The Consumer Credit Act and the business purpose exemption

The business purposes exemption is a key provision under the Consumer Credit Act that many lenders seek to rely on when lending to individuals. As you would expect, strict compliance with the requirements of the exemption is essential – as highlighted in the recent case of Wood v Capital Bridging Finance Limited.

The facts

The facts of the above case are not uncommon: the borrower entered into a credit agreement for a loan of £64,000, repayable in six months, in order to assist her son-in-law with his business. The lender, who was in the business of making unregulated loans, presented the borrower with a credit agreement which claimed to be exempt from regulation under the Consumer Credit Act 1974 (CCA) because it was for business purposes and exceeded £25,000. The borrower signed the credit agreement containing a business purposes declaration and the monies were advanced to the son-in-law.

The son-in-law failed to make payments to the borrower and, as a result, the borrower subsequently defaulted on the loan. The lender sought a money judgment against the borrower (having tried but failed to enforce its legal charge over the borrower’s property for technical reasons).

The lender was originally successful in obtaining judgment. The borrower, however, appealed on the basis that the credit agreement was not exempt because it was not for her business purposes and it did not comply with the form and content requirements of the CCA. Lack of compliance with the CCA meant that the agreement could only be enforced by a court order, which the lender had not applied for.

The court’s decision

The court agreed with the borrower that the credit agreement was a regulated agreement under the CCA and was not exempt. It was held that, as no enforcement order had been applied for, the money judgment must be set aside.

What about the business purposes declaration in the credit agreement?

A business purposes declaration (which must comply with requirements set out in the FCA’s Consumer Credit sourcebook) is intended to help lenders discharge the burden of proving whether a credit agreement is exempt or not. The inclusion of a compliant declaration creates a presumption that the agreement was entered into wholly or predominantly for the purposes of a business carried on, or intended to be carried on, by the borrower.

The presumption does not, however, apply where the lender (or anyone acting on behalf of the lender) knows or has reasonable cause to suspect that the credit agreement was not entered into wholly or predominantly for the purposes of a business carried on, or intended to be carried on, by the borrower. In these circumstances, the burden falls back on the lender to prove that the business purpose exemption applies.

In this case, all parties involved in the credit agreement, including the lender’s employee, were aware that the borrower was obtaining funds for the purpose of her son-in-law’s business, and not the borrower’s business. As a result, the business purposes exemption did not apply and the credit agreement was regulated under the CCA.

A reminder

This case serves as a reminder to all lenders and sets a clear scope for reliance on the business purpose exemption: the credit agreement must be for credit exceeding £25,000 and be entered into wholly or predominantly for the purposes of the borrower’s business. Failure to demonstrate strict compliance may cause a credit agreement to be unenforceable (at least temporarily).