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Can settlement agreements be regulated credit agreements and do lenders risk breaching the provisions of the Consumer Credit Act 1974 (CCA)?

In CFL Finance Ltd v Bass and others [2019] EWHC 1839 (Ch) the Court considered whether the settlement agreements had to comply with the CCA and whether their enforceability could be challenged on these grounds.

Lenders can, for now, rely on this ruling that structured settlement agreements are not regulated consumer credit agreements.

Fund

The legal action arose out of a loan made by CFL Finance Ltd (CFL) to Lanza Holdings Limited (Lanza). Lanza defaulted and the CFL sued Moises Gertner (MG), a director of Lanza, on his personal guarantee for around £1.7million.

The proceedings were compromised in a Tomlin order under which MG agreed to pay £2million in instalments. It was a term of the Tomlin order that if he made no payments, the full amount would become due and payable. He failed to pay and insolvency proceedings followed. CFL applied for a bankruptcy order and took steps to enforce the debt.

It was accepted by all parties that the Schedule to the Tomlin Order was a contract. MG’s main argument was that this agreement was a regulated credit agreement under the CCA, and because CFL failed to comply with the mandatory requirements of regulated credit agreements, the Tomlin order was unenforceable.

In particular, MG disputed the debt on the ground that Sections 77A (duty to furnish periodic statements) and 86B (duty to notify sums overdue) of the Consumer Credit Act 1974 (CCA) had not not been respected. MG argued that there was also an unfair relationship between the parties under Section 140A of the CCA.

If its arguments were accepted, the CFL would not have an enforceable claim.

Authorities

Section 9(1) of the CCA provides that “credit” includes a cash loan and any other form of financial accommodation. MG argued that since the payment schedule defers payment, it is a “credit” within the meaning of CCA.

The Court reviewed decisions in previous cases such as Dimond vs. Lovell [2000] 1QB 216in which it was held that “if payment for goods or services or land is deferred after the time when, if no payment period had been agreed, payment would be due, the payer grants a credit“. Diamond was distinguished on the grounds that, in CFL’s request, there was no lack of agreement as to the due date of MG’s debt; it was due on the dates specified in the Tomlin order. There was no agreement that payment be deferred beyond the payment dates specified in the Tomlin order.

This may be questionable, as it seems that in Diamond the intention was for the Court to consider the hypothetical ‘if there was no agreement on the payment date, so when would the debt have become due? » test, then examine whether the payment term has been extended beyond this date.

In Holyoake vs. Candy [2017] EWHC 3397 (Ch), a series of covenants rescheduling a loan were admitted to be subject to consumer credit regulation. MG’s debt vis-à-vis CFL was distinguished on the grounds that in holyoake the original loan was “a credit agreement within the meaning of Art. 140C(1) because it was an agreement between Mr. Holyoake, an individual, and CPC whereby CPC granted Mr. Holyoake credit“, as opposed to a personal guarantee.

Again, in distinguishing on these grounds, the judgment could be questioned, as it does not apply the test described above and instead focuses on the underlying source of the debt. The fundamental principles relating to settlement agreements and the granting of credit were the same in holyoake and in CFL’s claim.

Decision

The Court disregarded MG’s argument that the entire amount became due and payable as soon as MG failed to make the payments according to the payment schedule (in accordance with the default clause of the Tomlin order) and that, as a result, the time for payment had been extended.

ICC Chief Judge Briggs found that a reasonable person would have understood the parties to mean that no credit was given beyond the payment due date. He did not give MG the option of paying later than the date on which payment must be made under the contract; instead, he was given a structured schedule to meet his contractual obligation. Under the operative clauses of the contract, the debt was not due and payable immediately; it was due on the dates indicated. That was the agreement and the purpose of the contract.

He argued that “According to a true interpretation of the contract, the debt in the contract was not deferred and the credit was not extended. In my view, the law does not provide that a structured settlement clause providing for the payment of a debt over time extends credit or financial accommodation

The provisions of the CCA did not apply.

This decision provides that, generally, a debt compromised in a structured settlement agreement does not constitute a credit and is not subject to the provisions of the CCA. This is good news for the many Tomlin settlement agreements and orders that have not been documented as regulated credit agreements.

However, it should be noted that ICC Chief Justice Briggs’ decision could be criticized if one considers that:

  • the debt itself was due immediately under MG’s personal guarantee;
  • the Tomlin order also provided that the debt was immediately repayable in the event of default by MG in accordance with the payment schedule; and
  • at common law, where no time for repayment is specified, the lender’s cause of action arises from the date of the loan and the debt is repayable from that date.

It is arguable that the Court erred in concluding that the full amount had not already become due or that but for the agreement it would not have become due anyway, which, applying Diamondwould mean that the payment deadline has been postponed.

While the judgment of CFL can be relied upon at this time, caution should be exercised in distinguishing past cases based on their facts.