Is it possible to have a credit agreement declared void or unenforceable so as not to have to pay back any of the money loaned?
Many of the challenges to loan and credit agreements rely on the lender not being able to produce the original agreement. Sections 77 and 78 of the Consumer Credit Act 1974 impose an obligation upon a lender to provide a copy of the credit agreement to the borrower upon request and payment of the laid down fee. In many cases, they cannot do so and this has led to a number of challenges. These challenges have been notwithstanding the fact that the granting of credit and receipt of money loaned has not been denied.
A large number of these challenges – around 100 – occurred in Manchester some years ago and they were all heard together by way of a test case. The court in this case of Carey v HSBC Bank was asked to decide whether, if a borrower requested a copy of the original credit agreement as he is entitled to do and the lender could not provide it, what will happen to the loan. Would it be unenforceable? Will there be any other way of satisfying the requirement and if not would there be an ‘unfair relationship’, which might make the loan agreement unenforceable.
All the statutory provisions were considered at length by the judge in a judgement which stretched to nearly 60 pages. In a nutshell, the arguments failed. It was held that provided the lender could provide a ‘reconstituted version’ of the original agreement, the requirements of Section 78 of the Consumer Credit Act were satisfied. The ‘reconstituted’ agreement must show the borrower’s name and address, but this need not necessarily come from the agreement.
Worse still was to come for those trying to escape liability. It was held that the reconstituted agreement did not even need to be Consumer Credit Act compliant. Furthermore, the unavailability of the agreement did not create an unfair relationship so as to make the agreement unenforceable under Section 140 of the Act.
Circumstances for unenforceable credit agreements
It therefore seems that many of the promises and hype of the Claims Management Companies had no basis in law. Promises that a clearly incurred debt could be wiped out simply because the original agreement is not forthcoming has no basis in law and are only for the gullible. But that does not answer the question of whether some loans and credit agreements can be unenforceable in their entirety. Some are. There are other reasons why a loan may be unenforceable. In certain circumstances a consumer credit agreement cannot be enforced. That is the law, and it is well known and accepted by banks and other lenders.
What must be realised therefore is that there are no loopholes, no magic formula or secret procedure as some would pretend. The truth is that consumers who borrow money have protection under the Consumer Rights Act, and that if lenders fail to provide certain information (referred to as prescribed terms) intended to protect a borrower, they face draconian consequences. These may be that the agreement cannot be enforced and action cannot be taken to enforce the loan.
Regulations made under section 60(1) of the Act
Section 61 of the Consumer Credit Act stipulates that a credit agreement is not properly executed unless it contains all the prescribed terms and conforms to regulations made under section 60(1) of the Act, and is signed in the prescribed manner. Therefore, the consequence of a failure or omission to state fully and correctly any of the prescribed terms is to render the agreement improperly executed and therefore unenforceable save by order of the court. However, were an application to be made to the court, 127(3) requires the court to dismiss the application for an enforcement order. Therefore, such an agreement may be considered to be irredeemably unenforceable.
The prescribed terms for the purposes of section 61 which are set out in Schedule 6 of the Consumer Credit Act (Agreements) Regulations 1983 state that:
A regulated agreement is not properly executed unless
- A document in the prescribed form, itself containing all the prescribed terms and conforming to regulations under section 60(1) is signed in the prescribed manner both by the debtor or hirer and by or on behalf of the creditor or owner; and
- The document embodies all the terms of the agreement, other than implied terms; and
- The document is, when presented or sent to the debtor or hirer for signature, in such a state that all its terms are readily legible.
In addition, the following must be contained:
- A term stating the credit limit or the manner in which it will be determined or that there is no credit limit;
- A term stating the rate of any interest on the credit to be provided under the agreement; and
- A term stating how the debtor is to discharge his obligations under the agreement to make the repayments, which may be expressed by reference to a combination of any of the following:
- Number of repayments;
- Amount of repayments;
- Frequency and timing of repayments;
- Dates of repayments.
- The manner in which any of the above may be determined; or in any other way, and any power of the creditor to vary what is payable.
Therefore, if a borrower has not signed the agreement containing all the prescribed terms, the agreement will not be enforceable without an order of the court and section 127(3) requires the court to dismiss the application for an enforcement order.
This will leave open the question of what if anything the lender can do. So what can a lender do if an agreement is unenforceable? The first thing for a borrower to remember is the difference between unenforceable and invalid agreements. An invalid credit agreement simply has no effect whereas an unenforceable agreement simply cannot be enforced until certain action has been taken. If action is possible, it will be considered only as temporarily unenforceable but if no action is possible it will be irredeemably unenforceable.
A lender is obliged to provide a copy of the credit agreement. The agreement is unenforceable until such time as they provide a copy. Once they do so it will become enforceable. Irredeemably unenforceable agreements are the ones which breach section 60 or section 65 of the Consumer Credit Act.
The fact that an agreement may be unenforceable restricts but does not eliminate the lenders rights. There are certain things which can still be done even though an agreement cannot be enforced through court action. The lender is entitled to do the following:
- Report or threaten to report information about the agreement to a credit reference agency or third party;
- Demand payment from you;
- Issue a default notice;
- Threaten legal action;
- Instruct a third party to seek to procure payment.
They may not however obtain or enforce a court judgement against you or enforce the agreement in any other way. This means that they may not instruct court bailiffs, place a charge over your property, or obtain an attachment of earnings order against you. They can threaten but not do anything to enforce payment.
Remember also that whether the agreement is enforceable or unenforceable, there are certain things which can never be done by the lender or anyone instructed by them. These are:
- Call on you either in person or by telephone early in the morning or late at night;
- Threaten to blacklist you (as opposed to merely record information with a credit reference agency);
- Report you to your employer or threaten to report you;
- Send vans to your property carrying signs prominently indicating that they are from a debt collecting agency.If they do so, they will be in breach of section 40 of the Administration of Justice Act 1970 and will be committing a criminal offence.
If you are being harassed in this manner, you will be able to obtain an injunction against your creditor or their appointed debt collector.
The question often asked is the effect on your credit rating of refusing to pay an unenforceable agreement. Unfortunately, it has been established that with temporally unenforceable agreements the lender is entitled to report the failure to pay to a credit reference agency.
Failure to pay an unenforceable agreement is therefore likely to affect your future ability to obtain credit. The position with irredeemably unenforceable agreements is less certain and at the present time awaiting determination by the courts.Finally, there are certain requirements concerning cancellable agreements. A consumer credit agreement is cancellable only if it was signed following or all representations by the lender in the presence of the borrower and was not signed at the lenders business premises. If the agreement satisfies these requirements and is cancellable, a notice explaining the rights to cancel must be included within the agreement. If this is not done, the borrower me cancel at any time until the correct notice is served. You will however have to pay back all monies received.