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Consumer Settlements: Considerations and consternation following the CFL Finance Ltd v Laser Trust decision

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The Court of Appeal's decision has complicated the issue of settlement agreements with individuals, with potentially undesirable consequences.
 
The Court of Appeal ruled in CFL Finance Ltd v Laser Trust [2021] EWCA Civ 228 (CFL) that a settlement agreement providing for an undisputed debt to be paid by instalments may be subject to the Consumer Credit Act 1974 (CCA).
 
The rationale for the decision is that where an agreement delays an individual's payment obligations in return for consideration, this may amount to a consumer credit agreement under the CCA.
 
What's new?
 
In CFL, Mr Gertner had guaranteed a loan facility provided by CFL Finance Ltd to Laser Trust. Following Laser Trust's default, CFL Finance Ltd claimed against Mr Gertner for around £1.7 million.
 
The parties settled by way of Tomlin Order (a form of consent order that brings the proceedings to a conclusion, save for the purposes of implementing the agreed terms set out in a schedule or separate documents).
 
In the schedule to the Tomlin Order, the parties agreed that Mr Gertner would repay the debt by way of instalments. After paying £1.5 million, Mr Gertner defaulted, and CFL Finance issued a bankruptcy petition against him.
 
At first instance, Mr Gertner argued that the agreement was unenforceable as it was a regulated credit agreement pursuant to the CCA. Mr Gertner's argument was rejected and the bankruptcy order was made.

On appeal, however, the Court set aside the bankruptcy order and considered the two following questions:

  1. Did the CCA apply to the schedule to a Tomlin Order?

  2. Did the Tomlin Order in question provide Mr Gertner with credit?
In relation to the first point, the court held that while it could approve or reject the Tomlin Order, the court could not intervene in the terms in the schedule because they constituted a contractual agreement between the parties.
 
On the second issue, Mr Gertner argued that there had been "financial accommodation" within the meaning of section 9(1) of the CCA.

The Court of Appeal found that a settlement agreement is a regulated agreement under the CCA in the following circumstances: 

  1. The debtor is an individual (this definition includes a sole trader, a partnership of two or three individuals or an unincorporated association); and

  2. The creditor must provide a financial accommodation e.g. by deferring the debt or accepting payments by instalments. If – at the time of the settlement agreement – the debt was not certain (because, for example, the debt was genuinely in dispute in its entirety), then this does not amount to advanced financial accommodation; and

  3. The debtor must provide a form of consideration. Consideration includes:

  • The payment of interest;

  • Agreeing to pay some of the other party's legal costs (as was the case in CFL);

  • Giving up a legal claim or defence that had a reasonable and fair chance of success; giving up a defence that lacks a fair chance of success does not amount to consideration.


Why does it matter if an agreement is CCA regulated?

Anyone entering a settlement agreement that falls under the CCA risks the agreement being unenforceable unless the creditor:

  • Holds the relevant FSMA authorisation; and

  • Complies with all the requirements of the CCA (for example, the provision of pre-contractual information and post-contractual notices etc.); or

  • Obtains the necessary court order that brings the agreement outside the CCA.

 
Exemptions
 
In some circumstances, it may be possible to argue that an exemption from the CCA applies:
 
Court Order
 
The CCA does not apply to terms embodied in a court order (although care should be taken following CFL, as the schedule to the Tomlin Order amounted to a contract between the parties and was not found to be within the remit of the court order).
 
12 or fewer Instalments

An agreement that:

  • Requires payment in fewer than 12 instalments

  • Over a period of less than 12 months

  • Entered into for a fixed amount

  • Before the debt has been incurred

  • Without any provision for interest on the debt
– is not subject to the CCA.
 
This exemption is only likely to apply in very limited instances, such as an upfront agreement about a company's invoicing or fee arrangements.  
 
Exemptions under the Financial Services and Markets Act 2000 (FSMA)

There are a number of exemptions under FSMA. The main two that apply to settlement agreements are:

  1. Section 60C Business Purposes Exception – the credit exceeds £25,000 and the agreement is entered into wholly or predominantly for business purposes.

  2. 60H High Net Worth Individuals Exemption – credit exceeds £60,260, where the annual income of the individual meets the required threshold (i.e. £150,000 annual income post tax or £500,000 in net assets) and where the debtor signs a statement stating they forgo the protection and remedies under the CCA.

 
What to do?
 
First, check whether the CCA applies to the settlement agreement. If it does, determine whether it falls within any of the exemptions outlined above.
 
If there are no available exemptions, consider agreeing a Consent Order instead of a Tomlin Order (but note that there may be wider reasons why a Consent Order is not appropriate, for example confidentiality).
 
If a business anticipates a huge number of settlement agreements with debtors, then – depending on the nature of the business – it might be worth obtaining FSMA authorisation and setting up a process that complies with the formal CCA requirements. For one-off litigation, this is not an attractive solution.
 
Another workaround is to remove the consideration from the agreement. No consideration – no agreement – no CCA. Simple!
 
Not really… A binding and enforceable settlement agreement often protects both parties from further litigation and expense. The creditor in particular might reasonably require security (in the form of a charge over property, for example) to set off the risk of allowing a long payment window against the risk of the debtor defaulting and then possibly disappearing. The cost of tracing a debtor and enforcement proceedings can be considerable.
 
For more complicated settlement agreements, there might be other terms that are important: indemnities, confidentiality and so on. It might simply not be a good idea to have a settlement without a binding agreement.
 
Developments
 
This CFL case considerably complicates the issue of settlement agreements with individuals. It discourages creditors from being generous with settlement terms, allowing individuals to pay what they can in instalments possibly backed by a charge over property.
 
Absurdly, it positively encourages creditors to enforce debts all in one go by issuing bankruptcy proceedings. The case significantly jars with efforts by the government to persuade creditors away from bankruptcy proceedings into alternative approaches to debt management.
 
In CFL, the courts did not make new law, they simply stated what the law is. Therefore, existing settlement agreements entered before this case may well come within the CCA.
 
A number of existing settlement agreements in which parties have perfectly sensibly agreed payments in instalments may actually be a) unenforceable and b) in breach of FSMA. This is serious stuff: the debtor is entitled to recover any money or property transferred under an unenforceable agreement and to compensation for any loss sustained as a result of parting with it. Separately, a breach of FSMA – depending on how serious it is – can lead to a criminal conviction.
 
Creditors should check carefully what unexpired settlement agreements they have in place, and if necessary seek legal advice.
 
CFL has sought permission to appeal to the Supreme Court, which may view the case differently and decide that settlement agreements are altogether outside the scope of the CCA.
 
This article was authored by Esther Thomas, trainee, and Ellie Pinnells, dispute resolution partner at Fieldfisher.

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Dispute Resolution

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Financial Services