Loan – Unenforceable secured loan — Consumer protection — Claimants being appointed as joint administrators of company – Claimants applying to court for directions in respect of unenforceable loan agreements made or acquired by company prior to administration — Whether debtors entitled to repayment of money paid to company under loan agreements — Whether unfair relationship existing between defendants and company — Whether payments being made out of proceeds of realisation of security – Application granted
The company carried on an unsecured and a secured lending business. The claimants were appointed as joint administrators of the company and applied to the court for directions arising out of loan agreements made or acquired by the company before the administration began, under which secured loans were made to customers but which were unenforceable because they contravened provisions of the Consumer Credit Act 1974. The legal consequences differed according to whether or not they were entered into before 6 April 2007. There were a total of 1,694 loans affected by this issue, of which 699 were entered into prior to that date. The total outstanding balance in respect of all loans affected was approximately £23.5m. The claimants had received payments with a total value of £19m in respect of those loans. The defendants were persons to whom such loans had been made. The first defendant and his partner, the second defendant, took out loans from the company after 6 April 2007. The third defendant and his wife, the fourth defendants, took out their loan before 6 April 2007 and the benefit of the loan agreement with them was subsequently acquired by the company.
The questions for the court were: (i) whether the defendants were entitled to an order, under section 140B of the 1974 Act, for repayment of money paid by them to the company under their loan agreements on the basis that there was an unfair relationship between the defendants and the company under section 140A(1) of the Act; (ii) whether, in respect of a secured loan to which section 106(d) of the Act applied, the debtor was entitled to recover all payments made under the loan whether or not those payments had been made out of the proceeds of realisation of the security; (iii) whether, section 106(d) had any application where the security had been realised and, where from the proceeds of the security alone or from those proceeds and other payments made by the debtor, the entire debt had been discharged; and (iv) whether the claimants were under a duty to notify any person that they had or might have a claim against the company.
Held: The application was granted.
(1) There was no unfair relationship under section 140A(1) between the first and second defendants and the company merely by virtue of letters sent to them by the company requesting payment. Accordingly they were not entitled to an order for repayment under section 140B(1)(b). On the other hand, the evidence of the third and fourth defendants was that they had made payments because of threats contained in letters to them from the company. Since those threats were untrue, their loan was irredeemably unenforceable. There was no legal action which the company could have taken which would have resulted in the third and fourth defendants losing their home. In view of the policy objective of the 1974 Act to provide protection for consumers, if the threat in the letters was a cause of the third and fourth defendants’ decision to make payments to the company, even though not the only cause, there was an unfair relationship between it and those defendants. The court had power under section 140B(1)(a) to order repayment of such sums to the third and fourth defendants: McGuffick v Royal Bank of Scotland plc [2009] EWHC 2386 (Comm); [2010] Bus LR 1108 applied; Re Nortel GMBH (in admin), Re Lehman Brothers International (Europe) (in admin) [2013] UKSC 52 considered.
(2) There was no analogy between the “realisation” of a security within section 106(d) of the Act and the redemption of a mortgage. In conventional legal terms the realisation of a security was something carried out by or on behalf of a creditor to release the value of the security so that the value could be applied in discharge of the debt. Redemption was something done by a debtor, viz payment of what was outstanding, in order to obtain the return of the secured property. There was no reason why “realisation” of the security for the purposes of section 106(d) should bear any meaning other than its conventional meaning. Section 106(d) did not oblige the joint administrators to repay sums that were not the proceeds of sale of the security but were voluntarily paid by the defendants in repayment of their loans.
(3) The route to section 106(d) lay via section 113(3)(d) and so via section 142(1). Read literally, the language of section 142(1) supported the interpretation that it could only apply when there was something outstanding for which the creditor required an enforcement order. That produced, however, a highly anomalous result, which was inconsistent with the manifest intention of Parliament to provide protection generally for debtors in respect of consumer credit agreements and specifically to prevent secured creditors avoiding the protections conferred on consumers under the Act by the self-help step of realising the security and using the proceeds of the realisation to discharge the debt. The defendants’ submission that section 142(1) extended to completed agreements was consistent with a legitimate purposive interpretation in the light of the Act as a whole. Read literally, only the word “is” in the expression “is not entitled to do that” at the end of section 142(1) was inconsistent with that purposive interpretation. The expression “is not entitled to do that” should not be read in a temporal sense but rather as describing the unlawfulness of the “thing” in the first line of section 142(1), that is to say the creditor’s action in issue and whether the “thing” lay in the past or the future.
(4) While an administrator was normally under no obligation to notify any person that they had or might have a claim against a company, the position was different in the present case. The potential claims of debtors against the company under regulated agreements arose under consumer protection legislation which imposed on the company an obligation to act fairly. The Office of Fair Trading guidance was consistent with an obligation of joint administrators, as officers of the court, to be frank and transparent about the potential claims under the 1974 Act of present and past debtors. That could be achieved by drawing the attention of potential claimants to the court’s judgment in this case.
Felicity Toube QC and Simon Popplewell (instructed by Denton UKMEA LLP) appeared for the claimants; Bradley Say (instructed by Stephensons) appeared for the defendants.
Eileen O’Grady, barrister
