This article will consider an interesting case involving deceit, when some defendants took out an unregulated loan, secured on a residential property, on the basis that the loan was wholly or predominantly for a business purpose.  

Background Facts

The case related to a lender, the Claimant, who was not authorised to carry out regulated activity under the Financial Services and Markets Act 2000 (“the FSMA”). The Claimant specialised in providing unregulated loans.

The Claimant provided a loan to A and B (“the Defendants”), which was secured on their residential property (“the Property”). The loan provided by the Claimant (“the Loan”) was a short-term loan for 6 months, which was repayable in full upon expiry of the 6-month term.

After expiry of the Loan term, the Claimant started possession proceedings as the Defendants had not paid off the Loan.

The Defendants had bought the Property initially using a mortgage from a regulated lender. However, the regulated lender had sought possession of the Property due to mortgage arrears. The Defendants had been unable to secure a re-mortgage due to their financial circumstances and approached a company (“the 3rd Party”). The 3rd Party stated it specialised in avoiding repossessions and could help arrange a loan which was based on the equity in the Property. The 3rd Party assisted the Defendants get the Loan from the Claimant and charged a fee for its services.

The Loan paid off the existing mortgage by the regulated lender, the 3rd Party’s fees and provided the Defendants with some money.

Key Legal Arguments

The Claimant relied upon representations made by the Defendants that they were not living in the Property and the Loan was for a business purpose. The Claimant also relied upon a declaration signed by both Defendants giving rise to a presumption under Art 60C(5) of the Financial Services and Markets Act 2000 (Regulated Activities Order) 2001 (“the RAO”).

The Defendants defended the possession proceedings on the basis that the Loan was regulated and as the Claimant was not regulated, the Loan was unenforceable under s.19 of FSMA as a result.  The Defendants relied upon Art 60C(6) of the RAO in that the Claimant had knowledge, or had reasonable cause to suspect that the Loan was not wholly or predominantly for the purpose of a business.

Reasonable Cause to Suspect

The judge was satisfied that the Loan had been formed at the point that the countersigned written agreement had been provided to the Claimant. The elements of a contract were made out where there was an offer, acceptance, communication of the acceptance and there was certainty of terms. These were all present.

At the point when the Loan was entered (roughly 2 weeks prior to the funds being released by the Claimant), the judge held there had been mixed messages. The Claimant had continued requesting information to satisfy itself whether the Loan was truly for a business purpose between the Loan agreement being formed and the funds being released.

Therefore, at the point of entering into the Loan agreement as per Article 60C(6) of the RAO, the Claimant had reasonable cause to suspect that the Loan was not wholly or predominantly for purposes of a business.  The presumption of the declaration under Article 60C(5) did not apply.

Deceit

There was a completed application form that the Claimant (allegedly) received for the Loan which consisted of 6 pages with signatures on the last 2 pages of both the Defendants. However, the Defendants were able to show that they had only been provided with the last 2 signature pages by the 3rd Party. The Defendants had returned the signed 2 pages to the 3rd Party without seeing the document in full.

There was also a sham tenancy agreement that was purportedly signed by the Defendants as joint landlords letting out the Property. The Defendants both denied ever seeing and signing the tenancy agreement. It was the Defendants’ case that they always lived in the Property and never had any intention to let out the Property.

Additionally, there were separate certificates of advice for each Defendant signed by the Defendants’ conveyancing solicitor confirming advice had been given to each Defendant. The said solicitor certified witnessing in person signatures by the Defendants on documents including the legal charge. The Defendants stated they had never met the conveyancing solicitor in person. In fact, there was an email from the 3rd Party asking the Defendants to sign a document and not to have it witnessed before returning the document. The conveyancing solicitor had then signed the documentation stating he had witnessed the signatures.

The judge held that the 3rd Party and the conveyancing solicitor were part of the overall deceit. The judge stated

“I have no trouble at all in accepting this in circumstances where it is firmly established that the 3rd Party sent partial documents to the Defendants to sign and then appended the signature pages to documents their clients had not seen; and in circumstances where it is very clear that an individual working at the conveyancing solicitor firm falsely claimed to have witnessed signatures which he had not witnessed and certified that he had given advice which he had not given.

In the face of that obvious misconduct by both the 3rd Party and conveyancing solicitor firm, it is no great stretch to find that they would fabricate a tenancy agreement and further evidence and details of a tenancy with no involvement by the Defendants.  Copying and pasting signatures onto documents and amending documents after signature without a client’s knowledge or involvement is no more egregious than the other acts which I have already found the 3rd Party and conveyancing solicitors committed.  In those circumstances, unusually, this is not a case where I consider that I would need expert evidence to find that, on the balance of probabilities, the documents were not, in fact, signed by the Defendants.” [edited to anonymise the names]

The judge further commented on how it was gross misconduct on the part of the conveyancing solicitor.

Estoppel

The Claimant also argued that given representations made by or on behalf of both Defendants, they were estopped from arguing that the Loan was not for a business purpose. The judge held that at the point of entering the Loan agreement, the Claimant was questioning those representations and seeking further clarification. As such, the Claimant did not rely on the representations.

Further, the judge held that estoppel would undermine the statutory framework under Article 60C of the RAO. All that was required was to show that the Claimant had knowledge or reasonable cause to suspect that the Loan was not wholly or predominantly for business purpose, which was mutually exclusive with estoppel. The judge further relied upon the case of Wood v Capital Bridging Finance Ltd [2015] EWCA Civ 451 where Briggs LJ stated that the protections for customers existed where there is a false declaration that a loan is for a business purpose where the lender has grounds for suspicion.

The judge agreed with the Defendants and held that the Loan was unenforceable as a result.

Commentary

This case highlights the importance for unregulated financial institutions to ensure that they have satisfied themselves that any exemption applies before entering into any agreement. Although the Claimant held off releasing the funds until it believed it had satisfied itself that the exemption applied, this had no effect regarding Article 60C(6) of the RAO. The point in time the court is concerned with, is when the agreement is entered into - that is the point in time when the court is concerned with the lender’s knowledge or if there is reasonable cause for suspicion.

It is also worth noting that when the Loan agreement was formed, the Claimant not only had evidence suggesting the Loan was for business purposes, but also information that contradicted that position. This included a bank statement with an alternative address. The Defendants had actively changed their address for one bank account in which they knew a statement was being provided to the Claimant. Despite this, the court still found the Loan unenforceable and that it was not just and equitable for the Loan to be enforced under s.28 of the FSMA.

Credit also to Will Jones of Jones & Co Solicitors (https://www.jonessolicitors.co.uk/) who represented the Defendants, in their successfully dismissal of the possession part of the claim.