Creditor Not Liable for Unconscionable Conduct It Did Not Know About

Direct Steel Traders Pty Ltd v Abdallah [2025] NSWSC 1551

Overview 

Turks recently obtained judgment for a steel supplier enforcing a third-party guarantee, after the guarantors; an elderly couple with limited English and no connection to the borrower, claimed they were misled into signing and sought to have the guarantee and mortgage declared void.

The Court held that vulnerability alone is not enough to defeat a guarantee on unconscionable conduct grounds, the guarantor must show the creditor had knowledge of that vulnerability. Alleging ignorance of or a failure to consider vulnerability is insufficient.

The facts

• Direct Steel Traders Pty Ltd (DST) supplied steel on credit to Steelcorp Engineering Pty Ltd (Steelcorp).
• The director of Steelcorp, arranged for Mr and Mrs Abdallah (Guarantors) to provide a guarantee and mortgage over their family home. It was alleged that the Guarantors had limited English and no involvement with Steelcorp. 
• Mr and Mrs Abdallah said in evidence that they believed they were signing a character reference for the director. Neither received legal or financial advice, and neither had any direct contact with DST.  
• Steelcorp later went into liquidation and DST called on the guarantee. 
• Mr and Mrs Abdallah defended the proceedings and alleged that the guarantee and mortgage should be void on the grounds of unconscionable conduct.  

The legal framework 

Unconscionable conduct can be established under the general law (equity) or statute (Australian Consumer Law or s 12CB of the ASIC Act). Both were argued here. Under the general law (Thorne v Kennedy (2017)), three things are required: 

• The innocent party must be subject to a ‘special disadvantage’ that seriously affects their ability to make a judgment in their own best interests;
• The other party must have unconscientiously taken advantage of that disadvantage; and
• The other party must have had actual knowledge or constructive knowledge of the special disadvantage.

The decision 

At trial, DST accepted that the Guarantors were subject to a special disadvantage given their limited English skills, limited education and no involvement in Steelcorp. However, this concession did not determine the outcome. 

The Court found that DST had no actual or constructive knowledge of the Guarantors’ disadvantage. DST had never contacted them directly, made no inquiries into their circumstances, and had no reason, on the information available to it, to suspect they were vulnerable. Knowing their ages, their countries of birth, and that they were not connected to Steelcorp was not enough to attach constructive knowledge to DST.

The Court drew a clear and important distinction between:

• Constructive notice: being aware of facts that might, on inquiry, lead to discovery of a disadvantage if not sufficient.
• Constructive knowledge: actual awareness of facts from which the party ought to have known of the specific disadvantage is required.

The Court also noted that DST placed no time pressure on the Guarantors. It neither required nor requested that the documents be signed within any specific timeframe. The opportunity to obtain independent legal or financial advice was available to them; they simply did not take it.

The Court rejected the Guarantors' argument that accepting a mortgage without investigating their capacity to repay was inherently unconscionable. Following the High Court's decision in Stubbings v Jams 2 Pty Ltd,¹ there is nothing inherently wrong with a creditor taking security over property without investigating a guarantor's capacity to repay. Something more is required, and it was not present here.

By reason of the above, the Guarantors were unable to establish unconscionable conduct, and the Court granted judgment in favour of DST. 

Takeaways for credit managers

Vulnerability alone does not defeat a guarantee. If you had no knowledge of a guarantor's special disadvantage, an unconscionable conduct claim is unlikely to succeed. 

There is no general duty to investigate a guarantor's personal circumstances. You are not required to inquire into a guarantor's age, health, education, English proficiency, or financial position before accepting their guarantee. 

If warning signs exist; for example, a guarantor who appears to have no understanding of what they are signing, or where there are clear indicators of a language barrier, you should take steps to verify their understanding and encourage independent legal advice. 

^[1]Stubbings v Jams 2 Pty Ltd (2022) 276 CLR 1; [2022] HCA 6.