Purpose of loan must be clear to lenders to gain exemption protection
Two recent Consumer Credit Act 1974 (CCA) decisions have considered the exemption relating to business under section 16B CCA.
S16(B)(1) provides that the CCA does not regulate a consumer credit (or hire) agreement for credit (or payment) exceeding £25,000, if the agreement is entered into wholly or predominantly for the purposes of the borrower’s (hirer’s) business (or intended business).
S16(B)(2) provides that if an agreement includes a declaration made by the debtor (hirer) that the agreement is entered into wholly or predominantly for the purposes of his (intended) business, the agreement shall be presumed to have been entered into wholly or predominantly for such purposes.
S16(B)(3) provides that that presumption does not apply if, when the agreement is entered into, the creditor (owner), or any person acting on his behalf, knows, or has reasonable cause to suspect, that the agreement is not entered into wholly or predominantly for such purposes.
Wood v Capital Bridging Finance Ltd
In Wood v Capital Bridging Finance Ltd (Capital), 75-year old Mrs Wood was persuaded by her son-in-law to apply to Capital for a six-month business bridging loan secured on her property. Capital was in the business of making unregulated loans. Capital had been told the purpose of the loan was to help the son-in-law’s business. Despite this, Mrs Wood signed a declaration pursuant to s16(B)(2) that she was entering into the loan for her own business purposes. She also provided a false residential address, knowing Capital would not accept her home as security.
Default occurred and Capital issued possession proceedings.
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First instance decision
At first instance the court held that the mortgage could only take effect as an equitable mortgage with no power of sale as it was not properly witnessed. A money judgment based on pure contract was subsequently obtained.
Mrs Wood appealed. She argued, among other things, that as she had not borrowed the money for her own business purposes, the agreement was not exempt from regulation under s16B. It was therefore a regulated agreement and, as such, its form and content were not as prescribed by the CCA. It could only be enforced by an enforcement order under s127 of the CCA, which Capital had not applied for.
Court of Appeal’s view
The Court of Appeal held that the burden of proving that the business exemption applied lay with the creditor. That burden is discharged by obtaining a declaration from the borrower in accordance with s16B(2). However, the business presumption does not apply when s16(B)(3) is engaged. In such a situation, the burden of proving business purpose falls back on the creditor.
Capital was aware that the s16(B)(2) declaration was untrue, as it knew from the outset what the purpose of the loan was.
Mrs Wood was not estopped by her declaration from denying that the agreement was unregulated as there is a clear prohibition on contracting out of provisions to protect consumers as per s173(1) of the CCA. The presumption which arose from s16B(2) did not therefore apply.
Although Mrs Wood had misrepresented the purpose of the loan, estoppel by representation did not arise either, as Capital had always known the truth and had not relied on her representation.
The Court of Appeal held that the agreement was regulated and the money judgment had to be set aside. Capital was, however, given leave to apply for an enforcement order as the court held that Mrs Wood would inevitably have to repay a substantial sum to Capital.
Woolsey v Payne and Payne
In Woolsey v Payne and Payne, Woolsey entered into a loan agreement with the Paynes and their limited company. Again, the loan purported to be exempt from the CCA under s16(B) and contained the business purpose declaration under s16(B)(2).
The borrowers defaulted. Woolsey served statutory demands and subsequently obtained a bankruptcy order against Mrs Payne. The Paynes successfully challenged the enforceability of the loan agreement under the CCA, primarily on the basis it was a regulated, not unregulated, agreement and so not compliant with the CCA. The statutory demands and bankruptcy order were set aside.
Woolsey appealed. One of the Paynes’ arguments was that the loan had not been made for their business purposes but for their company’s business purposes and a company is, of course, a separate legal entity. Woolsey argued for a wide interpretation of s16(B)(2) so that it was irrelevant whether the sums advanced were used for the borrowers’ or their company’s business purposes. The Paynes also argued that Woolsey must have known that the loan was to pay off personal debts of Mr Payne and not for business purposes.
The court’s findings
The High Court held that a purposive approach to the construction of "a business carried on by [the consumer]" in s16B was required and a strict company law approach would be inconsistent with the provisions of the CCA. It held that it would be odd if a company director borrowing money for the purposes of his company was treated as a consumer whereas a sole trader borrowing money for the business he operated in his own name would not be so treated. S16(B) should therefore include an agreement entered into wholly or predominantly for the purposes of a business carried on by the borrowers’ limited company.
In this case there was a substantial dispute as to the purpose of the loan agreement and what Woolsey had known or had reasonable cause to believe about the loan’s purpose. A trial would be required to determine this point but the appeal in relation to the bankruptcy proceedings failed.
The wider interpretation of "business purposes" in Woolsey is helpful. It reflects commercial reality as borrowers often refer to themselves or their company interchangeably.
However, the protection afforded to consumers by the CCA exists as a matter of public policy, even where the consumer has made false declarations, as in the case of Mrs Wood.
Lenders must be satisfied as to the purpose of the loan if they want to ensure the protection of the exemption.
Greg Standing is partner in the finance litigation team at Wragge Lawrence Graham & Co