Legal News | 14/10/21

The Consumer Credit Act 1974 (CCA) defines “credit” as “a cash loan, and any other form of financial accommodation”. That definition is extremely wide, and credit can therefore include (but is certainly not limited to) a loan, a hire purchase agreement, or any other agreement allowing a debtor time to settle their indebtedness in return for some form of consideration (e.g. interest).

Until very recently it was considered common ground that terms embodied in a settlement agreement or Tomlin Order, by which parties settle a dispute, are not subject to the CCA. However, the recent Court of Appeal case of CFL Finance Ltd v Gertner raises the possibility that some settlement agreements and/or schedules to Tomlin Orders entered into between funders and individuals might be regulated by the CCA.

Mr Gertner guaranteed a loan facility provided by CFL Finance (CFL) to another company, who defaulted on the repayment terms. CFL therefore issued proceedings against Mr Gertner, which were compromised by a Tomlin Order. The schedule provided for repayment of the debt, plus interest in the case of a default.

Mr Gertner defaulted under the Tomlin Order, and CFL petitioned for his bankruptcy. Mr Gertner defended that petition on the basis that, amongst other things, the Tomlin Order’s schedule provided him with a “form of financial accommodation” and was therefore “credit” under the CCA. As the schedule was not CCA-compliant, Mr Gertner argued that the Tomlin Order was unenforceable as a regulated credit agreement under the CCA. This, he said, was a genuine ground for defending the ongoing bankruptcy petition.

In the first instance, the Court dismissed Mr Gertner’s defences, and a bankruptcy order was made. On appeal, however, the bankruptcy petition was dismissed on entirely unrelated grounds. CFL appealed the decision on this unrelated ground, and Mr Gertner cross appealed on his CCA point. Ultimately, following the original appeal being struck out, only Mr Gertner’s CCA argument was considered (unopposed) at the appeal hearing.

In Gertner, the Court considered two fundamental questions: does the CCA apply to the schedule to a Tomlin Order; and did a settlement agreement entered into between Mr Gertner and CFL provide Mr Gertner with “credit”?

The parties agreed that the CCA does not apply to terms embodied in a Court Order. However, and crucially, whilst Tomlin Orders are approved by the Court the schedules attached to them are not. The Court concluded that the CCA can apply to a Tomlin Order’s schedule because it is ultimately a contract between the parties. The inevitable impact of this decision is that the schedules to Tomlin Orders, and settlement agreements themselves, are at risk of being caught by the CCA.

As regards the second question, the Court of Appeal ultimately agreed with Mr Gertner and concluded that challenging whether the Tomlin Order’s schedule was unenforceable for being non CCA-compliant was a genuinely triable issue and therefore not appropriate for use in petitioning a debtor for bankruptcy.

Although not binding precedent, Gertner supports the principle that a settlement agreement between a funder and an individual (whether attached to a Tomlin Order or not) could represent a contract subject to the CCA, where it provides “credit” to the debtor.

Unless funders are authorised by the FCA, and settlement agreements are CCA-compliant, any such agreements would therefore be unenforceable without a Court order under s127 CCA.

CFL had lodged an application for permission to appeal the case to the Supreme Court, but appointed a voluntary liquidator on 13 July 2021. Unless CFL’s liquidator (or someone else) continues the appeal on CFL’s behalf, therefore, it is unlikely that the Supreme Court will have an opportunity to review.

Going forward, funders will need to weigh-up the risk of settlements being potentially unenforceable before settling claims against individuals for anything other than a lump-sum payment