Rosling King LLP recently acted for Southern Pacific Personal Loans Ltd (“SPPL”) in this test case before the Court of Appeal arising from the interpretation of the Consumer Credit Act 1974 (“the Act”). SPPL were successful in their appeal.
On 26 March 2005, Mr and Mrs Walker (“the Borrowers”) entered into a secured loan agreement (“the Agreement”) with SPPL. The loan was for a fixed sum of £17,500 and the Agreement was regulated under the Consumer Credit Act 1974 (“the Act”). The Agreement displayed the ‘amount of credit’ as £17,500. At the time they entered into the Agreement, the Borrowers paid a broker administration fee (“the Broker Fee”) in the sum of £875 to a mortgage broker responsible for arranging their loan with SPPL. The Broker Fee was paid by SPPL on their behalf and interest was charged on it for the term of the loan.
The Borrowers fell into arrears and SPPL commenced possession proceedings in response to which the Court made a suspended Order for possession on terms. However, the Borrowers failed to comply with the terms of the suspension and SPPL sought to enforce the Order. In response to SPPL’s attempts to take possession of their property, the Borrowers appealed.
The Original Appeal
The Borrowers’ appeal was heard by HHJ Halbert sitting in the Chester County Court on 27 April 2009. They alleged that the Agreement was unenforceable on the basis that the ‘amount of credit’ stated in the Agreement was inaccurate. The Consumer Credit (Agreements) Regulations 1983 provide that a regulated credit agreement must contain certain prescribed terms, one of which is the ‘amount of credit’ supplied by a lender. If these terms are absent or incorrectly stated in an agreement entered into prior to April 2007, the Court is prohibited from making an enforcement Order in favour of a lender and the agreement is rendered ‘irredeemably unenforceable’.
The key to the Borrowers’ argument was the interpretation of Section 9(4) of the Act, which provides that an item added to the total charge for credit in a regulated agreement should not be treated as ‘credit’ for the purposes of the Act, even though time is allowed for its payment. The Borrowers argued that the Broker Fee was in fact part of the true ‘credit’ supplied by SPPL as time had been allowed for its payment. For this reason, the Borrowers said that the ‘amount of credit’ was incorrectly stated as £17,500 in the Agreement as it excluded the Broker Fee.
Controversially, the Borrowers also argued that Section 9(4) effectively prohibited a lender from charging interest on anything other than ‘credit’. They alleged that interest was a necessary feature of credit and that to charge interest on the Broker Fee would be to ‘treat it as credit’ in breach of Section 9(4).
Judge Halbert accepted these arguments and decided that the Agreement was irredeemably unenforceable. SPPL appealed to the Court of Appeal.
The Second Appeal
On appeal, SPPL objected to the Borrowers’ purposive interpretation of Section 9(4) and the suggestion that the Act prohibited the charging of interest on anything other than credit. SPPL argued that Section 9 was a definition section which defined ‘credit’ for the purposes of the Act and that interest was not a necessary feature of credit. For example, interest-free credit is available to consumers and although interest is not charged on that credit, it is ‘credit’ for the purposes of the Act as it represents a financial accommodation under Section 9(1). SPPL also pointed out that the definition in Section 9 was linked to other provisions of the Act designed to ensure that unscrupulous lenders could not add fees and charges to the amount of credit they supplied to a borrower and call them ‘credit’ in order to bring an agreement outside the protection of the Act.
In its unanimous Judgment, the Court of Appeal decided that Judge Halbert had been wrong to conclude that the Agreement was unenforceable and held that Section 9 was a definition section. The Court rejected the Borrowers’ argument that Section 9 contained a prohibition upon the charging of interest on anything other than ‘credit’, as defined by the Act. In his leading Judgment, Lord Justice Mummery held that any such prohibition would have been set out in plain terms in the Act, and it was not. The Court concluded that the Agreement was compliant with the Act and subordinate legislation and that SPPL was at liberty to enforce it.
The Act and Regulations flowing from it can be difficult to understand and interpret and the Court of Appeal has now given clear guidance regarding the meaning and effect of Section 9. The decision is symptomatic of what appears to be a move by the higher Courts towards a more pragmatic and commercial view regarding technical challenges brought by borrowers to the enforceability of pre 2007 regulated agreements. It may act as a deterrent to similar claims in future at County Court level and is good news for lenders.
For further information please contact Georgina Squire or the Partner with whom you usually deal