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A recent judgment in the Court of Appeal has caused concern amongst the lender community, when a dishonest borrower was perceived as successfully avoiding debt, on the back of her own false declarations and deceit.
However the legal reality is somewhat different to general perception.
The borrower, via an introducer, applied for a bridging loan. The loan was placed with the lender, as an unregulated facility by reason that;
1. It was to be provided for business purpose, and
2. It was to be secured upon a property by first legal charge which was not in owner occupation.
The Facts
In Wood v Capital Bridging Finance Ltd, Mrs Wood was 75 years old. She lived and continued to live at the property intended as security. Her son-in-law had persuaded her to raise finance against her home for his business (not hers) and Mrs Wood agreed. They sought to raise a loan facility in the sum of £64,000. During the application loan process, she was required to provide two declarations to prove the loan fell outside regulation. The first was a declaration that she did not occupy the property, and the second that the finance was for business purpose. Mrs Wood provided both declarations. Both were false. The proceeds were indeed to be for business purpose, not hers, but her son-in-law’s, in which she had no involvement or share. Given her age, it was unlikely that Mrs Wood would have been actively involved in any business.
As a finding of fact, the lender received notice (by email) that the loan purpose was to assist a family member, and notwithstanding, proceeded with the advance on the basis of the business declaration provided. That email, and the business purpose declaration were somewhat inconsistent, but the lender did not pursue the point further.
As regards the non-occupation declaration, it was accepted, that the lender was wholly deceived; Mrs Wood even going to the lengths of providing falsified bank statements to prove an alternative residential address.
The son-in-law who had promised to repay the debt did not do so, and later absconded to North Cyprus, leaving his mother-in-law to face the lender’s actions for recovery of debt.
During the course of the action, issues arose as regards the validity and execution of the Legal Charge, resulting in the lender relying on its money judgment for its debt under the facility and thereafter an Order for Sale of the property, rather than the usual mortgage possession route founded upon a valid mortgage deed. Money judgment in the lender’s favour was granted in the County Court.
The borrower sought to avoid the order for sale, based upon the judgment having been obtained on an improperly executed consumer credit act agreement, and only being capable of being enforced by enforcement order under the special procedure laid down by the Act, and not within the form of the present proceedings.
The Law
Where a loan facility is regulated by the Consumer Credit Act, its form and content are prescribed thereby. Agreements which are by character regulated, but where the formalities prescribed by the Act have not been met, may only be enforced by enforcement order under Section 127 of the Act.
Section 127 of the Consumer Credit Act gives the Court an extensive range of powers when allowing a lender to enforce, including powers to reduce the debt (or indeed discharge the entire sum payable).
The burden of proving business exemption falls on the creditor but this can be discharged, by way of presumption where the creditor obtains declaration in prescribed form, and this is typically the case. All lenders in the lending community will be aware of the format of the declaration and the need to obtain such a declaration in unregulated lending.
However if a creditor knows, or ought to know, that the declaration is false, he may have failed to discharge the necessary burden and will face huge difficulty in persuading a court that the loan falls outside regulation. Even if a lender receives a false declaration, but has a reasonable cause to suspect that the loan is indeed for business purpose, he may still be able to prove that the lending falls within the exception.
The Result
The Court of Appeal held, that the loan amounted to regulated lending and the lender in this case could not rely upon the borrower’s own declaration of business purpose, which it knew, on a finding of fact, to be false. In this case, the Court held that the lender placed no reliance upon the declaration, and as a result of that, the borrower was not prevented from advancing an argument on regulation later at court, notwithstanding her own misrepresentation, deceit and dishonesty in obtaining the loan on the basis of her own false declaration provided with intent to avoid regulation.
But it is notable the Court did not dismiss the proceedings entirely, and took a pragmatic approach in paving a route for recovery, on the basis that the borrower knew and understood that she had borrowed money, accepted that a debt had arisen, and a sum remained likely to be due notwithstanding deficiencies in the documents. So the Court provided the lender with further opportunity to apply, within the existing set of proceedings for an enforcement order (see above) and, helpfully to the lender, also sought the borrowers undertaking not to dispose of the security in circumstances where the charging order could no longer continue (being based on a judgement which was set aside), until issues are resolved.
Lessons to be learned
Obtaining declarations which deal with taking lending outside the parameters of regulation is not a simple tick box exercise. Underwriting requires the lender to know and satisfy themselves that the declarations have merit, are believable, and are likely to be reliable in the context of the overall facts, circumstances and application detail.