Away from the courts, 2009 may have been an atrocious year for the banks, yet in front of the senior judiciary they notched up a number of notable successes. Most widely-reported was Office of Fair Trading v Abbey National plc [2009] 3 WLR 1215, in which the Supreme Court effectively called time on the "bank charges reclaim" litigation clogging the county courts. Less well-publicised was a series of cases handed down, one every month, in October, November and December 2009 in which the courts cast a critical eye over many of the arguments raised by debtors against creditors in the current slew of litigation under the Consumer Credit Act 1974 ("the CCA"). In all three cases, the debtors' principal contentions were roundly dismissed. This article will summarise the key elements of each case in turn.
McGuffick v Royal Bank of Scotland plc [2009] EWHC 2386 (Comm), 6 October 2009
McGuffick concerned a loan entered into in October 2005. In February 2009, Mr McGuffick's solicitors made a request for a copy of his agreement, as well a statutory statement of account, under s.77 of the CCA. S.77 provides that the bank should provide a copy of the agreement and the statement of account within 12 working days, and that during any period of default it is not entitled to "enforce" the agreement: s.77(4)(a).
The bank failed to respond by the deadline. It had received hundreds of such requests from solicitors and claims management companies ("CMCs"). Eventually in May it found and served a copy of the agreement. It forgot to provide a signed statement of account. However, it continued to threaten that Mr McGuffick's details would be passed to credit reference agencies ("CRAs"). Mr McGuffick then issued proceedings for among other things a declaration that, because the bank had not complied with s.77, his obligations under the agreement were suspended, and for injunctive relief, restraining the bank from notifying CRAs of default during the period of non-compliance.
Cleverly, as it turned out, the bank chose not to rectify its omission in failing to serve a statement of account under s.77, so that the case could come on as a test case before Flaux J. The key issue that fell to be decided was the meaning of "enforce" in s.77(4)(a) of the CCA.
To lay the groundwork, Flaux J held that the effect of s.77 is not to extinguish the debtor's obligations during a period of non-compliance. He remains liable, say, to make instalment payments and if he fails to do so a debt will accrue due. The bank's mirror-image rights remain in existence during a period of non-compliance but are statutorily "unenforceable".
What, then, is "enforcement"? Mr McGuffick argued that any coercive action by the bank to compel or secure performance of his prima facie obligations under the loan was "enforcement", including reporting to CRAs. However, he conceded that among other things none of the following constituted "enforcement": issuing a default notice, threatening legal action or instructing a third party to recover a debt. Flaux J thought the concession rightly made: "at most these activities are steps preparatory to subsequent enforcement" [80]. Further, even the bringing of proceedings does not amount to enforcement, because otherwise the bank could not apply to court for an enforcement order under s.127(1) of the CCA: Rankine v American Express Service Europe Ltd [2009] CCLR 3. The comments of Flaux J relating to everything apart from the CRA issue were, of course, obiter dicta only.
Once that concession was made, and approved, it was inevitable that the debtor was going to face an uphill struggle in persuading the court that reporting to CRAs was unlawful "enforcement". Unsurprisingly, Flaux J held that the bank was not debarred from reporting the state of Mr McGuffick's account to CRAs during the period of non-compliance. Neither would the bank be debarred from demanding payment from Mr McGuffick: after all, he remained obliged to pay. So, even if reporting his debt to CRAs was indeed an attempt to coerce him to pay the debt, the bank remained entitled to do so.
What does amount to enforcing the agreement, then? The answer is narrow: obtaining a court order, or seeking to enforce it (for instance by way of a charging order).
Mr McGuffick, as well as the OFT in its guidance on s.77, had got it wrong. The decision may have surprised some advisors, but it followed from the various concessions made by the debtor. There are some difficulties with the decision, nevertheless. "Enforcement" has in effect been confined to the narrow confines of the previous paragraph. In principle it is not easy to understand why to issue a claim does not amount to enforcement (see Rankine) but, say, to obtain judgment in default does. Practical as well as conceptual problems abound. A creditor could issue wrongly obtain judgment in default, and nullify any prima facie effective application to set aside judgment by complying with s.77: the debtor's costs of the application may be irrecoverable, although the application was quite properly made. In any event, the Court of Appeal dismissed Mr McGuffick's application for permission to appeal on 16th February 2010.
Southern Pacific Personal Loans Ltd v Walker [2009] EWCA Civ 1218, 12 November 2009
This was a very different sort of case, turning on a technical argument that the lender had wrongly stated the "total credit" in the agreement. The creditor is required by s.61 of the CCA to state correctly the "amount of credit" in the credit agreement, failing which the agreement is unenforceable unless an order under s.127 can be obtained. For agreements concluded before 6th April 2007 (when s.127 was amended), no enforcement order under s.127 may be made if prescribed terms, such as the "total credit", are incorrect or omitted.
In Walker, a loan, secured by a second charge, had been made in March 2005. The debtors had applied for a loan of £17,500, referred to in the agreement as both the "Loan" and the "Amount of Credit". However, an additional payment was required from them of £875, described as a "Broker Administration Fee". Payment of the £875 fee was deferred for the same period as, and on the same interest terms as, the principal loan. The fee was not described as "credit", but as part of the "Total Amount Financed": not a statutory wording.
The Walkers fell into arrears, and possession proceedings followed. Their defence was that the agreement was unenforceable because the £875 fee should have been included in the "credit" on the face of the agreement. Like many such arguments, it was far from attractive, as if successful the Walkers would gain the windfall of over £40,000 (including payments already made) and the clearance of the second charge. But at first instance before HHJ Halbert QC in the Chester County Court, it succeeded. Judge Halbert was much influenced by the payment of interest on the £875, finding that interest on a mere "charge for credit" was not permitted by s.9(4) of the CCA.
The Court of Appeal disagreed. S.9(4) was of no assistance, because it expressly permitted that payment of a charge for credit could be deferred, but was silent on the question of whether interest could be paid on the charge. Interest was not even a necessary feature or indicator of credit: [34]. The judge should have looked at the purpose of the borrowing, and established whether the broker's fee was part of the borrowing itself, or only part of the cost to the Walkers of the borrowing. It was, concluded Mummery LJ, only part of the cost of borrowing.
Judge Halbert can be forgiven for having got this wrong. The dividing line between "credit" and "total charge for credit" is difficult, and at times impossible, to draw. Before Walker, many advisors would have assumed that interest was, if not necessary to, then at least an indicium of credit: now, it is clear, that would be mistaken. It is probably not even right to take it into account as a relevant factor in drawing the line. The Court of Appeal's approach reveals a certain documentary fundamentalism: the agreement was clear on its face; it did not describe the fee as credit; so it was wrong to argue that the fee was credit. But the case has been appealed to the Supreme Court. It is to be hoped that the final appellate decision will provide advisors with a structured analytical approach drawing the line dividing "credit" from "charge for credit".
Carey v HSBC plc [2009] EWHC 3417 (QB), 23 December 2009
Carey is the most important, and certainly the most lengthy, of the three decisions. With the north-western courts clogged by hundreds of debtors' claims issued out of Manchester, Chester and Salford, HHJ Waksman QC selected a tranche of lead cases and transferred them to the Mercantile Court so as to give a binding ruling to manage the bulk litigation.
In most of the cases, allegations were raised that the lender has failed to provide the information required by s.78 of the CCA (which for present purposes is the same as that required by s.77). Among the most important issues considered by Judge Waksman were:
- What must a creditor provide when asked for a "copy" of agreement under s.78?
- Will the s.78 duty be satisfied by providing a reconstituted copy or must the creditor provide a photocopy of the original agreement?
- Must the document be such as would comply (if signed) with the Consumer Credit (Agreements) Regulations 1983 ("the Regulations")?
- If agreement has been varied by the creditor under a contractual power, does the creditor comply by providing only a copy of the current terms?
- Does breach of s.78 give rise of itself to an unfair relationship under s.140A?
The debtors, and the CMCs underpinning them, came off badly in what might be thought to have been a series of artificial claims. In a scrupulous judgment, most of the principal contentions made by the debtors (and a few of the more extreme positions taken by the banks) were rejected.
Firstly, the "copy" required by s.78 could be reconstituted from information held by creditor as to the terms and nature of agreement from sources other than the agreement itself. The purpose of s.78 is not to prove that the agreement complied with s.61 when made (and so to provide ammunition for claims that it was unenforceable), but to provide information about the agreement. The copy should however contain both the name and address of the debtor as it was at time of execution (although creditors can provide that information from whatever records they have).
Further, when complying with s.78, creditors need not provide a document which in form would comply with the Regulations. The reconstituted information may be contained in a number of documents. However, if the agreement has been varied, the creditor must nevertheless provide a copy of the original agreement and its terms, as well as any variations to it. It would not be good enough for the creditor to provide only the most up-to-date variation, even if by doing so that would be sufficient information to allow the debtor to understand his current obligations.
Unsurprisingly, the debtor cannot legitimately allege that there is an unfair relationship under s.140A (under which the court has a wide range of powers if it finds that the relationship between creditor and debtor arising out of the terms of an agreement is "unfair" to the debtor) only on the basis that there has been a breach of s.78 does not give rise to an unfair relationship under. S.140A is very fact-sensitive, but s.78 provides its own (limited) penalty: the creditor may not "enforce" agreement during the period of non-compliance.
Of the three decisions, Carey is the one that most rewards careful reading. The whiff of opportunism surrounding the claims was not allowed to get in the way of a thoughtful judgment. Judge Waksman dealt with a raft of issues in addition to those set out above, and for practitioners running or defending debtors' claims under s.78, the proper approach to those claims has to a large extent been clarified.
Conclusion
So far, the spate of CMC-driven litigation has not met with much judicial favour. Nevertheless, the flurry of judicial activity shows little sign of abating. Walker has been appealed to the Supreme Court, and a decision is awaited. The bulk "payment protection insurance" litigation will be one of the next in the firing-line, and it is anticipated that the High Court may rule on a number of test cases this year or shortly into 2011. It is understood that the Court of Appeal may well rule soon on whether the de minimis principle applies to the calculation of the total charge for credit in a fixed-sum agreement. Watch, as they say, this space.
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