Can settlement agreements be regulated credit agreements, and are lenders at risk of falling foul of the provisions of the Consumer Credit Act 1974 (CCA)?
In CFL Finance Ltd v Bass & Others  EWHC 1839 (Ch) the Court looked into whether settlement agreements need to comply with the CCA, and whether their enforceability can be challenged on these grounds.
Lenders can, for the time being, rely on this decision that structured settlement agreements are not regulated consumer credit agreements.
The debt action arose out of a loan given by CFL Finance Ltd (CFL) to Lanza Holdings Limited (Lanza). Lanza defaulted and CFL sued Moises Gertner (MG), a director of Lanza, on his personal guarantee for circa £1.7m.
The proceedings were compromised in a Tomlin Order under which MG agreed to pay £2m by instalments. It was a term of the Tomlin Order that if he failed to make payments then the entire amount would become due and payable. He failed to pay, and insolvency proceedings followed. CFL sought a bankruptcy order and took action to enforce the debt.
It was accepted by all parties that the schedule to the Tomlin Order was a contract. MG's primary argument was that this contract was a regulated credit agreement under the CCA, and as CFL had failed to comply with the mandatory requirements for regulated credit agreements, the Tomlin Order was unenforceable.
In particular, MG challenged the debt on the basis that s.77A (duty to provide periodic statements) and s.86B (duty to provide notice of sums in arrears) of the Consumer Credit Act 1974 (CCA) had not been complied with. MG argued there was also an unfair relationship between the parties pursuant to section 140A of the CCA.
If his arguments were accepted, CFL would not have an enforceable debt.
s.9(1) CCA provides that "credit" includes a cash loan, and any other form of financial accommodation. MG argued that as the payment schedule defers payment, it is "credit" within the meaning of the CCA.
The Court considered decisions in past cases such as Dimond v Lovell  1 QB 216, in which it was held that "if payment for goods or services or land is deferred after the time when, if nothing about the time for payment had been agreed, the payment would be due, the payer is giving credit". Dimond was distinguished on the basis that in CFL's claim, there was no absence of agreement as to when MG's debt was due; it was due on the dates specified in the Tomlin Order. There was no agreement for payment to be deferred after the dates specified for payment in the Tomlin Order.
This may be open to challenge, as it appears that in Dimond the intention was that the Court should consider the hypothetical 'if there was no agreement as to the date for payment, then when would the debt have become due?' test, and then consider whether the time for payment had been extended beyond that date.
In Holyoake v Candy  EWHC 3397 (Ch), it was accepted that a series of supplemental agreements rescheduling a loan were subject to consumer credit regulation. MG's debt owed to CFL was distinguished on the basis that in Holyoake the original loan was "a credit agreement as defined in s. 140C(1) as it was an agreement between Mr Holyoake, an individual, and CPC by which CPC provided Mr Holyoake with credit", as opposed to a personal guarantee.
Again, by distinguishing on these grounds the judgment could be questioned, because it does not apply the test outlined above and instead focuses on the underlying source of the debt. The fundamental principles relating to settlement agreements and providing credit were the same in Holyoake and in CFL's claim.
The Court disregarded MG's submission that the entire amount had become due and payable immediately upon MG's failure to make payments in accordance with the payment schedule (as per the default clause in the Tomlin Order), and that therefore the time for payment had been extended.
Chief ICC Judge Briggs found that a reasonable person would have understood the parties to mean that no credit was extended beyond the due date for payment. It did not give MG the option to pay later than the time by which payment must be made under the contract; instead he had been given a structured schedule for satisfying his contractual obligation. Under the operative clauses of the contract, the debt was not due and payable immediately; it was due on the dates specified. That was the agreement and the purpose of the contract.
He held that, "On a true interpretation of the Contract the debt in the Contract was not deferred, and credit not extended. In my judgment the law does not provide that a structured settlement clause making provision for the payment of a debt over time extends credit or financial accommodation"
The provisions of the CCA did not apply.
This decision provides authority that, in general, a debt compromised in a structured settlement agreement does not constitute credit and is not subject to the provisions of the CCA. This is good news for the many settlement agreements and Tomlin Orders out there which have not been documented as regulated credit agreements.
However, it should be noted that Chief ICC Judge Briggs's decision could be criticised when considering that:
There is scope to argue that the Court was wrong to find that the entire amount had not already become due and payable, or that absent agreement it would not have become due and payable in any event, which, applying Dimond, would mean the time for payment had been deferred.
Whilst the judgment in CFL can be relied upon for now, caution should be exercised in distinguishing past cases on their facts.
Read the full judgment
Contributor: Zoë Lockton
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