In the UK, the Court of Appeal in CFL Finance v Laser Trust & Mr Gertner (2021) recently decided that, if a lender gives an individual (e.g. a guarantor) time to pay a debt (e.g. under a settlement agreement), that agreement may be regulated by the Consumer Credit Act and be unenforceable without the court’s permission and (if applicable) The Financial Conduct Authority’s permission; this decision is of practical importance to lenders and their legal adviser, writes Kevin Heath of Locke Lord LLP. 

Where credit is provided to a company (e.g. loan or hire purchase), the credit agreement is not subject to the Consumer Credit Act 1974 (CCA), as the CCA only applies to an agreement with an “individual”[1].

Time to pay

If an individual has given a personal guarantee as security for repayment of the debt owed by the company and the creditor calls in the guarantee and then (in exchange for the creditor giving the individual time to pay), the individual provides consideration (see below), the creditor may[2] have given “credit” (within the CCA[3]) to the guarantor.

In that event, the debt would be unenforceable without an order of the court and (if the creditor is not authorised to engage in credit-related regulated activity) the Financial Conduct Authority’s (FCA) permission: CFL Finance v Laser Trust & Mr Gertner (2021)(CA)[4].  

In short, even though the credit agreement with the company is not regulated by the CCA, the agreement giving the “individual” time to pay may be regulated “credit”, if there is consideration (see below). 

Consideration

The requirement for consideration may be satisfied where, for example, the individual has agreed to pay: (a) interest at a higher rate or on a different basis than that already payable under the guarantee or any amount for interest if not previously payable; or (b) a fixed amount in respect of the creditor’s legal costs[5] (even though payable under the guarantee[6]) or any legal costs (if not so payable).  

Settlement

If there is a dispute over an individual’s liability to the creditor, which is compromised by a settlement agreement, which gives the individual time to pay an unregulated debt and, in exchange, the individual gives up his or her defence, the CCA will not apply to the settlement if: 

(a) the creditor simply refrains from enforcing its right to immediate payment (i.e. forbearance) and the individual has not provided consideration, i.e. no agreement[7];

(b) the individual recognised his/her defence to lack “even a fair chance of success”, i.e. no consideration[8];

(C) the individual genuinely disputed the creditor’s claim in its entirety on substantial grounds[9], i.e. no existing debt = no “credit”[10]; ‎or 

(d) the settlement is embodied in a court order (not a schedule to it), i.e. no agreement[11]‎. 

The CCA may apply to a settlement, however, if:‎

(i) the settlement purports to exclude the application of, or to settle claims under the CCA, where there is (a) no genuine dispute about the application of the CCA[12] or (b) no bona fide compromise of claims made under the CCA, i.e. public policy [13];

‎(ii)‎ the individual did not have a defence to the entirety of the creditor’s claim[14], i.e. there is a debt; or

(iii) the settlement is by way of a deed, i.e. no consideration required[15].‎

Enforcement

If the CCA applies and the agreement giving time to pay does not comply with the requirements of the CCA (e.g. proper execution, periodic statements and notice of arrears[16]), the settlement agreement is unenforceable without:‎

‎(i)‎ an enforcement order, which the ‎court will not grant unless (amongst other things) it considers ‎it just ‎to do so having regard to (amongst other things) the prejudice ‎caused by the ‎‎contravention in question and ‎the degree of culpability for it[17]; and

‎(ii) ‎ permission ‎from the FCA[18] to enforce the settlement on the ground ‎that “it is just ‎and equitable in the circumstances of the case”, which must have regard to whether the creditor “…reasonably believed that by making the agreement the relevant firm was neither contravening the general prohibition nor contravening section 20”[19].

 ‎Conclusion

To determine the enforceability of a settlement, in which an individual is given time to pay a debt, the creditor will have to consider whether “…the debt was disputed only on grounds which (a) the debtor did not himself believe to have even a fair chance of success and (b) did not objectively have a real prospect of succeeding[20]. The only certainty in this respect is that creditors will require legal advice. 

‎An application has (apparently) been made for permission to appeal to the Supreme Court.  

Kevin Heath leads Locke Lord’s banking litigation team in London and has over 30 years’ experience advising banks, asset-based lenders and consumer financiers on a wide range of disputes. 

NOTES

[1] s.8(1), CCA; “individual” includes: (a) a partnership consisting of two or three persons not all of whom are bodies corporate; and (b) an unincorporated body of persons which does not consist entirely of bodies corporate and is not a partnership: s.189(1), CCA. 

[2] “…there is a “genuine triable issue” as to whether the Settlement Agreement provided Mr Gertner with “credit” within the meaning of the CCA and, hence, is, at present, unenforceable for non-compliance with one or more sections 40, 61-64, 77A and 86B of the CCA”: para 54

[3] s.9 CCA: “…”credit” includes a cash loan, and any other form of financial accommodation.

[4] https://www.bailii.org/ew/cases/EWCA/Civ/2021/228.html 

References in this article to “para” followed by a number, correspond to this judgment.

[5] “Mr Gertner undoubtedly gave consideration under the Settlement Agreement since he undertook to pay £50,000 as a contribution to CFL’s legal costs”: para 46.  

[6] Mr Gertner’s guarantee obliged him to pay the debt of £3.5m “plus all interest and costs thereon properly payable by the Borrower in accordance with the Facility Agreement”: para 2. 

[7] “…mere forbearance will not of itself attract the CCA…”: paras 36 & 45 i).

[8] Para 45 ii)

[9] “A promise to forgo either a claim or a defence can, of course, constitute consideration…The principle extends to the renunciation of a claim which was in fact invalid “so long as it was a ‘reasonable claim’ (i.e. one made on reasonable grounds) which was in good faith believed by the party forbearing to have at any rate a fair chance of success”: para 37

[10] ‎para 45 iii)

[11] ‎para 26

[12] ‎para 42-43

[13] Binder v Alachouzos [1972] 2 QB 151Holyoake v Candey (2017) EWHC 3397 (Ch); paras 42-43.

[14] ‎para 45 iii)

[15] This point did not arise in CFL Finance but follows as a matter of contract law

[16] paras 17-18

[17] s.127, CCA

[18] ‎If, when entering into the ‘credit agreement’ (i.e. the settlement), the creditor did so by engaging in a ‎regulated activity (entering into, enforcing or ‎having the ‎right to enforce the settlement), the creditor was not authorised to do so or did not do so in accordance with the permission given: s.19 & s.20 Financial Services and ‎Markets Act 2000 (“FSMA”)‎

[19] ‎s.28A, FSMA

[20] ‎‎“There is room for argument as to quite where the dividing line is between a debt (in relation to which ‎the CCA could apply) and a mere claim (to which it could not)…‎”: para 51