Time to pay up: is your settlement agreement unenforceable?

Time to pay up: is your settlement agreement unenforceable?

26 October 2021.

According to a decision by the Court of Appeal, potentially, yes it could be.

The case of CFL Finance Limited v Laser Trust and Gertner [2021] EWCA Civ 228 raises a host of potential headaches for unregulated lenders pursuing the recovery of a debt from debtor where settlement terms have been agreed.

Why is this case a problem? you ask.  Well, if by the settlement agreement the debtor is given more time to pay the undisputed debt across installments together with interest on what they owe, this could be caught by the definition of what amounts to “a consumer credit agreement” of the Consumer Credit Act 1974 (“the Act”).  It becomes a serious problem if the lender does not have authorisation from the Financial Conduct Authority to provide credit and if the lender does not comply with the documentary requirements of the Act.  If this is the case, then it is unlikely that the terms of the settlement can be enforced against the debtor.  This can result in huge losses for the lender.

Therefore, careful thought should be given to the drafting of any settlement agreement to avoid the risk of it being caught by the Act.

1. How did this situation happen in the first place?

The case has a long history, dating back to 2008.   Here is how it all happened.

CFL advanced £3.5m to Lanza Holdings under a facility agreement in June 2008.  Mr. Gertner (“Mr. G”), whose family, owned Lanza Holdings, signed a guarantee, and guaranteed Lanza’s obligations to CFL.

Lanza defaulted.

CFL issued proceedings for £1.7m plus interest. At this point, £1.8m was owed in interest. 

The interest continued to accrue on a compound basis at 2.25% per month

The litigation was settled on agreed terms between CFL and Mr. G.

Mr. G agreed to pay £2m to CFL across 8 quarterly installments and the dates that each of those payments was due was stated in the agreement.

A default clause was put into the agreement which said that if Mr. G failed to pay the quarterly installments, then the £1.7m capital sum would be due immediately together with simple interest on £3.5m and £1.7m.  Compound interest was payable on the outstanding balance up to the date of payment.

Mr. G paid a little over £1.5m but did not pay anything else.

CFL served a statutory demand on Mr. G for £11m.  He failed to pay and CFL commenced bankruptcy proceedings against him.  The Insolvency Court declared Mr. G bankrupt.

Mr. G appealed to the High Court.  He argued that the bankruptcy proceedings should have been stayed to allow Mr. G’s creditors to consider a voluntary arrangement (“IVA”) and, in addition, the settlement provided credit to Mr. G which meant that it was a regulated credit agreement which fell within the Consumer Credit Act 1974 (“the Act”).   He said that the agreement was “unfair” because CFL did not have a licence from the Office of Fair Trading (as required under the Act at that time) and that CFL did not comply with the documentary requirements of the Act.  Therefore, as the agreement was unfair, it followed that it was unenforceable.

The High Court agreed with Mr. G about the bankruptcy order and set it aside.  However, the Court did not accept Mr. G’s arguments that the settlement agreement was “unfair”. 

CFL appealed the decision to set the bankruptcy order aside.  Mr. G cross appealed.  He repeated his arguments that the settlement was a regulated credit agreement under the Act, and it was unfair because CFL had not complied with the requirements of the Act.

The Court of Appeal decided that because the settlement agreement provided for future payment of a debt that was owed, this did confer “credit” to Mr. G therefore it was caught by the Act.   CFL did not have a licence from the Office of Fair Trading and, it had failed to issue the required documents to comply with the Act. As a result, the Court said that the settlement agreement was unfair and therefore it was unenforceable.

2. Here comes the legal bit

What does the Act say about consumer credit agreements?

Section 8 of the Act says that a consumer credit agreement is an agreement between an individual (“the debtor”) and any other person (“the creditor”) by which the creditor provides the debtor with credit of any amount.  The key term “credit” is defined in Section 9 as including a cash loan or any other form of “financial accommodation”

All agreements that satisfy this definition are automatically treated as regulated credit agreements under the Act unless an exemption applies.

What are the documentary requirements under the Act that a lender must comply with?

In short, they are as follows:

1. The agreement must be in the prescribed form by the Act, containing all the prescribed terms.

1. It must be signed in the prescribed manner both by the debtor and the creditor

1. The creditor must supply a copy of the regulated credit agreement to the debtor

1. The creditor must give notice of cancellation rights to the debtor

1. Upon request by the debtor, the creditor must give the debtor a copy of the signed agreement and any other document referred to it, including a statement signed by the creditor which shows:

1. The total sum paid under the agreement
2. The total sum which remains unpaid

• The total sum which is to become payable under the agreement by the debtor

1. The creditor must give the debtor statements which relate to consecutive periods about the debt owed. The statements must be issued annually.

1. The credit is obliged to give the debtor a notice of arrears if the payment(s) by the debtor is less than the total sum which should have been paid.

How does an agreement become unenforceable under the Act?

Section 140A says that a Court may order a creditor to reduce, discharge or repay a longer under a credit agreement if it decides that the relationship between the creditor and the debtor is unfair to the debtor because of one or more of the following:

1. Any of the terms of the agreement.

1. The way in which the creditor has carried out or enforced any of its rights under the agreement.

1. Any other thing done or not done by the creditor either before or after the agreement.

3. How can you stop your settlement agreement becoming

           unenforceable against the debtor?

1. Check whether any of the exemptions under the Financial Services and Markets Act 2000 (“FSMA”) apply such as where the credit exceeds £25,000 and it is wholly or predominantly for the purposes of the debtor’s business. However, a note of caution here, it is important that the business purposes declaration is contained in the agreement.    This is intended to help lenders discharge the burden of providing whether a credit agreement is exempt or not.  The inclusion of the declaration (which must comply with all the formalities) creates a presumption that the agreement was entered into wholly or predominantly for the purposes of a business carried on, or intended to be carried on, by the debtor

1. If the period of credit to be given to the debtor in the settlement agreement will be over 12 monthly payments and interest is charged, the lender must ensure that it complies with all the requirements of the Act. This relates to all the pre-contractual information that must be given to the debtor, in the prescribed form and content of the agreement and that all the post agreement notices and statements are provided.  Whilst this does create more of an administrative burden for the lender, it reduces the scope for the debtor to raise arguments that the documentary requirements of the Act have not been complied with.  In most cases, it will be worthwhile the lender taking these additional steps when compared against the risk of the debt either being varied or discharged by the Court.

1. If, as a lender, your business enters lots of settlement agreements to avoid the significant costs of litigation, then it may be in your interests to consider obtaining authorisation from the Financial Conduct Authority.

1. If, upon reflection, the settlement agreement is likely to be construed as a consumer credit agreement, the lender will need to reconsider its original claim against the debtor either by issuing proceedings afresh or, where appropriate, re-commencing the legal proceedings. The downside to this approach, is that there will be cost consequences. 

4. What next then for the future of these types of settlement

           agreements?

There has been a lot of legal commentary about the consequences of this case in that it may possibly discourage lenders from agreeing settlement with the debtor and instead pursue the terms of the existing agreement through to Court.  Not only is this option more expensive for lenders, but it also goes against the Court’s expectation and active encouragement to all litigants that they should try to settle their disputes wherever possible, and that litigation is a last resort.

CFL v Mr. G is currently being appealed to the Supreme Court which is the highest Court in England and Wales.   We will have to wait and see what the Supreme Court makes of it all.

If you have any existing settlement agreements or you are considering settlement with debtors and you are worried about whether those agreements will be caught by the Consumer Credit Act 1974, get in touch with our dispute resolution expert, Kelly Ellery.