed the appeal.