Mortgage – Consumer Protection Act 1974 – Regulated agreement – Respondent and associated company offering to secure annulment of appellants’ bankruptcies and make short-term loan for that purpose – Associated company initially providing funds but respondent making loan once annulment achieved – Whether respondent entitled to enforce agreement – Whether a regulated agreement such that unenforceable for failure to comply with requirements of 1974 Act – Appeals allowed
The respondent and an associated company, P Ltd, operated a business model that involved contacting people who had been made bankrupt on a creditor’s petition and offering to secure the annulment of the bankruptcy by advancing moneys on a short-term loan, which, together with substantial interest and fees, was secured on the property of the debtor. The debtor could then seek refinancing to repay that short-term indebtedness, but, if it failed to do so and was unable to repay the debt, then the security could be enforced. The respondent brought five claims against the appellants in respect of five such loans, seeking repayment of the sums due and enforcement of its security against the appellants’ homes.
The facts of the first claim were typical of all five. The relevant documents signed by the appellant included: (i) a letter by which she instructed a solicitor to procure the annulment of her bankruptcy, while P Ltd agreed to provide immediate funds to facilitate the annulment by discharging the appellant’s debts and stipulated a fee of £5,000, plus VAT, for its services; (ii) a facility letter from the respondent, by which it agreed to make a loan to be used to refinance the debt; (iii) a legal charge over the appellant’s home; and (iv) a letter of authority to the solicitor, pursuant to which it held the facility letter and charge until the annulment of the bankruptcy, whereupon it completed and delivered those documents to the respondent and registered the charge. The appellant failed to secure refinancing and the respondent brought a claim to recover the debts.
By their defence to the respondent’s claims, the appellants contended that, inter alia, the agreements to which the debts related were regulated agreements for the purposes of the Consumer Credit Act 1974 that did not comply with the requirements of the Act, such that the respondent could not enforce them.
That argument turned on whether the agreements were restricted-use credit agreements: (i) to refinance any existing indebtedness of the debtor’s whether to the creditor or another person, within section 11(1)(c), in which case they were regulated; or (ii) to finance a transaction between the debtor and a person other than the creditor, within section 11(1)(b) of the 1974 Act, in which case they were exempt and enforceable. The appellants contended for the former and the respondent for the latter. In the county court, the judge found in favour of the respondent and allowed the claims. The appellants appealed.
Held: The appeals were allowed.
The relevant agreement contained in the facility letter was a restricted-use agreement within section 11 of the 1974 Act. On the proper construction of that agreement, the debtor contractually agreed that the credit in question was to be used only for a particular purpose. That purpose was to pay sums to P Ltd and the solicitor in connection with the annulment of the bankruptcy; in other words, the purpose was to pay the sums that had been incurred for the purpose of annulling the bankruptcy: National Westminster Bank plc v Story [1999] CCLR 70 applied.
Unless and until the annulment was made, the facility letter and legal charge were of no effect but were held by the solicitor to the order of the appellants. P Ltd had already paid the appellants’ creditors and the other sums required to be paid in order to secure the annulment of the bankruptcy. It had done so at the appellants’ request, such that they became liable to repay to it the sums so advanced. The appellants were indebted to P Ltd until the annulment order was made and the facility letter and legal charge were delivered to the respondent; similarly, when the annulment order was made, the appellants became liable to pay P Ltd’s fee. The effect of the facility letter was to replace the appellants’ indebtedness to P Ltd with indebtedness owed to the respondent. The purpose of the agreement was therefore to refinance the appellants’ indebtedness to P Ltd.
Section 11 drew a distinction between the financing of a transaction and the refinancing of an existing indebtedness. If a transaction, under which money was to be earned by a creditor and paid by a consumer, had been completed so as to create indebtedness on the part of the consumer, then any third party finance that was to be used to satisfy that indebtedness would be for the purpose of refinancing. If the transaction had not yet taken place, the agreement would be to finance the transaction. In the instant case, P Ltd was entitled to be paid when its services were complete on the making of the annulment order. The respondent then received the facility letter and the legal charge and the appellants became bound by them. On its true construction, the purpose of the facility letter was to refinance the appellants’ indebtedness to P Ltd and the solicitor. It followed that the agreement between the respondent and the appellants was a refinancing agreement within section 11(1)(c) and was a regulated, not an exempt, agreement. In consequence of the failure to comply with the statutory requirements of the 1974 Act, the agreement could not be enforced in the present proceedings.
Edward Bartley Jones QC and John Pugh (instructed by Chadwick Lawrence LLP, of Huddersfield) appeared for the appellants; Mark Cawson QC (instructed by Abacus Solicitors LLP) appeared for the respondent; Julia Smith (instructed by the Office of Fair Trading) appeared for the intervener.
Sally Dobson, barrister