The Business Exemption under the Consumer Credit Act

Do we, at last, have some clarity on this issue?

The Business Exemption has recently come under scrutiny in the Courts. In particular, the case of Wood v. Capital Bridging Finance Limited questions the extent to which a creditor can rely on the “business declaration” made by a borrower within an agreement when it is found that the creditor had prior knowledge that the loan relating to the agreement was not intended for business purposes at all.

The exemption relating to business (previously s.16B of the CCA 1974) is now contained within article 60C of the RAO and states that the agreement is an exempt agreement if (a) the lender provides the borrower with credit exceeding £25,000 and (b) the agreement is entered into by the borrower wholly for the purposes of a business carried on, or intended to be carried on by him.

The facts of the case are as follows. The borrower was a 75 year old woman who agreed to take out a loan on behalf of her son-in-law. The loan was intended to be used for the purposes of his business. The borrower signed the declaration relating to business on the agreement even though all parties were aware (and had been throughout the initial discussions) that the loan was not, in fact, in respect of the borrower’s business but a personal loan from the borrower to her son-in-law.

The Judge in the case found that the burden of proving that the business exemption applies to an agreement lies with the creditor. He went on to say that if an agreement includes a declaration made by the borrower to the effect that the agreement is entered into by him wholly or predominantly for the purposes of a business, the agreement shall be presumed to have been entered into by him wholly or predominantly for such purposes.

There is an easy method of discharging the creditor’s burden, by way of presumption – where the creditor obtains a declaration in the prescribed form. However, where on the facts, that presumption is inapplicable as in the Wood case, the burden falls back on the creditor. In the Wood case, the creditor was aware that the loan was not for business purposes and therefore it is hard to see how he could prove anything to the contrary. However, if the creditor only has reasonable cause to suspect that this may be so, it does not stop him from proving that with the benefit of hindsight, such suspicion was wrong.

A further case, Payne & Payne (Woolsey) v. Payne: Woolsey v. Payne raised a question over the approach determining the meaning of the phrase “a business carried on… by him”. This was a bankruptcy case where the registrar found that the borrower’s loan did not fall within the business exemption. This finding was based on the fact that the creditor had had reasonable cause to suspect that the purpose of the loan was not for a business carried on by the borrower but, instead, for use in the couple’s company which had its own legal personality. The creditor argued that the registrar had adopted an unnecessarily narrow interpretation of the words “a business carried on… by him”.

It was held that a “purposive” approach must be made to the construction of the business exemption; that it would be odd if a company director borrowing money for his company was treated as a consumer entitled to the protection of the Consumer Credit Act where a sole trader borrowing money for his business would not be entitled. Various authorities discussing the meaning of “consumer” were relied on in this case and supported the fact that the registrar had taken too narrow a view. In any event, the creditor’s case was not assisted by applying a wider definition of “a business carried on… by him” as there was a substantial dispute of fact between the parties as to the purpose of the loan agreement and whether the creditor had knowledge of the intention of the loan. The appeal was dismissed in this case.