Is your settlement agreement unenforceable – the impact of consumer credit protection?

The Court of Appeal decision in CFL Finance Ltd v Laser Trust & Gerter [2021] EWCA Civ 228 has confirmed that settlement terms contained in the schedule to a Tomlin Order could be a "financial accommodation" pursuant to s.9 of the Consumer Credit Act 1974 (the "CCA"). If that is the case and compliance with the CCA is not established, enforcement of those settlement terms could be delayed or prohibited.

Background

If an agreement to provide credit is regulated under the CCA, there are prescriptive requirements a lender must follow. Indeed, the requirements of the CCA are complicated and a failure to comply can afford debtors (who must be individuals) protections, including:

• Where there is an improperly executed regulated agreement, requiring a Court order before a lender can enforce (s.65);
• Preventing a lender from enforcing the credit agreement during periods of non-compliance (ss.75-86); and
• Giving the Court a wide discretion to remedy an "unfair relationship" between the creditor and debtor in relation to a credit agreement (s140A).

Over the years, debtors, their debt advisors and CMCs have sought to test (a) the extent of the protections (e.g. where lenders fail to provide prescribed information or the remedies for an unfair relationship in mis-selling contexts); and (b) the types of agreement to which the CCA applies. In some cases, this has had the effect of restricting creditors' ability to pursue recoveries or requiring lenders to offer wide-ranging redress schemes.

Analysis

The procedural history of this case is unusual but is relevant to understand the limited application of the decision.

In summary:

• Mr Gertner was a personal guarantor to the principal debtor, Lanza Holdings Ltd ("Lanza"). Once Lanza defaulted, CFL pursued Mr Gertner under the guarantee for £1.7m plus interest of £1.8m (which was continuing to accrue). CFL applied for summary judgment in August 2011.

• Mr Gertner disputed CFL's claim on various grounds and the proceedings were settled in September 2011 in the usual course by way of a Tomlin Order with a schedule of terms (the "Settlement Agreement"). The Settlement Agreement provided that Mr Gertner pay sums totalling £3.725m (including £50k towards CFL's costs) over a period of time. If Mr Gertner defaulted on these terms, the sums claimed in the proceedings (including substantial interest) would immediately become due.

• Mr Gertner paid over £1.5m but ultimately defaulted on the terms of the Settlement Agreement. In turn, CFL presented a bankruptcy petition in October 2015 and a bankruptcy order was made by Judge Briggs in July 2019.

• The bankruptcy order was subject to an appeal on various grounds (including that it was unenforceable under the CCA). The appeal was considered by Marcus Smith J in May 2020 (see here).

• The appeal was successful, and the bankruptcy order set aside with the petition stayed pending a further order. However, whilst Marcus Smith J found that the CCA could apply to a schedule to a Tomlin Order, in this case, it did not because:

“[…] the effect of the Settlement Agreement was to dispose of CFL’s claims against Mr Gertner under the guarantee and to replace them with a new (primary) obligation to pay the various sums […]. There is nothing in the Settlement Agreement that involves the provision of any kind of credit or financial accommodation. All that has happened is that the parties have agreed to end the dispute between them on Mr Gertner’s promise to pay money to CFL. In no sense has the obligation to pay under the guarantee (to the extent it existed) been deferred. Rather, that obligation has been extinguished, and replaced by another.”

• Both CFL and Mr Gertner appealed the judgment of Marcus Smith J. However, due to CFL's failure to provide security for costs, its appeal was struck out and the bankruptcy petition dismissed.

• Consequently, in the absence of other parties (and their advocates) this Court of Appeal decision was limited to Mr Gertner's narrow appeal and, particularly, whether Marcus Smith J's rejection of the appeal on the ground that the Settlement Agreement did not provide "financial accommodation" under the CCA, was correct.

Does the CCA apply to the schedule to a Tomlin order?

It was accepted that Marcus Smith was correct to find that there was no point of policy (or any other reason) that meant a settlement agreement within a Tomlin Order would cause the CCA not to apply.

In short, the schedule to a Tomlin Order is a contractual agreement like any other – on which the CCA could bite if the relevant definitions apply. As the Court put it:

"The key question […] is whether the Settlement Agreement involved the provision of “credit” to Mr Gertner by CFL.

Did the Settlement Agreement provide Mr Gertner with “credit”?

This was a much more sensitive consideration and one that will depend on the facts of each case. In particular, whether the settlement agreement (a) afforded the debtor time to pay a debt - in respect of which the CCA could apply; or (b) compromised a substantially disputed claim - to which it could not.

The Court of Appeal did not fix a dividing line for circumstances where (as in Mr Gertner's case) the debtor denied liability before reaching the settlement, but the defence put forward appeared to lack substance (it was not necessary for his appeal).

Instead, where Mr Gertner's defence appeared invalid in law and there was a real possibility that he did not believe it had a fair chance of success, it appeared more likely to be a deferral of a debt (rather than a mere claim). Therefore, the Court found there was a genuine triable issue as to whether the Settlement Agreement did, in fact, provide credit under the CCA and would be unenforceable for non-compliance. Consequently, had the petition still been live, it would therefore have been dismissed.

Commentary

Due to the convoluted procedural context, the decision does not offer creditors entering settlement agreements with individuals the certainty they would like. Instead, the Court suggests where the room for argument exists it will need further consideration in future cases.

Nevertheless, the Court did summarise some factors which might help parties assess whether their settlement agreements were potentially caught by the CCA:

• The CCA does not apply to an agreement simply giving more time to pay where there is no consideration (e.g. if a creditor defers enforcement action but reserves its rights to do so at any time);
• A debtor will not have provided consideration by giving up a defence which the debtor recognises as lacking a fair chance of success (e.g. raising and abandoning a "straw-man" defence will not satisfy the consideration requirement, the debtor must actually offer something);
• Even where consideration is present (eg a payment towards costs), the CCA will not apply to an agreement which compromises a claim if the debtor genuinely disputed the claim on substantial grounds – provided this is not a mechanism to avoid the CCA applying to any underlying agreement; and
• In contrast, if the debtor does not dispute that he is indebted, and a settlement agreement is entered into (with consideration) providing for payment by instalments then this would be captured by the CCA.

Creditors used to business lending where the CCA does not apply, should be particularly mindful of the application of this decision to personal guarantors who, like Mr Gertner, are individuals who may raise a defence simply to secure time to pay. Settlement in these circumstances, where consideration is given, could be regulated by the CCA. Therefore, it might be preferable to secure summary judgment, rather than risk replacing an enforceable agreement with an unenforceable one.