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"Warm Body" refinancing held not to be unconscionable.

This month the Full Court of the Western Australian Court of Appeal has unanimously held that the actions of a financier agreeing to refinance a developer's loan and take significantly more security, in circumstances where it knew the developer was certain to default under the new loan was not unconscionable under the ASIC Act.


In the case of Westgem Investments Pty Ltd v Commonwealth Bank of Australia Ltd [2022] WASCA 132, the full court considered the case of an asset rich, yet cash-flow insolvent, developer (Westgem) who sought a refinance in order to complete a multi-storey development being constructed in the heart of Perth.


The most interesting aspect of this case was that the Bankwest officers managing the facility described their approach as "warm body" refinancing driven by the desire to gain additional security and the ultimate capitalisation and amortisation of the further funding (in the asset rich company) rather than truly assist the developer with its cash flow and improve the prospects of the project's success.


Westgem's allegation of unconscionable conduct centred around the decision to extend the current loan on 22 September 2010, at a time when both parties were fully aware the pending $23 million repayment due on 30 September 2010 had no prospect of being paid.


However, the 'warm body' strategy of Bankwest in providing this refinance saw it gain an additional $72 million in real property security - which the developer alleged had all the hallmarks of pure asset lending.


Of course, on 30 September 2010, the developer did default on the new facility, meaning that the lender had gained an additional $72 million in security without any prospect of ever having to extend the loan or advance further funding.


However, the Full Court rejected the borrower's claim because, although what happened on 22 September 2010 in and of itself could have been construed as unconscionable, the Court held that this approach failed to take into account all of the circumstances, including as to how the parties "contemplated" the refinanced loan would be administered.


The Court said:


"The main difficulty I have with this submission is that it looks to the position of Westgem and the Financiers when the Restated MOFA was executed without regard to how the parties contemplated, at that time, the Restated MOFA would be implemented. It also ignores the manner in which the Restated MOFA was actually implemented. The court must determine whether the Financiers engaged in conduct that was, in all the circumstances, unconscionable within the meaning of s 12CC(1) of the ASIC Act. Both parties contemplated deferral of the payment obligation at the time of execution of the Restated MOFA. Deferral of the $23 million payment obligation was a circumstance that was reasonably foreseeable at the time of the alleged contravention of s 12CC of the ASIC Act."


Accordingly, the Court held that the refinancing of the loan in circumstances where the lender knew a default was certain was not unconscionable given that both parties anticipated the contractual obligation to make a payment on 30 September 2010 would not be enforced.


By Rob Norton



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