Creditors' rights not extinguished

30.11.09

 

This article was written by Greg Standing, partner in Wragge & Co LLP's finance, insolvency, recoveries and sales team and published in the November issue of Motor Finance

 

Last month, I reported on the Office of Fair Trading (OFT) draft guidance note on how to comply with duties to give debtors and hirers copy documents and statements of account following requests under sections 77 – 79 of the Consumer Credit Act 1974 (the Act).

There has now been a case, McGuffick v Royal Bank of Scotland PLC.

The facts

McGuffick entered into a fixed-sum regulated loan with the bank. A default notice was served together with a letter warning that if payment wasn't made, information about the debtor's indebtedness would be passed to Credit Reference Agencies (CRAs). A s77 information request was then made by the debtor and the bank was advised that as the debtor considered the agreement was in dispute, no reference should be made to CRAs and no other enforcement could be taken until resolved.

The bank was unable to locate a copy of the agreement and advised the debtor that although the loan may be unenforceable, it was still valid and that continuing default would be reported to the CRAs. Although the bank did subsequently send a copy of the agreement to the debtor, it failed to supply a signed statement of account as required by s77(1) at the same time. The debtor commenced proceedings for a declaration that the agreement was irredeemably unenforceable.

The decision

The court found that:

• The effect of unenforceability under s77 of the Act was that the bank's rights and the debtor's liabilities/obligations continued to exist but were unenforceable. Those rights/liabilities were not thereby extinguished or deemed never acquired. As the bank had subsequently complied with the request, the agreement was now enforceable.
• Continuing default could be reported to CRAs by the bank. To do so was an essential act of responsible lending and of the licensing process. It allowed CRAs to share the bank's data with other financial institutions for the purposes of assessing credit applications. The debtor's data was being processed fairly and lawfully and the debtor was not entitled to injunctive relief to prevent such use of the data.
• Such reporting did not constitute a step in enforcement contrary to the Act.
• The bringing of proceedings was only a step taken with a view to enforcement and not actually enforcement.
• Demanding payment, issuing a default notice, threatening legal action and instructing a third party to demand payment or otherwise to seek to procure payment from a claimant was not enforcement either for the purposes of the CCA.

Comment

This is a positive judgment for finance company lenders.

Many debtors who have commenced proceedings seeking a declaration that their credit agreement is irredeemably unenforceable under sections 61 and 127 of the Act by reason of a failure by the lender to comply with an information request will now need to amend or discontinue their proceedings.

If they do not do so, finance companies should take advice on making applications for strike out or summary judgment.

For further information about this published aticle, contact Kathryn Hobbs on +44 (0)121 213 2397, Amie Ryalls on +44 (0)121 213 2360 or Rebecca Davies on +44 (0)121 213 2396

This published article may contain information of general interest about current legal issues, but does not give legal advice.