Mrs Xian Zhu was the owner of a property in Wahroonga, a suburb in Sydney, that she purchased in 2014 for $2.6mil. On 20 August 2020, she signed documents that made her a guarantor and security provider of a $1,3 mil three-month loan to assist with the payment of interest owing on a large project known as the Mann St or Gosford project. Mrs Zhu had agreed to sign the documents at the request of her former husband who had an interest in the project. Mrs Zhu had been promised that the loan would be paid out within three months. There was a default, and the dispute as to Mrs Zhu’s liability was decided on 30 August 2024 (Gemi 193 Pty Ltd v Xian Zhu [2024] NSWSC 1113).

Gemi 193 was part of a group of companies that financed large projects such as the Mann St project. Mr Zhu had an interest in the Mann St project because he had already guaranteed loans and his construction company would be the builder on the project.  When additional funding was required in 2020, he represented that he controlled the Wahroonga property.

The evidence showed that the strategy of the owner of the project, through its director Mr Walker, in paying the $1.3 million was to buy time and good will in the hope of securing refinance.

Mrs Zhu was willing to help her husband as she had done in the past by offering her home as security for loans but insisted on meeting the lender and the owner of the property to obtain an assurance that the loan would be repaid within the 3 months and the caveat removed. Mrs Zhu repeatedly insisted she had no capacity to repay the loan, and she needed to sell the property to assist her son Alex who was studying in the United States. Mrs Zhu said that she was given the assurances she sought and relied on them.

Mrs Zhu did not want to get legal advice and to circumvent that issue Mrs Zhu was appointed as a director of the borrower company.

Mrs Zhu signed the loan documents on 5 August 2020 before the solicitor for the borrower. It was unsuccessfully argued that the solicitor also advised Mrs Zhu. The court rejected this argument because her interests were different to those of the borrower.

Mrs Zhu knew very little about the Mann St project or its many loan defaults.

Mrs Zhu finally met Mr Epstein, a representation of the lender, on 11 August 2020. There was a marked difference in the evidence given about what was said during this conversation. Mrs Zhu gave evidence that Mr Epstein made positive statements to her that there was no risk, that she would not have to pay anything and that the loan would be repaid within 3 months. His Honour did not accept that Mr Epstein made these positive statements and Mrs Zhu’s case, in this respect, failed.

The court however found that Mrs Zhu was entitled to relief because the conduct of the defendant was unconscionable. Mrs Zhu was successful to proving that she was under a disability and that the lender took advantage of that disability and knew of the effect of her special disadvantage. Gemi 193 claimed that Mrs Zhu was an astute businesswoman and was not at any special disadvantage. His Honour did not accept this, pointing out that Mrs Zhu knew very little about the history of the indebtedness of the project company and although she had done a bookkeeping course and had taken steps to improve her knowledge she trusted and relied on her former husband. Importantly the court accepted that she did not benefit from the transaction. On this basis the court held that the loan should be set aside.

The court also determined that Mrs Zhu was entitled to relief under the Contract Review Act because there was an inequality of bargaining power between Mrs Zhu and the lender, the terms of the transaction were not explained to Mrs Zhu, and she did not receive independent legal advice.

As stated earlier, Mrs Zhu’s case based on positive misrepresentations failed. In addition, her case that the silence of the lender and the project company as to the true state of the project also failed. His Honour referred to a number of cases that narrowed the obligations of a lender to a guarantor. For example, that a creditor has no obligation to disclose to a guarantor the level of indebtedness of a borrower.

Gemi 193 submitted that if the court found against it and Mr Epstein the concurrent liability provisions should be applied and the damages be apportioned between not only the present defendant’s but also Mr Zhu, the solicitor who acted for the borrower and witnessed Mrs Zhu’s signature and Mr Walker. His Honour gave the parties leave to make submissions about these matters without making a decision.

Mrs Zhu was successful in having the loan set aside. She would have received the money held pending this decision, the property having been sold.