Enforce Settlement Agreements – Debt, Accounts Receivable, Or Somewhere In Between?
The appeals court finds that settlement agreements are unenforceable under the Consumer Credit Act 1974
In the decision in CFL Finance Ltd v Laser Trust & Moises Gertner  EWCA Civ 228 The appeals court ruled that if a settlement agreement involves paying a fault by a Individually‘in return for granting additional’Recital‘, which is given for the commitment of the debtor to repay the debt at a later date, such a deferral is called’recognition‘and the settlement agreement is deemed to be’regulated loan agreement‘according to the Consumer Credit Act 1974 (CCA) regardless of whether the underlying contract giving rise to the original liability is itself entirely outside the CCA legal system. The decision is now being appealed to the Supreme Court.
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LET’S SUMMARY – WHAT FOLLOWS ARE THE CONSEQUENCES OF AN AGREEMENT RECEIVED BY THE 1974 CONSUMER CREDIT ACT?
A loan agreement is an agreement between a person (the “debtor“) and any other person who acts in the course of their business, commercial or professional activity (the”creditor“) whereby the obligee grants the debtor a loan. The key concept”recognition“is defined as a cash advance or any other form of”financial housing“. All agreements that meet this definition of credit agreements are automatically treated as regulated credit agreements for the purposes of the CCA, unless an exception applies. This includes agreements to refinance transactions.
The consequence of a settlement agreement being a regulated loan agreement is that the settlement agreement is in most cases unenforceable without a court order if:
- the obligee did not have the appropriate FCA authorization and approval at the time the settlement agreement was entered into; or
- the obligee has not met all of the requirements of the CCA in relation to the provision of pre-contractual information, the required form and content of the agreement, and the provision of post-contractual communications.
In such a case, the obligee must re-examine his claims against the debtor, either by issuing or re-initiating the underlying legal proceedings against the debtor. This can have significant cost implications.
BACKGROUND FACTS TO THE FALL
In 2008 CFL Finance Ltd (Compact fluorescent lamps) paid £ 3.5 million to Lanza Holdings Ltd (Lanza) under an agreement for which Mr Gertner (shareholder and director of Lanza) has promised a guarantee of up to £ 3.5million. Lanza then defaulted on the facility and after CFL enacted a process to enforce the guarantee, the dispute was resolved through a settlement agreement for a Tomlin order.
CFL then obtained a bankruptcy order against Mr Gertner by enforcing the terms of the settlement agreement and recovering more than 11 million. but Marcus Smith J stated in relation to Mr Gertner’s defense that the settlement agreement was a regulated loan agreement:
“There is nothing in the settlement agreement that includes the granting of any loan or financial arrangement … in no way has the obligation to pay under the guarantee (if any) been postponed. Rather, this obligation has expired and has been replaced by another.”
DECISION OF THE COURT OF APPEAL
The appeals court was faced with two questions:
1. DOES AN AGREEMENT WITHIN A TOMLIN ORDER CONSTITUTE AN “AGREEMENT” UNDER THE CCA?
The appeals court ruled that an agreement under a Tomlin order could constitute a regulated credit agreement under the CCA. The decision has been appealed to the Supreme Court, where the issue is being re-examined.
2. DID THE COMPETITION AGREEMENT PROVIDED FOR A “LOAN”?
The appeals court stated:
- The CCA does not apply if a creditor allows a debtor more time to pay without consideration;
- The consideration could be provided by paying additional interest, costs or by waiving his defense, provided that the debtor seriously believes that the defense has at least a reasonable chance of success;
- The CCA would not apply if a debtor actually disputes a claim for good cause because the creditor does not “to put off a blame“but compromises with the debtor on a claim who may or may not have been successful; and
- If a debtor does not deny that a debt is owed and the two parties come to an agreement on the deferral of the debt, possibly in the form of installment payments, this corresponds to the provision of ‘recognition‘and would be a’Consumer credit agreement“Under the CCA.
Applying this ruling to other cases, the appeals court made it clear that there can be no credit without debt. However, in circumstances where a debtor denies that a debt is due but the grounds for dispute are weak in law or in fact, the appeals court has recognized that a difficult ‘parting line“That needs to be drawn.
It is therefore decisive whether there are legitimate disputes between the parties or whether the defenses of the debtor are clearly ineffective. If in doubt, an in-depth legal analysis should be carried out.
The decision will of course worry those who wish to enter into, or have entered into, settlement agreements, including those intended for a Tomlin Order.
Creditors and even applicants who do not believe that they are holders of a ‘fault“Must be particularly careful when entering into settlement agreements with individual defendants. Caution is also advised when a managed debt collection strategy brings legal action to a court or enforces personal guarantees that involve the greatest risk. However, it should be noted that the decision to resolve any dispute is of universal importance.
The decision is being appealed to the Supreme Court and there is hope that the much-needed clarity can be created. In particular, if the decision is upheld, the Supreme Court must provide further guidance on how to determine whether a debt has actually been disputed and whether and under what circumstances the exemptions contained in Chapter 14A of Part 2 of the Regulated Activities Regulation may apply.