Consolidated Finance Ltd v Collins & Anor

A credit agreement is restricted-use under section 11 of the Consumer Credit Act 1974 only where the debtor has contractually agreed that the credit be used for the specified purpose. Once a service transaction is complete and creates an indebtedness, later third-party funding used to discharge it is refinancing existing indebtedness under section 11(1)(c), rather than credit to finance the transaction under section 11(1)(b). Where contractual language has gone wrong, the court may construe it in context and disregard a meaningless definition; that is distinct from implying a term. The facility therefore refinanced existing liabilities and was regulated, not exempt. Non-compliance made the facility and charge unenforceable in the proceedings.

Consolidated brought five related claims to recover sums allegedly advanced to bankrupt individuals and to enforce charges over their homes. The parties agreed preliminary issues concerning whether Consolidated had made the loans and whether the facility letters were regulated or exempt under the Consumer Credit Act 1974.

On 14 June 2012, Her Honour Judge Hazell Marshall QC, sitting in the Central London County Court, held that the loans had been made by Consolidated and that the agreements were exempt and enforceable. The appeals concerned whether the defendants were indebted to Consolidated or to its associated company, Protection, and whether the facilities financed a transaction under section 11(1)(b) or refinanced existing indebtedness under section 11(1)(c).

The appeals were allowed. The agreements and legal charges were regulated agreements and could not be enforced in the present proceedings.

1. Under section 11 of the Consumer Credit Act 1974, credit is restricted-use only if the debtor contractually agreed that it was to be used for the specified purpose. The Court applied the approach stated in National Westminster Bank v Storey [1999] CCLR 70.
2. The Court agreed with the reasoning in Consolidated Finance Ltd v McCluskey [2012] EWCA Civ 1325 that no additional contractual restriction could be implied into the materially identical facility letter. However, construing defective language is distinct from implying a term. Following the approach illustrated by Chartbrook Ltd v Persimmon Homes Ltd [2009] AC 1101, the circular definition of the loan could be disregarded and the facility letter construed in its commercial context.
3. Protection had already paid the bankruptcy liabilities and had completed its service when the annulment order was made. Mrs Collins was therefore indebted to Protection, including for its fee. The facility letter replaced that existing indebtedness with indebtedness to Consolidated. It was consequently refinancing under section 11(1)(c), not financing under section 11(1)(b).
4. Liabilities incurred after the bankruptcy order and not provable in bankruptcy were not caught by section 285 of the Insolvency Act 1986. Section 285 affected enforcement of provable debts but did not prevent the underlying liability from arising. Section 360 was irrelevant because Protection knew that Mrs Collins was an undischarged bankrupt.
5. Since the agreements were regulated and the statutory requirements had not been met, Consolidated could not enforce them or the charges in these proceedings. Future enforcement would require the necessary default notices and, if the agreements were improperly executed, an enforcement order under section 127. The Court also expressed concerns about the manifest disadvantage to the consumers and the solicitors’ conduct, but reached no conclusion on those matters.

• Central London County Court: On 14 June 2012, Her Honour Judge Hazell Marshall QC held that Consolidated had lent the claimed sums and that the agreements were exempt and enforceable.
• Court of Appeal (Civil Division): The appeals were allowed. The agreements were held to be regulated and unenforceable in the present proceedings.