Consumer Credit Act 1974 – Bridging loan – Loan agreement containing declaration that taken out for purposes of debtor’s business – Declaration giving rise to presumption in section 16B(2) that agreement unregulated – Whether respondent properly obtaining money judgment against appellant borrower on contractual claim for sums due under loan – Whether section 16B(2) presumption disapplied under section 16B(3) where respondent knowing loan not for purposes of appellant’s own business – Appeal allowed
The appellant took out a bridging loan with the respondent lender in the sum of £64,000 for a period of six months, pursuant to a written loan agreement, in order to raise funds for her son-in-law’s business. The loan agreement contained a declaration that the loan was entered into wholly or predominantly for the purposes of a business carried on, or intended to be carried on, by the debtor; the purpose of the declaration was to attract the exemption from regulation for such agreements provided by section 16B of the Consumer Credit Act 1974. In fact, the appellant told the respondent that the loan was for her son-in-law’s business, not for any business carried on by her. The loan was meant to be secured by a mortgage over the appellant’s home but the mortgage deed was defective since it was not properly witnessed.
Although the son-in-law had promised to repay the loan, he failed to do so and the respondent brought a claim against the appellant for possession of the appellant’s property. The judge held that the mortgage was unenforceable since, owing to the defect in the mortgage deed, it took effect only as an equitable mortgage, which was not contemplated by the loan agreement and therefore failed to fulfil the formality requirements of section 2 of the Law of Property (Miscellaneous Provisions) Act 1989. However, he allowed an alternative claim, advanced after the claim on the mortgage failed, for a money judgment in the sum of nearly £152,000, together with contractual interest at 3% per month, pursuant to the terms of the loan agreement.
The appellant appealed. She contended that the judge had erred in giving judgment on a purely contractual basis since, on the facts that he had found, the loan was a regulated agreement under section 8(3) of the 1974 Act which did not comply with the requirements of that Act and the regulations made thereunder. She submitted that the agreement could therefore only be enforced by an enforcement order under section 127, in relation to which the court had a range of powers enabling it to refuse to enforce, to reduce or discharge a sum payable, to give time to pay, to impose conditions, and to suspend operation of the order.
Held: The appeal was allowed.
(1) The declaration in the loan agreement gave rise to a presumption, under section 16B(2), that the agreement qualified as an unregulated agreement made for the purposes of the debtor’s business. However, that presumption was disapplied under section 16B(3) since, on the facts found by the judge, the respondent knew or had reasonable cause to suspect that the agreement was not entered into wholly or predominantly for the qualifying business purpose. If a creditor merely had reasonable cause to suspect, that would not disable it from proving that its suspicion was wrong and that the loan was in fact for the qualifying business purpose. If, however, the creditor knew that the agreement was not entered into by the debtor wholly or predominantly for the purposes of the debtor’s own business, then it was hard to see how the creditor could ever prove the contrary. In the instant case, there was unchallenged evidence that the respondent knew that the appellant wanted the loan for the purpose of assisting her son-in-law’s business, nor her own. On the face of it, therefore, the presumption in section 16B(2) did not apply since there was no room for the respondent to establish that the appellant’s predominant purpose was such as to bring the loan agreement within the section 16B business exemption. It was not open to the respondent to argue that, had the appellant taken the point further at trial, it might have established, by cross-examination of the appellant or by further evidence of its own, that the appellant had a share in her son-in-law’s business so that the business was also hers. The onus lay with the respondent to establish that matter and it had made no attempt at trial to discharge that burden.
(2) It was not open to the respondent to argue that the appellant was estopped, by reason of her declaration in the loan agreement, from denying that the agreement was unregulated. Estoppel of a contractual nature could not prevail against the clear prohibition, in section 173(1) of the 1974 Act, against contracting out of the protection of the Act. The essence of contractual estoppel was that it had contractual force. To give contractual effect to a declaration, in what was otherwise a regulated agreement, that it was not a regulated agreement would therefore fall foul of the prohibition on contracting out. Nor could the respondent rely on estoppel by representation. Even if the appellant’s written declaration contained a representation by her that the loan was sought for her own business purposes, there had been no relevant reliance on the representation since the respondent knew the truth about the purpose of the loan. Nor was there any estoppel by convention. The respondent knew, before the appellant ever signed the declaration, that its content was not true, and it was difficult to identify any relevant conduct by the parties thereafter which could properly form the basis of a conclusion that they acted on a mistaken assumption that it was true. Furthermore, any attempt to construct an estoppel by convention from a declaration designed to comply with section 16B(2), in circumstances where it was disabled by section 16B(3), ran counter to the requirements of the 1974 Act.
(3) The appellant was not barred from raising her argument even though she sought to do so for the first time on appeal and she had obtained the loan by fraud. The onus lay on the respondent to demonstrate, as a necessary part of a claim for a contractual money judgment, that the loan was not a regulated agreement. The respondent’s attempt to rely upon the appellant’s declaration was nullified by its own evidence. It was relevant that the respondent had advanced its contractual claim for a money judgment at a late stage, after its primary case for enforcement of the mortgage failed, and that it was seeking to hold on to a judgment by way of contractual enforcement of the loan in a sum that was much larger than it could have obtained on a claim for recovery of the money lent by way of rescission for fraud, or damages for deceit. Further, the protection afforded to consumers by the 1974 Act existed as a matter of public policy, even in cases where the debtor had made a false declaration as to her business purpose, where there were grounds for suspicion by the creditor within the meaning of section 16B(3). In those circumstances, there was no injustice in permitting the appellant to take her point of law for the first time on appeal, based on the facts already found by the judge.
The money judgment would accordingly be set aside, but with leave for the respondent to apply to the court for an enforcement order under section 127 of the 1974 Act.
Soofi Din (instructed by direct access) appeared for the appellant; Turlough Stone (instructed by Brecher) appeared for the respondent.
Sally Dobson, barrister
Click here to read transcript: Capital Bridging Finance Ltd v Wood
