CCCFA -Debtor's purpose when entering into a credit contract

This Topic Includes:

Personal purpose then used for business 
Unclear purpose
Documenting a business purpose as as consumer credit contract

Unless you can establish otherwise, it will be assumed that the debtor has entered into the contract for consumer purposes.

Ascertaining the debtor’s purpose when entering into a credit contract

If you are not certain what the debtor’s purpose is when entering into a credit contract, the Act (Section 11, Meaning of consumer credit contract) allows you to take a declaration from a debtor as to their purpose. If they declare they are entering into the contract primarily for business or investment purposes, the contract is not a consumer credit contract.

You may rely on the declaration as evidence of the debtor’s purpose. However, if the person who took the declaration knew, or had reason to believe, that the debtor was in fact entering into the contract for personal, domestic or household purposes the declaration will be ineffective. It does not matter who took the declaration. You should be wary before relying on declarations taken by brokers or other third parties.

To be effective, a declaration must be in writing in a separate document that the debtor has confirmed they have read and understood. If a declaration is not in this form, you will lose the benefit of the declaration and will have to rely on other evidence to establish that the contract is not a consumer credit contract.

What if the debtor enters into the contract for personal purposes but later uses the credit for business purposes, or vice versa?

The contract is established as a consumer credit contract (or otherwise) depending on the debtor’s purpose at the time they entered it. It is irrelevant if their subsequent use of the credit differs from this. However, in absence of other information, their use of the credit may be evidence of their intentions in entering the contract.

Examples

• Sally enters a credit contract to buy a vehicle and intends using it for her sales business. You take a declaration to that effect. However, Sally later uses the car for her personal transport. As at the time of entering the contract Sally’s purpose was business related, it is not a consumer credit contract.
• Paul borrows $100,000 for the purpose of renovating his house, but uses it to build an office. Because at the time of entering the contract Paul’s purpose was domestic, the contract is a consumer credit contract.

What if the debtor’s purposes are still unclear?

In some cases the debtor’s purpose may remain unclear, or you may not wish to inquire as to their purposes. For example, if the majority of your customers obtain credit for domestic purposes, it may not be efficient to inquire as to each debtor’s purpose or to establish separate systems for business and consumer credit.

In this case, you may choose to document all your contracts as consumer credit contracts. By doing so, the Courts may not apply the most serious consequences that may arise if they subsequently determine that a contract is a consumer credit contract but you have not fully complied with your obligations under the Act relating to consumer credit contracts.

What if I document a business credit contract as a consumer credit contract?

If it is later shown that the debtor entered the contract for business purposes it will not be a consumer credit contract. This means that in a dispute, the debtor cannot claim the penalties and remedies that are only available to consumer debtors.