Section 140 of CCA ammended 2006
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The new unfair relationship provisions - implications for business regulated and unregulated by the Consumer Credit Act
New ‘unfair relationship’ rules are intended to make it easier to challenge unfairness in relation to credit agreements.
From 6 April 2007, these provisions – with one limited exemption - will apply to all new credit agreements with individuals, irrespective of the amount of the credit being provided1. This includes agreements with sole traders and partnerships with three or less partners. They will not apply to hire or lease agreements (but will, for example, apply to hire-purchase and conditional sale).
For agreements made before 6 April 2007, the new rules will apply from 6 April 2008, unless the relevant agreement has been completed before then.
Why should this matter to creditors?
These changes are significant for creditors because where a court determines that a relationship is unfair, it can make a wide range of orders.
Among them are:
• requiring repayment of all or part of any sum paid by the debtor or any guarantor by virtue of the agreement or any related agreement2;
• requiring the creditor to do or not do anything specified in the order in connection with the agreement;
• setting aside all or part of any obligation of the debtor or any guarantor as a result of the agreement or related agreement;
• altering the terms of the credit agreement;
• directing the return of property given as security for the agreement.
The unfair relationship provisions – which are wider in scope and give the courts more discretion - will take the place of the existing “extortionate credit bargains” under the Consumer Credit Act.
The Office of Fair Trading recently published guidance (available on its website) indicating how it expects the unfair relationship provisions to interact with its own powers under the Enterprise Act. Under these powers, the OFT can bring proceedings against businesses that breach their legal obligations and by doing this harm the collective interests of UK consumers, whereas the unfair relationship provisions are a route for individuals themselves.
Although recognising that it is ultimately a matter for the courts, this guidance gives examples of conduct and practices which the OFT considers could contribute to or give rise to unfair relationships.
How will a court determine whether a relationship is unfair?
A debtor or surety (such as a guarantor) can invoke the court’s powers to determine whether a relationship is unfair. The debtor or surety can make an application without any existing proceedings.
Alternatively, an order can also be made at the instance of the debtor or a surety where there are court proceedings between the debtor and creditor: (a) relating to the enforcement of the agreement or any related agreement; or (b) where the amount paid or payable under the agreement or any related agreement is relevant.
When a debtor or surety alleges an unfair relationship, it is for the creditor to prove to the contrary.
There is no precise definition in the legislation of what is an “unfair relationship”. A court can determine that the relationship arising out of the credit agreement (or the credit agreement taken with any related agreement) is unfair to the debtor because of any one or more of the following:
• any of the terms of the agreement or any related agreement. This could include terms requiring the debtor to pay a disproportionate amount as compensation for his breach (for example by way of default charges or termination sums);
• the way in which the creditor has exercised or enforced any of its rights under the agreement or any related agreement. This could include heavy-handed debt collection practices;
• any other thing done (or not done) by or on behalf of the creditor before or after the agreement (or any related agreement) was made. This could include the nature of the creditor’s advertising, misrepresenting the terms of the contract or applying unreasonable pressure on the debtor to sign it.
The court can take account of all matters it thinks are relevant. It is likely that the courts in determining unfairness will look to the meaning of ‘unfair’ in other legislation, such as the Unfair Terms in Consumer Contracts Regulations 1999. If so, they are likely to look at whether there is a significant imbalance between the parties rights and obligations to the individual’s detriment and also whether there is generally fair dealing. Not every one-sided provision in an agreement will necessarily lead to there being an unfair relationship.
A particular concern is the scope for conflicting court decisions given the breadth of the discretion and lack of a categorical definition of what is an unfair relationship.
Only time will tell whether debtors will use these new provisions any more widely than the current extortionate credit bargains have been. However, creditors would be wise to review the terms of their credit agreements and their operations in light of them.
1 This exemption includes consumer credit agreements secured by a land mortgage where the creditor is making the agreement as a regulated activity under the Financial Services & Markets Act 2000 and certain home purchase plans.
2 A related agreement includes (among other things) a credit agreement consolidated by the main agreement and security provided in relation to the main agreement
140A Unfair relationships between creditors and debtors
(1) The court may make an order under section 140B in connection with a credit agreement if it determines that the relationship between the creditor and the debtor arising out of the agreement (or the agreement taken with any related agreement) is unfair to the debtor because of one or more of the following—
(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).
(2) In deciding whether to make a determination under this section the court shall have regard to all matters it thinks relevant (including matters relating to the creditor and matters relating to the debtor).
(3) For the purposes of this section the court shall (except to the extent that it is not appropriate to do so) treat anything done (or not done) by, or on behalf of, or in relation to, an associate or a former associate of the creditor as if done (or not done) by, or on behalf of, or in relation to, the creditor.
(4) A determination may be made under this section in relation to a relationship notwithstanding that the relationship may have ended.
(5) An order under section 140B shall not be made in connection with a credit agreement which is an exempt agreement by virtue of section 16(6C).”
20 Powers of court in relation to unfair relationships
After section 140A of the 1974 Act (inserted by section 19 of this Act) insert—
“140B Powers of court in relation to unfair relationships
(1) An order under this section in connection with a credit agreement may do one or more of the following—
(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.
(2) An order under this section may be made in connection with a credit agreement only—
(a) on an application made by the debtor or by a surety;
(b) at the instance of the debtor or a surety in any proceedings in any court to which the debtor and the creditor are parties, being proceedings to enforce the agreement or any related agreement; or
(c) at the instance of the debtor or a surety in any other proceedings in any court where the amount paid or payable under the agreement or any related agreement is relevant.
(3) An order under this section may be made notwithstanding that its effect is to place on the creditor, or any associate or former associate of his, a burden in respect of an advantage enjoyed by another person.
(4) An application under subsection (2)(a) may only be made—
(a) in England and Wales, to the county court;
(b) in Scotland, to the sheriff court;
(c) in Northern Ireland, to the High Court (subject to subsection (6)).
(5) In Scotland such an application may be made in the sheriff court for the district in which the debtor or surety resides or carries on business.
(6) In Northern Ireland such an application may be made to the county court if the credit agreement is an agreement under which the creditor provides the debtor with—
(a) fixed-sum credit not exceeding £15,000; or
(b) running-account credit on which the credit limit does not exceed £15,000.
(7) Without prejudice to any provision which may be made by rules of court made in relation to county courts in Northern Ireland, such rules may provide that an application made by virtue of subsection (6) may be made in the county court for the division in which the debtor or surety resides or carries on business.
(8) A party to any proceedings mentioned in subsection (2) shall be entitled, in accordance with rules of court, to have any person who might be the subject of an order under this section made a party to the proceedings.
(9) If, in any such proceedings, the debtor or a surety alleges that the relationship between the creditor and the debtor is unfair to the debtor, it is for the creditor to prove to the contrary