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Consumer Credit Act default notices
Consumer Credit Act default notices - Lexology
Ian Karl Robert Brandon v American Express Services Europe Limited [2011] EWCA Civ 1187
What?
On 25th October 2011, the Court of Appeal handed down judgment in Ian Karl Robert Brandon v American Express Services Europe Limited. The Court’s decision perpetuates the current uncertainty about what action a lender can or should take if it discovers that a default notice served by a lender on a borrower pursuant to s. 87(1) Consumer Credit Act 1974 is defective.
Regulatory background
Under the provisions of the Consumer Credit Act 1974, (as amended, the “CCA”) if a creditor wants to take certain steps to enforce a CCA regulated credit or hire agreement, the creditor can only do so provided that he has fi rst served on the debtor a default notice in the prescribed form. The steps which a creditor cannot take without fi rst having served a compliant default notice on the debtor are listed at s.87 CCA and include termination of the regulated agreement; demanding accelerated payment of sums payable under the agreement; and the recovery of goods.
In order to be compliant, the default notice must be in the prescribed form pursuant to s.88 (2) CCA and must clearly set out the debtor’s breach of the agreement and the steps which the debtor should take to cure his breach. Crucially, the debtor must be allowed at least 14 clear days in which to remedy his default before the creditor becomes entitled to take enforcement action.
Facts of the matter
Mr Brandon was in arrears under his credit card agreement with American Express Services Europe Limited (“Amex”). Amex served on Mr Brandon a default notice and then, when Mr Brandon failed to remedy his default, Amex pursued him for the full outstanding balance owed under his credit card agreement.
Amex applied for and obtained summary judgment against Mr Brandon following a hearing before Deputy District Judge Gisby at Bristol County Court on 5th June 2009. Mr Brandon appealed the summary judgment on the basis that, amongst other things, the s.87 default notice served on him by Amex was defective. The notice did not allow him the statutorily prescribed 14 clear days in which to cure his default. Mr Brandon argued that accordingly, Amex was not entitled to enforce the credit card agreement against him.
At a hearing on 25th May 2010 before HHJ Denyer sitting as a judge of the High Court at Bristol County Court, Mr Brandon’s appeal against summary judgment was dismissed. HHJ Denyer noted that Mr Brandon did not deny that he owed Amex money. HHJ Denyer also noted that no enforcement action was taken against Mr Brandon within 14 days of the date of the default notice. HHJ Denyer concluded that to the extent the s.87 default notice served on Mr Brandon was defective due to the nature of the defects and the prejudice caused to Mr Brandon as a result of such defects was de minimis. Judgment in favour of Amex was upheld.
In a hearing on 12th and 13th July 2011, the Court of Appeal reversed this decision. Noting the threshold test for summary judgment at Part 24 CPR, the Court held unanimously that Mr Brandon did indeed have a real prospect of success with his defence based on the invalidity of the notice. The Amex case based on default was, in the view of the Court, untenable. The default notice on its true construction did not give Mr Brandon the requisite 14 clear days in which to remedy his breach. A failure to comply with the time period provided by statute could not be overlooked as de minimis. If the default notice had not or might not have allowed the minimum statutory period for Mr Brandon to remedy his default then it was at least realistically arguable that such a defect in the notice could not be dismissed as de minimis, both as to the nature of the defect and the prejudice caused thereby.
Amex had also sought to advance arguments that it was in any event entitled to terminate the credit card agreement with Mr Brandon pursuant to a contractual provision in the credit card agreement itself and thus, did not need to serve a s.87 default notice on Mr Brandon in order to terminate the agreement. However, the Court held that Amex could not avail itself of this route to termination.
Impact for creditors
The decision in Brandon is a rare item of bad news for creditors. The rules as to the form and content of CCA default notices are not straightforward, yet service of a compliant default notice is a pre– requisite of a successful action against a debtor where the creditor is seeking a remedy listed at s.87(1) CCA. Defective notices are widespread and until the judgment in Brandon, many creditors took comfort from the judgment by HHJ Denyer that a defective notice was not fatal to any claim against a debtor provided that the creditor could demonstrate that the defect was de minimis and/or otherwise that no prejudice was caused to the debtor as a result of the defect.
The judgment in Brandon has essentially put the situation back to square one. The Court of Appeal did not make any decisions on the substantive law; it simply held that Mr Brandon had a real prospect of success. As to the merits of his argument regarding the defective notice, that will be for the Court to decide in due course.
Unfair relationships
Shafi k Rahman & 7 ors v (1) HSBC Bank PLC (2) Andrew Donald Roger (3) Roger Nicholas Phillips (2012) [2012] EWHC 11 (Ch)
What?
The decision of HHJ Behrens sitting as a judge of the High Court in Leeds confi rms that within the parameters of a large scale commercial lending relationship between lender and borrower, where the parties had equal bargaining power, neither the requirement for overdraft facilities to be repaid on demand or the enforcement of cross default clauses contained in the relevant facility agreements was unfair for the purposes of s.140A CCA.
Regulatory background
Under s.140A CCA, a borrower can apply to the Court for a determination that the relationship between lender and borrower arising out of the credit agreement between them is unfair, (s.140A(1) CCA). The unfairness can arise as a result of the terms of the agreement between lender and borrower; the way in which the lender has exercised or enforced his rights under the agreement between lender and borrower; and/or as a result of any other thing done or not done by or on behalf of the lender. The Court may take into account all matters which it thinks are relevant, (s.140A(2) CCA). Crucially however, it is the relationship between lender and borrower which the Court must assess for unfairness and not the contractual provisions framing that relationship, (Harrison v Black Horse Limited, [2011] EWCA Civ 1128). Once a borrower has made an allegation of unfairness, the burden of proof falls on the lender to show that the relationship is in fact fair, (s. 140B (9) CCA).
If the Court determines that the relationship between lender and borrower is unfair, then the Court has wide powers to intervene in the relationship and make appropriate orders, including requiring the lender to do or cease doing anything specifi ed in such order, (s.140B CCA).
As a point to note, a borrower, provided that he is an ‘individual’ for the purposes of the CCA, (namely; a natural person; an unincorporated association; or a small partnership comprising 3 partners or fewer, (s.189(1) CCA)) may apply to the Court assess his credit agreement for unfairness under s.140A CCA even if the credit agreement itself does not fall to be regulated by the CCA.
Facts of the matter
In Rahman, the Claimants who, as a family group, had built up a large portfolio of investment properties alleged that the relationship between them and the lender, HSBC Bank PLC (“HSBC”) was unfair. HSBC had advanced a range of facilities to the Claimants including on demand and term facilities and had taken security by way of legal mortgage over the properties comprised in the Claimants’ portfolio.
The Claimants encountered diffi culties in meeting their repayment obligations. HSBC invited the Claimants to submit their proposals for repayment against the background of a deteriorating relationship between the Claimants and HSBC. Eventually, HSBC demanded repayment of the on-demand facilities and, pursuant to a cross default clause contained in the relevant facility agreements, also demanded repayment of the term facilities previously advanced to the Claimants, even though in respect of some of the term facilities, the claimants continued to service the interest payments on those term facilities. HSBC also appointed an LPA Receiver over the properties.
The Claimants alleged unfairness based on (i) the terms of the agreements and the mortgages, in particular the existence of the cross default clause which enabled HSBC to demand repayment of the term facilities ahead of time; (ii) the manner in which HSBC called for repayment and appointed the LPA Receiver; and (iii) alleged breaches by HSBC of promises of additional funding.
On the facts of the case, HHJ Behrens concluded that there was nothing remotely unfair about the repayment of overdraft facilities on demand. Such terms were commonplace. HHJ Behrens also concluded that there was nothing unfair about the inclusion of a term allowing HSBC to appoint an LPA Receiver following default on the basis that such a provision was also commonplace within the banking industry.
Further, HHJ Behrens concluded that, on the facts of the matter, the existence of the cross default clause was justifi ed by sound commercial reasons in order to protect HSBC’s security position.
Impact for creditors
Rahman provides further positive news for lenders in respect of the factors that a Court will take into account when assessing unfairness for the purposes of s.140A CCA. Of signifi cance is the fact that in reaching his conclusions set out above, HHJ Behrens took into account the nature of the relationship between the parties and their relative bargaining strengths. HHJ Behrens noted that the facilities advanced by HSBC constituted commercial lending and involved the advancement of substantial sums. On the facts, the Court found that the Claimants were in a strong bargaining position and had indeed threatened to take their business elsewhere on a number of occasions.
The decision in Rahman shows that it will be more diffi cult for borrowers who are commercially experienced to succeed with allegations of unfairness. On the facts of Rahman, the Court concluded that Mr Rahman had read the terms and conditions of the various facility agreements carefully and was aware of the nature of the facilities. In common with earlier authority therefore, (see for example, Maple Leaf Macro Volatility Master Fund and Another v Rouvroy & Another [2009] EWHC 257 (Comm)) in the circumstances, there was nothing unfair about the relationship.
Newsflash
In another case concerning unfair relationships pursuant to s.140A CCA, on 21st February 2012 the Supreme Court gave the Harrisons permission to appeal in Harrison & Harrison v Black Horse Limited [2011] EWCA Civ 1128. The appeal pertains to the limited question of whether the taking of an undisclosed commission by a lender in respect of the sale of a payment protection insurance policy (when there was no regulatory obligation to disclose the existence or amount of the commission) created an ‘unfair relationship’ for the purposes of s.140A CCA. The Harrisons’ appeal will be the fi rst time that the Supreme Court has considered the question of unfair relationships.
Consumer Credit Act default notices - Lexology
Ian Karl Robert Brandon v American Express Services Europe Limited [2011] EWCA Civ 1187
What?
On 25th October 2011, the Court of Appeal handed down judgment in Ian Karl Robert Brandon v American Express Services Europe Limited. The Court’s decision perpetuates the current uncertainty about what action a lender can or should take if it discovers that a default notice served by a lender on a borrower pursuant to s. 87(1) Consumer Credit Act 1974 is defective.
Regulatory background
Under the provisions of the Consumer Credit Act 1974, (as amended, the “CCA”) if a creditor wants to take certain steps to enforce a CCA regulated credit or hire agreement, the creditor can only do so provided that he has fi rst served on the debtor a default notice in the prescribed form. The steps which a creditor cannot take without fi rst having served a compliant default notice on the debtor are listed at s.87 CCA and include termination of the regulated agreement; demanding accelerated payment of sums payable under the agreement; and the recovery of goods.
In order to be compliant, the default notice must be in the prescribed form pursuant to s.88 (2) CCA and must clearly set out the debtor’s breach of the agreement and the steps which the debtor should take to cure his breach. Crucially, the debtor must be allowed at least 14 clear days in which to remedy his default before the creditor becomes entitled to take enforcement action.
Facts of the matter
Mr Brandon was in arrears under his credit card agreement with American Express Services Europe Limited (“Amex”). Amex served on Mr Brandon a default notice and then, when Mr Brandon failed to remedy his default, Amex pursued him for the full outstanding balance owed under his credit card agreement.
Amex applied for and obtained summary judgment against Mr Brandon following a hearing before Deputy District Judge Gisby at Bristol County Court on 5th June 2009. Mr Brandon appealed the summary judgment on the basis that, amongst other things, the s.87 default notice served on him by Amex was defective. The notice did not allow him the statutorily prescribed 14 clear days in which to cure his default. Mr Brandon argued that accordingly, Amex was not entitled to enforce the credit card agreement against him.
At a hearing on 25th May 2010 before HHJ Denyer sitting as a judge of the High Court at Bristol County Court, Mr Brandon’s appeal against summary judgment was dismissed. HHJ Denyer noted that Mr Brandon did not deny that he owed Amex money. HHJ Denyer also noted that no enforcement action was taken against Mr Brandon within 14 days of the date of the default notice. HHJ Denyer concluded that to the extent the s.87 default notice served on Mr Brandon was defective due to the nature of the defects and the prejudice caused to Mr Brandon as a result of such defects was de minimis. Judgment in favour of Amex was upheld.
In a hearing on 12th and 13th July 2011, the Court of Appeal reversed this decision. Noting the threshold test for summary judgment at Part 24 CPR, the Court held unanimously that Mr Brandon did indeed have a real prospect of success with his defence based on the invalidity of the notice. The Amex case based on default was, in the view of the Court, untenable. The default notice on its true construction did not give Mr Brandon the requisite 14 clear days in which to remedy his breach. A failure to comply with the time period provided by statute could not be overlooked as de minimis. If the default notice had not or might not have allowed the minimum statutory period for Mr Brandon to remedy his default then it was at least realistically arguable that such a defect in the notice could not be dismissed as de minimis, both as to the nature of the defect and the prejudice caused thereby.
Amex had also sought to advance arguments that it was in any event entitled to terminate the credit card agreement with Mr Brandon pursuant to a contractual provision in the credit card agreement itself and thus, did not need to serve a s.87 default notice on Mr Brandon in order to terminate the agreement. However, the Court held that Amex could not avail itself of this route to termination.
Impact for creditors
The decision in Brandon is a rare item of bad news for creditors. The rules as to the form and content of CCA default notices are not straightforward, yet service of a compliant default notice is a pre– requisite of a successful action against a debtor where the creditor is seeking a remedy listed at s.87(1) CCA. Defective notices are widespread and until the judgment in Brandon, many creditors took comfort from the judgment by HHJ Denyer that a defective notice was not fatal to any claim against a debtor provided that the creditor could demonstrate that the defect was de minimis and/or otherwise that no prejudice was caused to the debtor as a result of the defect.
The judgment in Brandon has essentially put the situation back to square one. The Court of Appeal did not make any decisions on the substantive law; it simply held that Mr Brandon had a real prospect of success. As to the merits of his argument regarding the defective notice, that will be for the Court to decide in due course.
Unfair relationships
Shafi k Rahman & 7 ors v (1) HSBC Bank PLC (2) Andrew Donald Roger (3) Roger Nicholas Phillips (2012) [2012] EWHC 11 (Ch)
What?
The decision of HHJ Behrens sitting as a judge of the High Court in Leeds confi rms that within the parameters of a large scale commercial lending relationship between lender and borrower, where the parties had equal bargaining power, neither the requirement for overdraft facilities to be repaid on demand or the enforcement of cross default clauses contained in the relevant facility agreements was unfair for the purposes of s.140A CCA.
Regulatory background
Under s.140A CCA, a borrower can apply to the Court for a determination that the relationship between lender and borrower arising out of the credit agreement between them is unfair, (s.140A(1) CCA). The unfairness can arise as a result of the terms of the agreement between lender and borrower; the way in which the lender has exercised or enforced his rights under the agreement between lender and borrower; and/or as a result of any other thing done or not done by or on behalf of the lender. The Court may take into account all matters which it thinks are relevant, (s.140A(2) CCA). Crucially however, it is the relationship between lender and borrower which the Court must assess for unfairness and not the contractual provisions framing that relationship, (Harrison v Black Horse Limited, [2011] EWCA Civ 1128). Once a borrower has made an allegation of unfairness, the burden of proof falls on the lender to show that the relationship is in fact fair, (s. 140B (9) CCA).
If the Court determines that the relationship between lender and borrower is unfair, then the Court has wide powers to intervene in the relationship and make appropriate orders, including requiring the lender to do or cease doing anything specifi ed in such order, (s.140B CCA).
As a point to note, a borrower, provided that he is an ‘individual’ for the purposes of the CCA, (namely; a natural person; an unincorporated association; or a small partnership comprising 3 partners or fewer, (s.189(1) CCA)) may apply to the Court assess his credit agreement for unfairness under s.140A CCA even if the credit agreement itself does not fall to be regulated by the CCA.
Facts of the matter
In Rahman, the Claimants who, as a family group, had built up a large portfolio of investment properties alleged that the relationship between them and the lender, HSBC Bank PLC (“HSBC”) was unfair. HSBC had advanced a range of facilities to the Claimants including on demand and term facilities and had taken security by way of legal mortgage over the properties comprised in the Claimants’ portfolio.
The Claimants encountered diffi culties in meeting their repayment obligations. HSBC invited the Claimants to submit their proposals for repayment against the background of a deteriorating relationship between the Claimants and HSBC. Eventually, HSBC demanded repayment of the on-demand facilities and, pursuant to a cross default clause contained in the relevant facility agreements, also demanded repayment of the term facilities previously advanced to the Claimants, even though in respect of some of the term facilities, the claimants continued to service the interest payments on those term facilities. HSBC also appointed an LPA Receiver over the properties.
The Claimants alleged unfairness based on (i) the terms of the agreements and the mortgages, in particular the existence of the cross default clause which enabled HSBC to demand repayment of the term facilities ahead of time; (ii) the manner in which HSBC called for repayment and appointed the LPA Receiver; and (iii) alleged breaches by HSBC of promises of additional funding.
On the facts of the case, HHJ Behrens concluded that there was nothing remotely unfair about the repayment of overdraft facilities on demand. Such terms were commonplace. HHJ Behrens also concluded that there was nothing unfair about the inclusion of a term allowing HSBC to appoint an LPA Receiver following default on the basis that such a provision was also commonplace within the banking industry.
Further, HHJ Behrens concluded that, on the facts of the matter, the existence of the cross default clause was justifi ed by sound commercial reasons in order to protect HSBC’s security position.
Impact for creditors
Rahman provides further positive news for lenders in respect of the factors that a Court will take into account when assessing unfairness for the purposes of s.140A CCA. Of signifi cance is the fact that in reaching his conclusions set out above, HHJ Behrens took into account the nature of the relationship between the parties and their relative bargaining strengths. HHJ Behrens noted that the facilities advanced by HSBC constituted commercial lending and involved the advancement of substantial sums. On the facts, the Court found that the Claimants were in a strong bargaining position and had indeed threatened to take their business elsewhere on a number of occasions.
The decision in Rahman shows that it will be more diffi cult for borrowers who are commercially experienced to succeed with allegations of unfairness. On the facts of Rahman, the Court concluded that Mr Rahman had read the terms and conditions of the various facility agreements carefully and was aware of the nature of the facilities. In common with earlier authority therefore, (see for example, Maple Leaf Macro Volatility Master Fund and Another v Rouvroy & Another [2009] EWHC 257 (Comm)) in the circumstances, there was nothing unfair about the relationship.
Newsflash
In another case concerning unfair relationships pursuant to s.140A CCA, on 21st February 2012 the Supreme Court gave the Harrisons permission to appeal in Harrison & Harrison v Black Horse Limited [2011] EWCA Civ 1128. The appeal pertains to the limited question of whether the taking of an undisclosed commission by a lender in respect of the sale of a payment protection insurance policy (when there was no regulatory obligation to disclose the existence or amount of the commission) created an ‘unfair relationship’ for the purposes of s.140A CCA. The Harrisons’ appeal will be the fi rst time that the Supreme Court has considered the question of unfair relationships.