Jack & Anor v Craig & Ors

Technical errors in regulated consumer-credit agreements do not, without more, create an unfair relationship or justify repayment. Where a creditor threatens enforcement under an agreement which is irredeemably unenforceable, the threat may be misleading and may create an unfair relationship if it caused the debtor to pay.

For the purposes of section 106(d) of the Consumer Credit Act 1974, realisation ordinarily means enforcement or sale of the security by or for the creditor. It does not include voluntary payments made by the debtor. The statutory scheme may nevertheless permit relief where security has been wrongfully realised and the debt has been fully discharged. Administrators should act frankly and transparently regarding potential consumer-credit claims.

Joint administrators of London Scottish Finance Limited sought directions concerning secured consumer loans whose documentation incorrectly included a credit broker’s fee in the stated amount of credit. The error made the agreements improperly executed and unenforceable without a court order. Agreements made before 6 April 2007 were irredeemably unenforceable; later agreements could be enforced only under section 127 of the Consumer Credit Act 1974.

The respondents represented borrowers in both categories. The court considered unfair-relationship claims, restitution, the rule in ex parte James, the effect of section 106(d) on payments and realised security, and whether the administrators should notify other debtors of potential claims.

1. The court held that the misstatement of the amount of credit, although sufficient to make the agreements unenforceable without an order, did not itself create an unfair relationship. The error did not affect the APR or other financial terms. A request for arrears was not unfair merely because enforcement required a court order: McGuffick v Royal Bank of Scotland plc, [2009] EWHC 2386 (Comm).

2. For the pre-6 April 2007 loan, the threat that legal action could lead to loss of the home was untrue because the agreement was irredeemably unenforceable. If that threat caused payments, even if it was not the sole cause, the relationship was unfair under section 140A. The court could order repayment and interest under section 140B. The later agreements were enforceable subject to an enforcement order, so the corresponding threat was not misleading and did not, without further facts, establish unfairness.

3. The rule in ex parte James did not assist without particular further facts. Restitution likewise added nothing for the pre-2007 borrowers and did not arise for the later borrowers on the assumed facts.

4. Section 106(d) concerns amounts received on realisation of security in its conventional sense: action by or for the creditor to release the value of the security and apply it to the debt. It does not require repayment of voluntary instalments made by the debtor. Wilson v Howard, [2005] EWCA Civ 147, was a special case turning on notional realisation in successive pawnbroking agreements and was distinguishable.

5. Section 142(1) should be interpreted purposively. A declaration may be available even where the security has been realised and the proceeds have discharged the entire debt. Otherwise a creditor could defeat the consumer protection by selling the security and applying the proceeds. The same result may, for later or uncompleted agreements, follow from sections 140A to 140C.

6. The administrators, as officers of the court, should be frank and transparent about potential claims by present and former debtors, including by drawing attention to the judgment.

First-instance directions application. No prior appellate decision is stated in the judgment.