What do you mean the terms of my lending might be “unfair”?

Articles for the ASTL concerning the Consumer Credit Act (Act) may seem an oddity; given the members of the ASTL do not routinely advance regulated debt to consumers.

However, sections 140A-140D of the Act allow any credit transaction where the borrower is a natural person, i.e. not a corporate vehicle, to be varied as a matter of judicial discretion. It is also irrelevant if the debt is unregulated or whether the borrower contracts as a consumer or in a business context. This is why these sections, and the case law that flows from them, have relevance to ASTL members.

The Court's powers

The Court may determine that a credit relationship is unfair because of one or more of the following reasons set out in s140A(1) of the Act:

(a) any of the terms of the agreement or of any related agreement;

(b) the way in which the creditor has exercised or enforced any of his rights under the agreement or any related agreement;

(c) any other thing done (or not done) by, or on behalf of, the creditor (either before or after the making of the agreement or any related agreement);

Following such a finding the Court can make an Order for one or more of the following as set out in s140B(1) of the Act:

(a) require the creditor, or any associate or former associate of his, to repay (in whole or in part) any sum paid by the debtor or by a surety by virtue of the agreement or any related agreement (whether paid to the creditor, the associate or the former associate or to any other person);

(b) require the creditor, or any associate or former associate of his, to do or not to do (or to cease doing) anything specified in the order in connection with the agreement or any related agreement;

(c) reduce or discharge any sum payable by the debtor or by a surety by virtue of the agreement or any related agreement;

(d) direct the return to a surety of any property provided by him for the purposes of a security;

(e) otherwise set aside (in whole or in part) any duty imposed on the debtor or on a surety by virtue of the agreement or any related agreement;

(f) alter the terms of the agreement or of any related agreement;

(g) direct accounts to be taken, or (in Scotland) an accounting to be made, between any persons.

In short, in an extreme case, the Court can rip up a loan agreement and the underlying security! So what guidance can we get from recent cases?

The cases

In the leading case on this topic, Plevin[1], the Supreme Court has ruled that in order to fail the unfairness test in s140A of the Act the lender does not need to have breached a duty to the borrower. The Act is deliberately framed in very wide terms and whilst the Supreme Court provided some general points by way of guidance, each case turns on its individual facts. This is helpfully illustrated by two very recent cases which were appeals from first instance decisions and both of which concern short term lending.

In the first case[2] the High Court rejected an appeal by the lender following a finding of unfairness. There was an underlying relationship between the controlling shareholder of the lender and the borrower which led the Court to classify the property development lending, as an informal joint venture not an ‘arm’s length’ commercial loan. The lender appealed on the basis that any actions of the controlling shareholder were not to be attributed to the lender. The High Court held that the original judgment had not been based upon the shareholder's actions as the judge had found that the relationship was unfair due to the artificially short term nature of the loan leading to an escalation of the interest rate (rather than the actual default rate), the compounding of interest quarterly and the lack of action by the lender to enforce the loan for four years whilst interest was accruing at the default rate. Further the judge had been entitled to take into account evidence about the origins of the loan and the understanding between the shareholder and the borrower.

In those circumstances the High Court upheld the initial judgment which extended the term from four years to eight years and reduced the interest rate from the initial rate of 6% per annum (and default rate of 9% per annum) compounded quarterly to 1.25% above Bank of England base rate compounded annually. This resulted in a seven figure reduction in the amount of interest due!

In the second case[3] the High Court dismissed a borrower’s appeal against a finding that a relationship arising out of two six month bridging loans was not unfair. In this case argument was focussed on the applicable interest rate and a 3% per month default interest rate was held to be fair. The High Court also held that the relationship was not unfair in relation to the likelihood of whether the term of the second loan was sufficient to allow the borrower to complete a remortgage.

So where do we go from here?

When these two cases are put alongside one another they demonstrate:

    • The unfair relationship provisions apply to short term lending and will continue to be used to challenge lender recoveries.
    • Each case will turn on its individual facts and whilst the Court will ultimately exercise its discretion based on the reasons set out in s140A(1) of the Act, the Court may well be influenced by wider factors in the relationship between lender and borrower and the underlying transaction.
    • A high interest rate will not automatically be unfair, particularly if the evidence points to it being an industry standard rate. However, it will equally not automatically be considered fair.
    • Even if a loan is fair for one borrower it does not mean it would be fair for every borrower and specialist advice is required whenever these issues are raised by borrowers or their advisors.

Any questions arising from this article should be referred to John Williams (https://gateleyplc.com/people/john-williams/) or Rob Payne (https://gateleyplc.com/people/rob-payne/) at Gateley Plc.

This article is intended only as a synopsis of certain recent developments. If any matter referred to in this article is sought to be relied upon, further advice should be obtained.

[1] Plevin v Paragon Personal Finance Ltd [2014] UKSC 61

[2] Pilgrim Rock Ltd v Iwaniuk [2019] 1 WLUK 106

[3] Pontearso v Greenlands Trading Ltd [2019] 1 WLUK 102