The Consumer Credit Act and the business purpose exemption

Lenders often rely on the business purposes exemption under the Consumer Credit Act 1974 (CCA) when lending to individuals. It’s essential for lenders to follow the requirements of this exemption closely – as was highlighted in the case of Wood v Capital Bridging Finance Limited.

The facts

The facts of this case are not uncommon: the borrower took out a 6-month loan for £64,000 to assist her son-in-law with his business. The lender, who was in the business of unregulated loans, provided the borrower with a credit agreement which claimed to be exempt from the CCA under the business purpose exemption. The agreement included a business purposes declaration which was signed by the borrower and the money was subsequently advanced to the son-in-law.

The son-in-law failed to meet the repayments and defaulted on the loan. The lender pursued the borrower for the overdue money and was initially successful in obtaining judgement from the court.

The borrower, however, appealed on the basis that credit agreement was in fact not exempt. The loan was not for her business purposes and as a result the agreement was not in compliance with the form and content requirements of the CCA.

The agreement could therefore only be enforced by a court order, which the lender had not applied for.

The court’s decision

On appeal the court agreed with the borrower. The credit agreement was not exempt and was regulated under the CCA. As no enforcement order had been applied for, the court set aside the lender’s claim against the borrower for the overdue money.

What about the business purposes declaration in the credit agreement?

The inclusion of a business purposes declaration helps lenders discharge their burden of proof as to whether a credit agreement is exempt or not. The form of this declaration is highly prescriptive and is set out in the FCA’ s Consumer Credit sourcebook. A compliant declaration creates a presumption that the agreement was entered into primarily for the business purposes of the borrower.

The presumption does not, however, apply where the lender knows or has reasonable cause to suspect that the credit agreement was not entered into for the business purposes of the borrower. In these circumstances the burden falls back on the lender to prove that the business purposes exemption applies.

In this case, all parties involved were aware that the borrower was obtaining funds for the purpose of her son-in-law’s business, 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 primarily for the purposes of the borrower’s business.

Failure by a lender to demonstrate strict compliance with these requirements may result in their credit agreements being unenforceable.