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Commercial: COMPROMISE: settlement agreement regulated by the Consumer Credit Act 1974

Winston Jacob explains how settlements can be regulated under the Consumer Credit Act 1974 in light of the latest Court of Appeal judgment for the case of CFL Finance v Laser Trust [2021] EWCA Civ 228.

Winston Jacob

Can a settlement agreement be a regulated agreement under the Consumer Credit Act 1974? Yes, depending on the circumstances, said the Court of Appeal in CFL Finance v Laser Trust [2021] EWCA Civ 228.

A claim for sums due under a guarantee was settled by way of a Tomlin Order. The schedule to the Order required the guarantor (“G”) to make a number of payments to the claimant (“CFL”), in default of which the total sum claimed would become payable. G defaulted in payment and CFL sought to enforce the agreement. G argued that the settlement agreement was a regulated agreement under the Consumer Credit Act 1974 (“CCA”) and unenforceable.

The Court of Appeal held that there was no reason in principle why the CCA could not apply to an agreement set out in the schedule to a Tomlin Order. Such an agreement was a contract. Provided it involved the provision of “credit”, the CCA could apply to it.

The term “credit” extended to refinancing transactions, whether or not the original indebtedness was CCA regulated. However, mere forbearance would not attract the CCA. The Court of Appeal identified the following circumstances where the CCA would or would not apply to a settlement agreement:

(i) It would not apply where the creditor allowed the debtor time to pay for no consideration (for these purposes, a debtor giving up a defence he believes lacks a fair chance of success provides no consideration).

(ii) It would not apply where the debtor disputed the original claim in its entirety on substantial grounds, provided there is no question of the settlement agreement defeating the application of the CCA to the original claim.

(iii) It would apply if the debtor admitted that he was indebted to the creditor and they entered into an agreement under which, for consideration, the creditor agreed to accept payment by instalments.

(iv) It might apply where, although the debtor denied any liability, the defence lacked substance, and the debtor provided consideration.

The present case fell within the fourth category. The Court of Appeal considered that there must come a point where the existence of the debt was sufficiently clear that an agreement providing for future payment would confer “credit” regardless of whether the debtor denied that anything was due. It declined to decide where the dividing line lies. However, on the facts, there was both a compelling case for saying that G’s defence had no real prospect of success and a very real possibility that G did not himself believe it to have a fair chance of success. That being so, there was a genuine triable issue as to whether the settlement agreement provided him with “credit” within the meaning of the CCA and was an unenforceable credit agreement.

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