A recent Federal Court decision sheds light on how presumptions about business purposes are treated under the National Credit Code (NCC), particularly in cases where borrowers have, or have not, provided a business purpose declaration.
This article unpacks a significant Federal Court ruling that’s sending a clear message to credit providers: relying on business purpose declarations without making proper enquiries is no longer enough.
ASIC has taken action against Green County Pty Ltd and Max Funding Pty Ltd for failing to verify the true purpose of loans issued to two vulnerable borrowers. The case explores how presumptions under the National Credit Code (NCC) apply, when they fail, and the legal and financial risks for lenders who don’t meet their obligations.
If you’re a credit provider, this is your compliance wake-up call.
Presumptions and Business Purpose Declarations
Under section 13 of the NCC:
- loans are presumed to be consumer loans and regulated unless the contrary is established.
- when business purpose declarations are used appropriately, Credit Providers can rely on the presumption that the use of the loan funds is not for consumer use.
- this presumption has limitations however and will not apply if the Credit Provider has reason to believe the purposes are consumer purposes or could have found this out by reasonable enquiry.
Unregulated loans are exempt from critical legal and regulatory requirements, including the licensing of credit providers and compliance with responsible lending obligations under the National Consumer Credit Protection Act 2009 (Cth) framework.
The Credit Providers
The case involved credit providers, the lender Green County Pty Ltd (GC) and its loan referrer/loan manager Max Funding Pty Ltd (MF), who issued multiple loans to two individuals.
Features of the loans were that they were turned around rapidly (within 72 or even 24 hours) and that neither GC nor MF had any in person meetings or even video conferences with borrowers. All communications were in writing (post or electronic) or via telephone.
MF’s website advertised “Small Business Loans in Australia, decision in 3 minutes”, “Get up to $1 million in loan funds”, “same day funding” and included GC’s loan application form. Loans were to be secured by mortgages and Start Up Business Loans were stated to be one of the most popular products.
The Borrowers and Their Loans
Of the two borrowers:
- Consumer 1 was a chronic gambling addict working in the concreting industry who applied for a business loan initially of $2,000, claiming he would use the funds for establishing his own concrete business when he had no such intentions.
- Consumer 2 was on Workcover and also applied for $2,000 for a seafood business she had no intentions to establish. MF called her to enquire about the loan’s purpose and she maintained the lie.
- Both had bad credit scores of “Risky: Dishonour double ⚠”.
- In respect of Consumer 1 his gambling was noted.
- Consumer 2 had another personal loan she had defaulted upon.
- Both borrowers provided business purpose declarations for their first loans which they accepted at trial were dishonest, after which they were “pre-approved” for significant sums for line of credit loans, in amounts of $273,000 and $114,000 respectively.
- Consumer 1 was given two more advances, signing forms (but not declarations) claiming business purposes, despite his financial situation and his credit score worsening each time, and his financial counsellor revealing there was never a business nor a genuine intention before the third loan.
ASIC pursued GC and MF on the basis that all loans were regulated.
Findings For First Loans
The Court found against ASIC for Consumer 1’s first loan, as the evidence was that Consumer 1’s addiction would have led him to lie further in order to obtain the original funds. Further enquiry at the stage he claimed to be in his business plans would therefore have been pointless. GC and MF were entitled to rely upon the declaration for this loan when all the facts were considered.
In respect of Consumer 2’s first loan a different finding was made. The Court considered the steps taken by GC or MF to verify Consumer 2’s intentions were of such poor quality that they did not amount to reasonable enquiries. Had better questions been asked of Consumer 2 then her true purpose of the loan would have been revealed.
Examples of the better questions she would not have been able to provide an adequate response to was given by the judge:
“For example, if asked (a) to provide further basic information as to the business, such as information about the specific type of retail seafood business she proposed to operate, (b) how she would fund the business, now and into the future, (c) whether she would have staff, (d) how she proposed to generate $55,000 per annum in profit (and indeed how she calculated that figure in the first place) and how should otherwise make ends meet in the meantime, (e) what she intended to use the funds for specifically, (f) whether she would be ceasing her then current employment to work in the business full-time, and (g) whether the business would be operated from a retail shop or markets, where she would source seafood, etc, it would have become obvious that she did not in fact intend to use the credit for the purpose of establishing a retail seafood business.”
His Honour summarised his findings on this point as follows:
“I am satisfied that, if reasonable inquiries had been made, the corporate respondents would have known or had reason to believe that Consumer 2 would not be applying the credit towards the purported business and that the credit would be applied wholly or predominantly for a Code purpose.”
Findings For 2nd Loans
No declaration had been obtained for either of the 2nd loans, meaning that GC and MF needed to establish that a contrary use for the loan funds existed.
They failed to do this for Consumer 1, as with this loan application:
- evidence showed his deteriorating financial condition;
- no evidence existed:
- that a business had been established with the first loan;
- as to what specifically the further advance was to be used for.
They again failed in respect of the 2nd loan to Consumer 2, the Court noting there was no evidence that:
- she had been asked to explain the purpose of the 2nd loan;
- GC had investigated if the 1st loan had been used toward the business;
- anyone had queried if Consumer 2 had even applied for an ABN.
Both 2nd loans were therefor regulated loans.
Finding For The 3rd Loan To Consumer 1
In respect of the 3rd loan to Consumer 1, GC and MF had been informed that Consumer 1 had never operated a business, so the presumption the loan was regulated was not able to be rebutted, His Honour Judge Shariff saying in respect of this 3rd loan:
“It is frankly perplexing that credit was provided by the corporate respondents to Consumer 1 notwithstanding the unequivocal position that had been conveyed.”
What’s Next?
The proceedings in respect of what penalties may be issued against GC and MF are still on foot, with further hearings to occur in October. Judgment can be expected later this year or early next year.
Interesting Factors
- Neither GC nor MF held the licences required to be involved in regulated loans and have now been involved in the proceedings brought by ASIC since March 2023, including 8 days of trial.
- A director of GC was also pursued, the claim against her dismissed at trial.
- GC and MF argued that there was one loan contract with each borrower. This argument failed, meaning the later loans were presumed to be regulated.
- Total loans advanced to Consumers 1 and 2 were less than $10,000 each.
- In the failed claim against GC’s director, neither GC nor MF were noted as being more than modestly profitable.
Lesson For All Lenders:
Regardless of what penalties are issued to GC and MF, the vigour with which ASIC has chosen to pursue these smaller credit providers for relatively small loan amounts to two borrowers should be cautionary.
The lack of reasonable enquiries meant 3 of the 5 loans were unable to be demonstrated to be unregulated, either to support a declaration that had been obtained or to rebut the automatic presumption where none had been obtained. Had reasonable enquiries been made in respect of these 3 loans GC and MF could have avoided them and the prosecution related to them.
To protect their loans and avoid prosecution, lenders should therefor ensure they:
- enquire reasonably and appropriately to confirm that the true purpose of the loan is for business purposes, and otherwise avoid the loan or (if licenced to do so) document as if it were a regulated loan; and
- if confident for business purposes after making the reasonable enquiries, ensure a fresh declaration is obtained for each advance that may be taken to be a separate loan.
About the Author – David Edwards
David is our trusted Senior Associate – Compliance at Green Mortgage Lawyers. With deep expertise across litigation, mortgage lending, agribusiness, and regulatory matters, he brings sharp legal insight and commercial clarity to every file. David is a go-to adviser for credit providers navigating today’s increasingly complex compliance landscape.