Evans & Anor v Finance-U-Limited

A secured creditor does not lose its security merely because it proves for the whole debt in a bankrupt debtor’s estate and receives a dividend. Bankruptcy replaces the creditor’s contractual right to recover the debt personally from the bankrupt with a right to prove, but preserves the right to enforce security. A joint debtor’s liability continues until payment or release, although that debtor may be protected from personal recovery by a separate bankruptcy. Where a regulated credit agreement continues during its stated term, enforcement based on instalment arrears normally requires the statutory notice appropriate to the alleged breach. After the agreement’s term has expired, the creditor may enforce the security without relying on those notice provisions. A broadly pleaded counterclaim may rely on bankruptcy as an alternative basis for recovering secured goods.

Mr and Mrs Evans borrowed money from Finance-U-Limited to buy a car and granted it security under a bill of sale. Both borrowers later became bankrupt. Finance-U-Limited proved for the debt in Mr Evans’s bankruptcy, received a dividend, and allowed Mrs Evans to continue making payments for a period. After payments stopped, it served a default notice based on an unpaid instalment and counterclaimed for delivery up of the car.

HH Judge Chambers QC declared that the car was free from the security and dismissed the counterclaim. Finance-U-Limited appealed. The central issues were whether proving for the debt had extinguished or released the security, whether Mrs Evans remained liable as a joint debtor, and whether the creditor could recover the car by relying on bankruptcy rather than instalment default.

1. Appeal allowed. The declaration that the claimants owned the car free from Finance-U-Limited’s claims was set aside, and an order for delivery up of the car was made.
2. Under Insolvency Act 1986, bankruptcy replaced Finance-U-Limited’s contractual right to enforce personal repayment against Mr Evans with a right to prove in the bankruptcy: s 285(3). It did not affect the right of a secured creditor to enforce its security: s 285(4). A secured creditor could prove for the debt while identifying and valuing its security under s 322(1) and rule 6.98(1)(e) of the Insolvency Rules 1986.
3. Finance-U-Limited’s failure to value the car and its proof for the entire debt did not amount to abandonment of the bill of sale security. The court applied the reasoning in Whitehead v Household Mortgage Corporation plc [2002] EWCA Civ 1657, where acceptance of a dividend did not, without more, constitute an election to treat secured debt as unsecured.
4. Mr Evans was released from personal liability, but the security remained enforceable. The court explained that Mrs Evans’s liability as joint debtor continued until payment or release. Her own bankruptcy protected her from personal recovery, but did not determine whether the security survived.
5. The court expressed the view that, while the regulated loan agreement’s term continued, enforcement based on instalment arrears required compliance with the Consumer Credit Act 1974. A default notice under s 87, read with s 88(1), had to identify a continuing contractual breach capable of remedy. Because neither borrower had continuing personal liability for instalments after bankruptcy, the notice based on non-payment was inappropriate. The creditor should instead have used a non-default notice under s 98 if termination during the term was required.
6. By the time of trial, however, the 48-month term had expired. Sections 76 and 98 no longer required notice before enforcement. The pleaded counterclaim was broad enough to permit reliance on either bankruptcy as an alternative contractual basis for recovering the car. That basis had not been waived by the subsequent payment arrangement.

• Court of Appeal (Civil Division): allowed Finance-U-Limited’s appeal from the order of HH Judge Chambers QC dated 28 May 2012; set aside the declaration and ordered delivery up of the car.
• Cardiff County Court: declared that the car was released and discharged from the bill of sale and dismissed the defendant’s counterclaim for delivery up.