In October 2005, the debtor entered into a fixed-sum regulated loan agreement with the defendant bank under which the debtor borrowed a sum of money. The debtor defaulted under the agreement and in consequence substantial arrears were outstanding. The bank then served a default notice under section 87 of the Consumer Credit Act 1974 (Act) together with a letter containing a warning that unless satisfactory payment or arrangements for payment were made, information about the debtor's indebtedness would be passed to Credit Reference Agencies (CRAs).
In February 2009 the debtor's solicitors made a request of the bank under section 77 of the Act. The letter also stated that the agreement was considered to be in dispute and that no references should be made to CRAs or regulatory bodies until the dispute was resolved.
Initially the bank could not locate a copy of the agreement. The bank wrote to the debtor's solicitors in April 2009 informing them that if the debtor decided not to meet his obligations under the agreement, the bank would not be able to enforce repayment of the loan. The bank added that it considered that the debtor should continue to meet his obligations under the agreement, bearing in mind that it was not void but remained valid and that continuing default would be reported to the various CRAs.
By May 2009 the bank located a copy of the agreement which it sent to the debtor's solicitors at the same time as stating that recovery action would now continue. However the bank inadvertently overlooked to provide a signed statement of account as required by section 77(1) at the same time as providing a copy of the agreement.
On 13 May 2009 the bank ascertained that proceedings were issued on behalf of the debtor. The bank could have remedied the default by providing a signed copy of the statement of the account but did not so to allow the court to determine the issues that had arisen.
The issues, among others, before the court were:
- whether the debtor's contractual obligation to pay the outstanding amount was extinguished/suspended or continued during the period of the bank's non-compliance with the debtor's section 77 request
- whether continued reporting by the bank to the CRAs of the state of the debtor's account during the period of non-compliance and unenforceability constituted 'steps in enforcement' contrary to section 77(4)(a) of the Act
- whether the claimant had any right which might properly be protected by an injunction. The debtor had sought numerous injunctions, including restraining the bank from making reports of non payments to CRAs, or requiring the bank to report additionally to the various CRAs that, by reason of the banks' breach of section 77, the debtor had no enforceable liability to make payments under the agreement
Did non-compliance with section 77 extinguish the bank's rights?
In answering this question, the court considered in some detail a number of authorities including Wilson –v- First County Trust Limited (No 2). Taking the authorities as a whole, Mr Justice Flaux held that the effect of unenforceability was that the bank's rights and the debtor's liability or obligation existed but were unenforceable.
An argument that, during the period of time when the bank was not compliant with section 77(1), the bank's rights had been completely extinguished or the bank had been deprived of those rights was an artificial one. The rights continued to exist while being unenforceable during the period of non-compliance.
The meaning of enforcement
The Act does not define what constitutes "enforcement" and therefore does not define what actions a creditor may not undertake during a period when the agreement is unenforceable. The debtor argued that any coercive action to compel or secure performance of the removed obligation or liability of the debtor to make repayment amounted to "enforcement" including any reporting to CRAs.
Mr Justice Flaux concluded that not only did reporting to the various CRAs not amount to enforcement, but that a number of other activities did not constitute enforcement either, such as:
- reporting to CRAs without also telling them that the agreement is currently unenforceable
- disseminating or threatening to disseminate the debtor's personal data in respect of the agreement to any third party
- demanding payment from the debtor
- issuing a default notice to the debtor
- threatening legal action
- instructing a third party to demand payment or otherwise to seek to procure payment
- bringing proceedings.
Consequently, the injunctive relief sought on behalf of the debtor was refused for the above (and other) reasons.
Office of Fair Trading (OFT) draft guidance on sections 77, 78 and 79 of the Act
The OFT has issued a draft guidance note to businesses in relation to their duties to give debtors and hirers copy documents and statements of account on request under sections 77(1), 78(1) and 79(1) of the Act. The draft note provides guidance so that businesses can understand what steps they should take to comply with their obligations under the Act in relation to these sections.
The guidance notes are intended to avoid the numerous disputes that have been generated over whether a request has been properly made, whether the duties have been complied with and whether as a consequence the agreement can be enforced.
On the question of enforcement, the OFT did address the wider question of what is considered within the term "enforcement", preferring to await clarification from cases before the courts which were likely to provide more authoritative rulings on the issue. Nevertheless, the OFT suggested that enforcement went beyond enforcement by obtaining a court order and included: demanding earlier payment of any sum; recovering possession of any goods or land; and treating any right conferred on the debtor or hirer by the agreement as terminated, restricted or deferred. It will be interesting to see how the OFT reviews its draft guidance note in light of this decision.
There has been a substantial increase in the number of requests by debtors under section 77 in the hope that that they will be able to write off their debts by obtaining a declaration that the agreement is irredeemably unenforceable under sections 61 and 127 of the Act. Indeed, there are a large number of claims currently before county courts all over the country where disputes have arisen between creditors and debtors concerning the effect on loan agreements and other credit arrangements of provisions such as section 77 of the Act which render the agreement unenforceable in certain circumstances.
In light of this judgment, debtors will either need to amend or discontinue their proceedings or face applications from lenders for strike out and/or summary judgment. In addition, lenders should seek to recover their legal costs incurred in defending proceedings brought against them.