The High Court has recently considered the circumstances in which a creditor will be caught by Section 77A of The Consumer Credit Act 1974.

Legislative Framework

Section 77A of The Consumer Credit Act 1974 (“Section 77A”) requires a creditor under a regulated fixed sum credit agreement to provide a debtor under such an agreement with a statement, the form and contents of which are prescribed by The Consumer Credit (Information Requirements and Duration of Licences and Charges) Regulations 2007 (the “Regulations”).

Section 77A came into force on 1 October 2008 and was subsequently amended by The Legislative Reform (Consumer Credit) Order 2008 (“the 2008 Order”). The effect of the 2008 Order is that Section 77A now applies to regulated agreements “whenever made”. Creditors are, however, subject to different requirements depending on when the relevant credit agreement was made. For agreements made on or after 1 October 2008, the first statement must cover a period of no more than one year which must begin either with the day the agreement was made or with the day the first movement occurs on the debtor’s account. For relevant credit agreements made before 1 October 2008, the first statement to be issued by the creditor must cover a period beginning no later than 1 October 2008 and ending no later than 30 September 2009. In each instance, subsequent statements must relate to consecutive periods not exceeding one year. Both the first statement and each subsequent statement must be given to the debtor within 30 days beginning with the day after the end of the period to which the statement relates.

There are significant penalties imposed on creditors who fail to issue their debtors with a statement pursuant to Section 77A. In such circumstances, a “period of non-compliance” shall commence, during which:

(a) the creditor cannot enforce the credit agreement;
(b) the debtor under the credit agreement has no liability to pay interest calculated by reference to the period of non-compliance; and
(c) the debtor has no liability to pay any default sum which would have become payable during the period of non-compliance or after the period ends in connection with any breach of the agreement during this period.

The Facts

Before 1 October 2008, Northern Rock (Asset Management) plc (the “Defendant”) had entered into a number of regulated fixed sum credit agreements (the “Regulated Contracts”) with individual borrowers (the “Borrowers”).

On 10 January 2008, the Defendant and JP Morgan Chase Bank, National Association (the “Claimant”) entered into an agreement by which the Defendant transferred its beneficial interest in the Regulated Contracts to the Claimant. At the same time, the parties entered into a servicing agreement pursuant to which the Defendant continued to administer the Regulated Contracts on behalf of the Claimant.

The Defendant issued statements to the Borrowers covering consecutive yearly periods beginning on either 1 January or 1 July 2008. These statements did not, however, comply with the Regulations and were accordingly non-compliant. Upon discovering its breach of Section 77A in late 2012, the Defendant provided the Borrowers with new statements which were intended to remedy the deficiencies in its earlier statements.

The issue before the High Court was when the period of non-compliance had commenced.

It was the Defendant’s contention that its earlier, no compliant statements, did not constitute statements given under Section 77A and therefore the period of non-compliance began as if no statement had been served at all, namely on the day following the last day on which a compliant statement could have been provided. Accordingly, the Defendant prepared new statements that recorded recalculated opening and closing balances by removing the interest and/or default charges which it had incorrectly debited.

The Claimant argued that the Defendant’s earlier statements, though non-compliant, were nevertheless statements made under Section 77A and therefore the period of non-compliance began 30 days after the period covered by the non-compliant statement. This would mean that the corrective statements issued by the Defendant were themselves non-compliant and showed incorrect opening and closing balances.

The High Court considered the correct interpretation of Section 77A as amended by the 2008 Order and whether a non-compliant statement was still a statement under this section.

The Decision

The High Court found that a non-compliant statement was not a statement under Section 77A of the Act and the Defendant’s construction was therefore correct. In circumstances where a creditor has provided a debtor with a non-compliant statement, the period of non-compliance shall therefore commence on a date to be calculated as if no statement had been served at all, and the period of non-compliance shall begin on the day following the last day on which a compliant statement could be given.

The decision of the High Court clarifies the circumstances in which a period of non-compliance will run should a creditor fail to issue a statement which adheres to the provisions of Section 77A.

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