Phillip McGuffick –v- The Royal Bank of Scotland Plc (High Court, October 2009)

There has been a sharp rise in claims by borrowers seeking to challenge the enforceability of loan agreements regulated by the Consumer Credit Act 1974 (“the Act”) and subordinate legislation.  Many borrowers are attempting to take advantage of the statutory framework of the Act to challenge their lenders and avoid paying back their debts. However, the High Court has recently provided clarification of the law which will be a welcome development for lenders and may discourage some claims by borrowers.

The Facts

Mr McGuffick borrowed the sum of £17,034 from The Royal Bank of Scotland (“RBS”) on 3 October 2005. The loan agreement between the parties was a regulated agreement under the Act. Unfortunately, Mr McGuffick was unable to meet the monthly instalments and repayments stopped within the first year of the term of the loan. RBS served a default notice upon Mr McGuffick under Section 87(1) of the Act, together with formal notice which stated that they intended to take action to recover the debt and that if Mr McGuffick did not bring his account up to date within 28 days of the letter, RBS would report the default to various credit reference agencies.

Mr McGuffick’s solicitors wrote to RBS requesting a copy of his loan agreement under Section 77 of the Act. Under this provision, RBS was obliged to produce a copy of the loan agreement within 12 working days. If it failed to do so, RBS would be prevented from taking enforcement action.

RBS could not find a copy of the loan agreement and so wrote to Mr McGuffick’s solicitors to say that it would not take enforcement action to recover the outstanding debt but that Mr McGuffick should continue to make repayments as the loan agreement was still in force. Further, RBS warned that, if Mr McGuffick failed to make his monthly repayments, RBS would report his continuing default to credit reference agencies.

In response to RBS’ failure to retrieve a copy of the loan agreement, Mr McGuffick commenced proceedings in the County Court alleging that the loan agreement was unenforceable and that RBS were prohibited from taking the action that they had threatened. The case was transferred to the High Court to be heard as a test case.

Main Issues

The High Court was invited to provide guidance upon a number of issues that had arisen as a result of the dispute between RBS and Mr McGuffick. RBS eventually managed to produce a copy of the loan agreement between the parties and was therefore able to take enforcement action to recover the debt in the usual way. However, Mr McGuffick’s claim raised questions regarding the status of the loan agreement and the contractual rights and duties of the parties during the period in which RBS was unable to comply with Mr McGuffick’s statutory request.

The Court considered, amongst other things, whether Mr McGuffick’s contractual obligation to pay the monthly instalments was suspended or extinguished during the period in which RBS had been unable to produce a copy of the loan agreement and whether the reports made by RBS to credit reference agencies regarding Mr McGuffick’s failure to pay under the agreement constituted enforcement action or ‘steps in enforcement’, which RBS may be prohibited from taking whilst it was unable to produce a copy of the loan agreement.

The Decision

The Court held, amongst other things, that where a loan agreement is rendered unenforceable as a result of a lender’s failure to comply with a statutory request for a copy of the relevant loan agreement, the lender’s rights are not extinguished. The borrower’s contractual obligation to make the monthly repayments is not suspended; it continues to apply. The parties’ contractual rights and obligations continued to exist during a period of default, though the lender was prevented from enforcing its rights during that time.

The Court decided that the threats made by RBS of reporting Mr McGuffick’s default to credit reference agencies and/or the reports made regarding the status of his loan account did not amount to enforcement action or ‘steps in enforcement’ under the Act. The Court concluded this was an essential aspect of responsible lending.

Comment

This decision provides useful clarification of what a lender can and cannot do during the period in which it is retrieving a copy of the loan agreement.  Although a lender may not call in a loan or enforce a Judgment during this period, it may continue to report to credit reference agencies regarding the status of an account and take various other steps.

This case should encourage borrowers to continue to meet their contractual obligations to pay monthly instalments due under loan agreements in circumstances where a lender has been unable to provide a copy of their loan agreement.  Lenders may find that a raft of similar claims are either withdrawn or amended.  At a time when borrowers are becoming ever more aware of their statutory rights and are increasingly willing to challenge the enforceability of loan agreements, this decision is good news for lenders.

For further information please contact Georgina Squire or the Partner with whom you usually deal