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.
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
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
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
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.
The content of this article is intended to provide a
general guide to the subject matter. Specialist advice should
be sought about your specific circumstances.
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