Credit coercion

Making business transactions with personal credit cards is illegal. Cookseys managing director David Morgan explains how new regulations affect who can be prosecuted

We all know that times are hard and for an increasing number of tied leaseholders, their financial world is caving in.

There has been an exceptional level of desperation escalating in the last few months — not only from lessees trying to pay for beer and supplies, but also from some of their pubco business relationship managers (BRMs), who have to meet monthly targets to keep their salary bonus structures in place.

An often repeated and dangerous practice is lessees who pay for beer and other supplies by using their credit cards to run up the bills in the short term.

If the card is registered to the business as a "business use card", then the card company will take the money out by direct debit on a monthly basis, which is normal practice. However, the danger begins when using a personal/private credit card.

MasterCard and Visa, for example, both send you a two-sided, small-print summary of terms and conditions with the start of a new credit card. OK, so nobody ever reads them, but at the very least you need to understand some basic rules. Under the Consumer Credit Act 1974, the credit-card companies require that with a private credit card "you must not use your card for anything illegal or for business purposes".

The credit-card company can end the agreement at any time and confirms that "we may require you to pay the full amount you owe under this agreement if you break this agreement repeatedly or seriously or any of the terms and conditions therein, but we will follow legal requirements for your protection before we ask for payment".

Legislation has been beefed up by the Consumer Protection from Unfair Trading Regulations 2008, which came into force on 26 May. Basically, the regulations introduce "a general prohibition on traders in all sectors engaging in unfair commercial (mainly marketing and selling) practices against consumers".

The law is only now weeks old and has not yet been tested in the courts. However, adding to previous consumer protection regulations, it links the pubco with the lessee if it was the pubco that induced the lessee to purchase business goods on a personal credit card.

Pressure is everything — if the pubco places the lessee on cash-with-order, ie, no line of credit or time to pay (they get 90 days) and either the credit-control office or the BRM tells the lessee to pay by credit card without assuring themselves that it is a business credit card, they could be as liable as the lessee for a fraudulent action. If that is the case they face fines (up to £5,000) or imprisonment for up to two years. The offence is criminal, not civil.

The consumer protection regulations apply to business practices and not private transactions, so a pubco "selling" beer to the lessee is considered in legal circles as "a business transaction". For clarity, the regulations apply to "actions, omissions and other conduct directly connected to the promotion, sale or supply of products or services to or from consumers".

In this example, there is an accepted grey area over the word "consumer". The fact that the licensee buys the product for onwards sale is not considered to change the fact that the pubco is selling the product to the licensee.

By the pubco selling beer to the lessee who accepts/takes in the promotion/sale of the product, the lessee has accepted the product and thus technically consumes it. The primary responsibility of the vendor of the product (the pubco) is not to induce the licensee to enter into an illegal contract by using a private/personal credit card to purchase business goods.

The rules of the credit card companies are clear cut. You cannot and should not use a private/personal credit card for business use. The responsibility for such action only ever impacts when the cardholder goes into administration or is declared bankrupt. At that stage, the Receiver looks for responsible parties as to how the debt has occurred. If they happen on the BRM or the credit-control office of the pubco, the very latest legislation may well widen the net of criminal legal responsibility.

The new regulations include practices that intimidate or exploit consumers (physically or psychologically) by harassment, coercion or undue influence so that the typical consumer's freedom of choice or conduct is significantly impaired, and he makes a different decision as a direct result. Responsibility under the latest consumer regulations has now cast the net far wider than before to include the root cause for any fraudulent action.