Our finance litigation experts bring you the latest on the cases and issues affecting the lending industry.
Declaration not worth the paper it was written on
A money judgment was not enforceable without an enforcement order where a loan could not properly be brought within the business exemption provision in s16B of the Consumer Credit Act 1974 (CCA)(s16B).
This was the position in Wood v Capital Bridging Finance Ltd (Capital), in which the 75 year old Wood had been persuaded by her son-in-law to obtain a six month business bridging loan secured by a mortgage over her property. Capital was in the business of making unregulated loans. Capital knew the loan was for the son-in-law's business but still Wood signed a declaration that she was entering into the loan for her own business purposes so as to bring the loan within the business purpose exclusion of s16B. She also gave a false residential address as she knew Capital would not accept the security of her residential address.
Default occurred and Capital issued possession proceedings. Wood denied having personally borrowed the money and disputed the fact of the loan being an unregulated business loan.
At first instance the court held Wood had received the loan but that the mortgage could only take effect as an equitable mortgage with no power of sale as the mortgage was not properly witnessed. The court also gave a money judgment.
Wood appealed on the basis that the money judgment should not have been given. As she had not borrowed the money for her own business purposes, the agreement was not exempt from regulation under s16B. It was therefore a regulated agreement and its form and content were not as prescribed by the CCA. It could only be enforced by an application for an enforcement order under s127 of the CCA which Capital had not applied for.
The Court of Appeal held that the burden of proving that the business exemption applied making the agreement unregulated lay with the creditor. Obtaining a declaration from the borrower in accordance with s16B(2) (that the loan was for business purposes) would discharge the burden. However, the business presumption in such a declaration would not apply if the creditor knew or suspected the agreement was not entered into wholly or predominantly for the purpose of a business carried on by the consumer (s16B(3)). In such a situation, the burden of proving business purpose then fell back on the creditor.
Capital was aware the declaration was untrue in this case as it was aware from the outset that the purpose of the loan was not for Wood's business but for her son-in-law's. Wood was not estopped by her declaration from denying that the agreement was unregulated as there is a clear prohibition on contracting out of the CCA as per s173(1) of the CCA. The presumption which arose from s16B(2) did not therefore apply.
The agreement was therefore regulated. The money judgment should not have been issued and was set aside. Capital was, however, given leave to apply for an enforcement order as the court held that Wood would inevitably have to repay a substantial sum to Capital.
Things to consider
The protection afforded to consumers by the CCA exists as a matter of public policy, even where the consumer has made false declarations where there are grounds for suspicion by the creditor within the meaning of s16B(3).
Appropriate test for annulment of bankruptcy order
In another case involving s16B CCA, the court has looked at the appropriate test for annulling a bankruptcy order and the approach to determining the meaning of the phrase " a business carried on ...by [the consumer]" in s16B(3).
In Woolsey v Payne and Payne, Woolsey lent his friends, the Paynes, money which was not repaid. He served statutory demands and subsequently obtained a bankruptcy order against Mrs Payne. The Paynes successfully challenged the enforceability of the loan agreement under the CCA - primarily on the basis it was a regulated agreement, not an unregulated one.
Woolsey appealed the order setting aside the bankruptcy order and statutory demand against Mr Payne. The issues before the court were:
- What was the correct test for the annulment of a bankruptcy order?
- Was the agreement a regulated credit agreement as it did not fall within the business exemption provided by s16B? The issue was whether the loan had been made for the wife's business purposes or for the couple's company's business purposes.
- Had Woolsey been carrying on an unlicensed lending business as found at first instance - this was not the first loan he had made to the Paynes?
The High Court held:
- The test for annulment of a bankruptcy order was the same as that for setting aside a statutory demand being whether there was a genuinely disputed debt and not whether the petition debt was owed.
- A purposive approach to the construction of "a business carried on by [the consumer]" in 16B(3) CCA was required and too narrow a view should not be taken. It would be odd if a company director borrowing money for his company was treated as a consumer whereas a sole trader borrowing money for his business would not be so treated. In this case there was a substantial dispute as to the purpose of the loan agreement and what Wooley had known or had reasonable cause to believe about the loan's purpose. A trial would be required to determine this point.
- Whether Wooley was carrying on a lending business depended on whether the loan was made "in the course of a business carried on by him". The instant loan was one of many he had made to the Paynes over the years and could not be summarily characterised as non-commercial. The relevant facts would have to be determined at trial and the relevant statutory provisions applied. It could not be dealt with summarily in bankruptcy proceedings.
The appeal failed.
Things to consider
It is not for the Chief Registrar to determine substantial disputes of fact in insolvency proceedings which is why, where the debt is "genuinely disputed", the use of insolvency proceedings is not the appropriate course of action. What is a genuine dispute can often be difficult to determine and where a debtor is "trying it on" a creditor should persevere, but always with the knowledge that if the court finds it all too difficult to determine summarily, there may be costs consequences in doing so.
Court provides guidance on adjourning hearings for health reasons
Lenders are often faced with litigants in person and an issue that often arises is whether to consent to or oppose an application to adjourn a hearing or trial due to the litigant's alleged ill-health. This was the issue before the High Court in the recent case of Decker v Hopcraft in which the claimant was suffering from cognitive impairment.
The claimant's application to adjourn for health reasons was made one day before the hearing of the defendant's application to strike out part of the claimant's claim and for directions for certain issues to be tried as preliminary issues. The High Court provided the following useful guidance:
- The decision as to whether to adjourn a hearing or to proceed in a party's absence is a discretionary case management decision. The discretion must be exercised in accordance with the overriding objectives having regard to the circumstances of the case.
- When faced with an application to adjourn on medical grounds made for the first time by a litigant in person, the court should be hesitant to refuse the application subject to what is set out below.
- The court must scrutinise carefully the evidence relied on in support of the application. A person's inability to work at a particular job was not necessarily an indication of his inability to attend court to deal with legal proceedings.
- The question of whether the litigant could or could not participate in the hearing effectively did not always have a straightforward yes or no answer. There might be reasonable accommodations that could be made to enable effective participation. The court needed evidence in order to assess whether that could be done and, if so, how.
- The question of whether effective participation is possible depended not only on the medical condition of the applicant but also, critically, on the nature of the hearing, the issues before the court, and what role the party concerned was called on to undertake. All depended on the circumstances, as assessed by the court, on the evidence put before it.
- The strength of the claim or defence also needed to be considered. If one or other party was bound to succeed, the less likely it was that proceeding would represent an injustice to the litigant.
- The court should also take into account whether the matter involved applications of a case management nature, or final determinations on the merits where Article 6 ECHR would be engaged. The court may be more cautious in the latter situation.
Applying established law, the court refused the application for an adjournment. Although the claimant may not have been fit for work - as his doctor's note suggested - the court held he was physically fit to attend the hearing and would be able to cope with it with, if necessary, reasonable accommodations being made. His evidence did not establish that his cognitive impairment was such as necessitated the grant of an adjournment.
The court held it was not unjust to proceed in the claimant's absence given the nature of the applications, the fact that the merits had already been addressed in correspondence (so the claimant's position was known) and the decisions to be made were plain and obvious.
Things to consider
The decision whether to adjourn or not is one for the court to make, and not one to be forced upon it. Litigants in person should be made aware of this and advised that until the court does make such a decision, the hearing sought to be adjourned remains live. This avoids any suggestion of misleading the litigant in person.
Statutory demand not set aside where undisputed sum was less than £750
The High Court has confirmed that a statutory demand must not necessarily be set aside simply because the undisputed part of the debt is less than £750.
In Howell v Lerwick Commercial Mortgage Corp Ltd (Lerwick), Lerwick obtained costs judgments against Howell in the sum of £3,935. Those orders formed the basis of a statutory demand against Howell. Howell alleged he had a cross-claim in separate proceedings for £2,750 plus interest and costs which put the sum owed to Lerwick at about £600. Howell's application to set aside the statutory demand was dismissed and he appealed submitting that the judge had not taken into account his claim for interest which would further reduce the sum due.
The High Court held that a bankruptcy petition could be based on one or more petitionable debts (being an unsatisfied judgment debt or debts the subject of an unpaid statutory demand). There was no requirement for each such debt to be at least £750 but the aggregate amount had to be at least £750. Creditors can join forces to ensure that the petitionable debts exceed £750.
A statutory demand for a sum less than £750 is not bad or liable to be set aside simply for that reason, but could not, on its own, justify the presentation of a bankruptcy petition. The court held that this applied equally where part of the debt included in the statutory demand was disputed, or where there was a cross-claim, as here, and the undisputed or residual part of the debt was under £750. Such a demand should not necessarily be set aside in its entirety under the residual discretion in r6.5(4)(d) of the Insolvency Rules 1986. It remained a petitionable debt which could form part of the basis for a petition should Lerwick be owed other debts by Howell, which appeared to be a possibility.
The court would not set aside the statutory demand and whether interest had been taken into account or not was irrelevant for these purposes.
Things to consider
If there can be no possibility of a further debt being owed by the debtor which could "top up" a statutory demand to above the £750 threshold, the court will dismiss the demand as a petition based upon it would be bound to fail.
The threshold for creditors petitioning for an individual's bankruptcy will increase from £750 to £5,000 on 1 October 2015.
In case you missed it
The Supreme Court decision in Jetivia SA & another v Bilta (UK) Limited and others, will be welcomed by insolvency practitioners (and creditors) who need to seek redress from dishonest directors who, in breach of their fiduciary duties, have caused the company to commit illegal acts from which it, and others, have suffered.