Consolidated Finance Ltd v Collins & Anor

The Court of Appeal allowed the defendants' appeal and held that the facility letter from Consolidated constituted refinancing of sums already advanced by Bankruptcy Protection Fund Ltd ('Protection') to secure the annulment of the bankrupt's order. The agreement therefore fell within section 11(1)(c) of the Consumer Credit Act 1974 as a refinancing agreement and was a regulated consumer credit agreement rather than an exempt debtor-creditor-supplier agreement under Article 3(1)(a)(i) of the Consumer Credit (Exempt Agreements) Order 1989. Because Consolidated had not complied with the statutory requirements for regulated agreements (including service of default notices under section 87), the facility letter and the legal charge were unenforceable in the present proceedings.

The court rejected the argument that a restricted-use agreement under section 11(1)(b) could be read into the facility letter by implication. It applied authorities on implication and contractual interpretation and concluded that the transactions after the annulment created an indebtedness to Protection which was then refinanced by Consolidated.

Background and parties: Consolidated sued five sets of defendants seeking payment and enforcement of mortgages executed to secure sums alleged due under 'facility letters'. The defendants challenged liability and argued the agreements were regulated consumer credit agreements under the Consumer Credit Act 1974 and non-compliant. The County Court (Her Honour Judge Hazell Marshall QC) had upheld Consolidated's claims, finding the agreements were exempt; the defendants appealed.

Nature of the claim / relief sought: Consolidated sought payment of sums claimed to be due and to enforce the mortgages over the defendants' homes executed to secure those sums.

Procedural posture: This is an appeal from Central London County Court judgment of 14 June 2012. The Court of Appeal heard consolidated appeals and the Office of Fair Trading intervened.

Issues framed by the court:

• Whether the defendants were indebted to Bankruptcy Protection Fund Ltd ('Protection') or to Consolidated.
• If indebted to Consolidated, whether the facility letter agreements were regulated or exempt under the Consumer Credit Act 1974 (in particular whether they were restricted-use agreements under section 11(1)(b) or refinancing agreements under section 11(1)(c)).

Facts and transactional structure: Protection offered to obtain annulments of bankruptcy by advancing or arranging third-party funds to pay bankruptcy creditors, introducing LF (a firm of solicitors) to handle the annulment. The bankrupt (Mrs Collins) signed a letter of instruction to Protection and standard documents from LF. Protection paid the creditors prior to the annulment hearing. LF held the executed facility letter and third-party legal charge to Consolidated pending drawdown and, after the annulment order, completed and delivered them to Consolidated. Consolidated claimed it had advanced sums under a facility letter (which included high monthly compound interest, hypothecation and exit fees) and sought to enforce the charge when the defendants failed to refinance.

Court's reasoning: The court traced the sequence of events and documents and concluded that Protection had advanced the funds to pay the bankrupt's creditors and that Mrs Collins became indebted to Protection once those payments were made. When the annulment was obtained and the facility letter and charge were delivered to Consolidated, the effect was that Consolidated replaced Protection as the creditor by refinancing the indebtedness then already due to Protection. The facility letter therefore fell within section 11(1)(c) as refinancing of existing indebtedness rather than within section 11(1)(b) as financing a third-party transaction, and so was a regulated agreement. The Court of Appeal rejected the implication of a restrictive term which would characterise the loan as restricted-use under section 11(1)(b), applying established authorities on implication and contractual interpretation. Because Consolidated had not complied with the requirements for regulated agreements under the Act (notably service of default notices), the agreements and charges were unenforceable in the present proceedings. The court noted the possibility of subsequent enforcement following compliance with statutory procedures and potential enforcement orders under section 127 for improperly executed agreements.

Subsidiary findings and observations: The court expressed concern about the fairness of the commercial model employed by Protection and Consolidated, the very high rates and fees charged, and the role of the solicitors (LF) who excluded advice on the funding. The court did not make findings against the solicitors but raised concerns about conflicts of interest and adequacy of advice to vulnerable consumers.

Appeal allowed. The Court of Appeal held that the facility letter operated to refinance sums already advanced by Bankruptcy Protection Fund Ltd and therefore fell within section 11(1)(c) of the Consumer Credit Act 1974 as a refinancing agreement. It was a regulated agreement, not an exempt debtor-creditor-supplier agreement, and because Consolidated had not complied with the Act's requirements for regulated agreements the facility letter and legal charge were unenforceable in the present proceedings.

Appeal from Central London County Court (Her Honour Judge Hazell Marshall QC), judgment given 14 June 2012; appeal heard in the Court of Appeal (Civil Division), neutral citation [2013] EWCA Civ 475.