Thomas Jack and Another v Keith Craig and Others

Hearing dates: 3rd December 2013

The Chancellor of the High Court,

This is my judgment on an application dated 29 June 2012 by Thomas Merchant Burton and Simon Allport, who were appointed joint administrators of London Scottish Finance Limited ("LSF") on 3 December 2008. The application is for directions arising out of loan agreements made or acquired by LSF before the administration began, under which secured loans were made to consumers but which were unenforceable because they contravened provisions of the Consumer Credit Act 1974 ("the Act").

The administration of LSF is currently being conducted by Mr Allport and Thomas Andrew Jack ("the Joint Administrators"), the latter having replaced Mr Burton as one of the administrators.

Background

LSF carried on an unsecured and a secured lending business. The unsecured lending business had a total book value at the date of administration of approximately £36 million (on an amortised cost basis). The secured lending business had a mortgage book totalling £51 million (on an amortised cost basis) at the date of administration. The security comprised a combination of regulated and unregulated first charges (£5 million) and second charges (£46 million).

As well as making its own loans, LSF also acquired loan books from other companies, one of which, relevant to the present application, was Dean House Financial Services Limited ("Dean House").

The present application concerns LSF's secured lending business regulated by the Act, pursuant to which loans were either made by LSF itself or were made by Dean House and then bought by LSF from Dean House. They concern, in particular, loans offered to customers through a credit broker. The way the broker's fee was recorded in the loan agreements in question was contrary to the Act. This affects their enforceability. The legal consequences differ according to whether or not they were entered into before 6 April 2007. There are a total of 1694 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 by the issue is approximately £23.5 million. The Joint Administrators have received payments with a total value of £19 million in respect of those loans.

The respondents are persons to whom such loans were made. The first respondent and his partner, the second respondent, took out loans from LSF after 6 April 2007. The third respondent and his wife, the fourth respondent, took out their loan from Dean House before 6 April 2007 and the benefit of the loan agreement with them was subsequently acquired by LSF.

The legal setting

The loans in issue are all regulated agreements as defined by section 8 of the Act, namely an agreement between an individual (the debtor) and any other person (the creditor), by which the creditor provides the debtor with credit of any amount and which is not an exempt agreement.

Section 60 of the Act provides for the Secretary of State to make regulations as to the form and content of documents embodying regulated agreements. Section 61(1) provides that a regulated agreement is not properly executed unless a document in the prescribed form, itself containing all the prescribed terms and conforming to regulations under section 60(1), is signed in the prescribed manner both by the debtor and by or on behalf of the creditor. Section 65(1) provides that an improperly executed regulated agreement is only enforceable against the debtor on an order of the court.

At the time the loans were made to the respondents the regulations made by the Secretary of State pursuant to section 60 of the Act were the Consumer Credit (Agreements) Regulations 1983 ("the Regulations"). By virtue of regulation 6(1) and paragraph 2 of schedule 6 of the Regulations "a term stating the amount of the credit" is a prescribed term.

Section 9 of the Act specifies that, for the purposes of the Act, "credit" includes a cash loan and any other form of financial accommodation. Section 9(4) provides that "an item entering into the total charge for credit shall not be treated as credit even though time is allowed for its payment". The effect of regulation 4(b) of the Consumer Credit (Total Charge for Credit) Regulations 1980 is that, at the time of the loans to the respondents, a fee payable to a credit broker was part of the total charge for credit within section 9(4) of the Act and so could not be included in the amount of credit required to be stated in the regulated agreement.

In the case of the respondents' loans, as in the case of all other loans to which the present application is relevant, the broker's fee was included in the amount of credit stated in the loan documentation. It was included in the wrong box on the documentation. That error had no impact on the accuracy of the other terms. In particular, the annual percentage rate of charge ("the APR") was correctly calculated. Nevertheless, by virtue of section 65(1) of the Act, the error made the respondents' loan agreements unenforceable without an order of the court.

The error did not render the loan agreements void or voidable but merely unenforceable without an order of the court: see McGuffick v Royal Bank of Scotland plc [2009] EWHC 2386 (Comm), [2010] Bus LR 1108 and the cases cited in it. Section 127(1) of the Act provides that the court shall dismiss an application for an enforcement order under section 65(1) only if it considers it just to do so having regard to (among other things) the prejudice caused to any person by the contravention in question and the degree of culpability for it.

Section 127(3) of the Act formerly provided that the court could not make an enforcement order under section 65(1) unless there was a document signed by the debtor containing all of the prescribed terms. Section 127(3) was repealed for agreements entered into on or after 6 April 2007. It follows that the third and fourth respondents' loan is not enforceable. In the language commonly used in this area of the law, their loan is "irredeemably unenforceable". In the case of the first and second respondents, however, their loans are enforceable if, but only if, the court makes an enforcement order pursuant to its power under section 127 of the Act.

Relevant provisions of the Act are set out in the Appendix to this judgment.

The application

The Joint Administrators seek the directions of the court to assist them in making decisions as to what to do about the unenforceable secured loan agreements made by or acquired by LSF both in respect of outstanding amounts due to LSF and in respect of money already received by LSF pursuant to those agreements.

The respondents have been joined as being typical of certain categories of borrowers, namely those whose loans were taken out before 6 April 2007 and those whose loans were taken out on or after that date. Their costs are to be paid out of LSF's assets.

The respondents are not, however, representative respondents in any formal sense. No order has been made pursuant to CPR Ord. 19.6 that they be representatives of other past or present debtors of LSF so as to make this judgment or any consequential order binding on others. Accordingly, the Joint Administrators must decide for themselves the extent to which the decisions which I make in this judgment are properly applicable to persons other than the respondents. Equally, it will be open to other debtors to argue that my decisions are not correct or are not binding on them.

Furthermore, as will be apparent, the ultimate right of the Joint Administrators to recover sums outstanding on unenforceable loans or the right of debtors to recover sums received by LSF in full or partial discharge of unenforceable loans will turn on the particular facts of each case. The directions which I have been asked to give are pitched at a limited range of issues and a level of generality which avoids any dispute of fact between the Joint Administrators, on the one hand, and the respondents, on the other hand.

It would seem that some of the matters on which I have been asked to give directions do not concern the respondents but are relevant to other debtors whose loans, for example, have been completely repaid or whose property was charged by way of security and has been sold. Mr Bradley Say, counsel for the respondents and a specialist in consumer credit law, has been most helpful in making submissions on those matters also. In effect, the Joint Administrators have argued the case for creditors of LSF who would benefit from the greatest reduction in claims by present and past borrowers based on contraventions of the Act. Mr Say has argued the case for such borrowers. I am content, for the assistance of the Joint Administrators, to take a practical approach and give guidance to the Joint Administrators on those matters rather than adjourning the application to enable a suitable debtor to be added as a respondent. It would, however, be entirely understandable if the debtors concerned are cautious about accepting the reliability of decisions made by the court without...