UPSETTING THE APPLE CART
DEBT DEFERMENT: CCA/FSMA IMPLICATIONS

Locke Lord

Legal News | 14/10/21

DEBT DEFERMENT: CCA/FSMA IMPLICATIONS

The Court of Appeal in CFL Finance v Laser Trust (2021) decided that the Consumer Credit Act 1974 (“CCA”) can apply to a settlement agreement, where payment of a debt by an “individual” is deferred, even if the CCA did not apply to the debt prior to the settlement, as in this case, where a loan of £3 million had been made to a company, guaranteed by Mr Gertner.

The existence of a debt has to be sufficiently clear for an agreement providing for future payment to constitute “credit” with the CCA. The Court of Appeal did not express a concluded view on where the dividing line lies between a debt (to which the CCA could apply) and a mere claim (to which the CCA could not), as the Court had only heard legal arguments from the debtor (the lender was not represented at the hearing of the appeal).

The Court of Appeal decided that:

a) the guarantor’s defence was clearly invalid in law and had no real
prospect of succeeding; and
b) there was a very real possibility that the guarantor did not believe
the defence to have even a fair chance of success.

For that reason, there was a triable issue as to whether the settlement agreement provided the guarantor with “credit” within the CCA and is at present, unenforceable for non-compliance with one or more sections of the CCA: s.40 (enforcement of agreements made by unlicensed trader), s.61-64 (making the agreement), s.77A (statements to be provided for fixed sum credit agreements) and s.86B (notice of sums in arrears under fixed sum credit agreements).

WHEN WILL THE CCA APPLY TO A SETTLEMENT?
The CCA will only apply to a settlement agreement if:

i) there is a debt;
ii) the debt is owed by an “individual” (as defined in the CCA);
iii) the debtor has agreed to provide “consideration” (i.e. to pay money or give something of value) in exchange for the creditor’s agreement to accept deferred payment (e.g. make a contribution to the creditor’s legal costs of the dispute).

Furthermore, the CCA will not apply if:

a) the creditor simply refrained from enforcing its right to immediate payment (i.e. forbearance); or
b) the individual recognised the defence to lack “even a fair chance of success” (i.e. no consideration for the settlement); or
c) the individual genuinely disputed the creditor’s claim in its entirety on substantial grounds (i.e. no debt and, therefore, no “credit”); or
d) the settlement is embodied in a court order (not a schedule to it).

ENFORCEMENT
If the CCA applies and the settlement agreement does not comply with CCA requirements (e.g. proper execution, periodic statements, notice of arrears), the settlement is unenforceable without 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.

If the lender is not authorised by the FCA, or does not have the necessary permission, a validation order from the FCA is required to enforce the settlement. The FCA will consider whether “it is just and equitable in the circumstances of the case”, having 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”.

APPEAL AND CONCLUSION
The Court of Appeal’s judgment is not being appealed to the Supreme Court. Legal advice will be required to determine whether the CCA applies to any settlement. Each case will need to be assessed on its merits. Only then will a creditor be able to decide whether an enforcement order and (subject to authorisation status) a validation order are required.