Business purpose declaration provided too late

In Bahadori -v- Permanent Mortgages Pty Ltd (2008) NSWCA 150 (26 June 2008) the New South Wales Court of Appeal decided that a signed business purpose declaration was ineffective under section 11(2) of the Consumer Credit Code where the declaration was obtained after the credit contract was entered into.

Background

Under section 11(1) of the Code, where for example the debtor is an individual ordinarily resident in the jurisdiction, it is presumed the Code applies to a credit contract, mortgage or guarantee unless the contrary is established.

Section 11(2) provides that it is presumed conclusively that the credit is to be applied wholly or predominantly for business or investment purposes (or for both purposes) if the debtor provides a declaration to that effect before entering into the credit contract.

Section 11(3) of the Code does however prescribe circumstances where a declaration can be ineffective if the credit provider knew or had reason to believe at the time the declaration was made that the credit was in fact to be applied wholly or predominantly for personal, domestic or household purposes.

The Decision

In Bahadori, a signed business purpose declaration was given after the initial letter of offer was accepted by the borrower and before the execution of the mortgage documentation.

Relevantly, Schedule 1 of the Code defines “contract” as including a series or combination of contracts or contracts and arrangements.

Applying this extended definition of “contract”, the Court of Appeal held on the facts that the accepted letter of offer constituted the first contract or arrangement in respect of the loan. It was said it was not necessary for the entire loan and mortgage documents to be executed before a credit contract came into existence.

The declaration provided by the borrower was ineffective as it was provided after the acceptance of the letter of loan offer.

As a result the lender in Bahadori was not entitled to the benefit of the section 11(2) presumption. Unfortunately, for the lender the loan on the facts was plainly for personal purposes. As a consequence, the loan and mortgage were subject to the requirements of the Code and the borrower was entitled to the protection under the Code.

What it means for lenders

A lender who seeks to rely upon the business purpose declaration should ensure that the signed business purpose declaration is provided to the lender before the borrower signs any document that forms part of the credit contract.

Lenders should be aware of the extended definition of a “contract” under the Code and implement appropriate procedures and documentation to ensure that the signed business purpose declaration is effective.

For more information regarding the information in this article, please contact Graham Roberts, Partner on (07) 3231 2404.