Consumer Credit Act applies to settlements by “Tomlin” order – CFL Finance Ltd v Gertner

On 23 February 2021 the Court of Appeal handed down its judgement in CFL Finance Ltd v Gertner [2021] EWCA Civ 228, confirming that the Consumer Credit Act 1974 (CCA) can apply to settlement agreements appended to “Tomlin” orders and that deferment of a debt included in such a settlement agreement can fall within the CCA definition of “credit”.

The case is likely to have significant ramifications for many litigants who seek to settle financial claims, whether by way of a Tomlin order or any other sort of settlement agreement. It will also be of interest to those for whom its insolvency context is relevant, but this article focuses on the CCA implications.

Background

The appeal has a long history, which is important so as to give context to the Court of Appeal’s decision. It arose as a second appeal of a bankruptcy petition presented by CFL Finance Ltd (CFL) against Moises Gertner (Mr Gertner) in 2015.

The petition was based on a debt claimed by CFL under a settlement agreement appended to a Tomlin order in 2011. The Tomlin order had settled a claim by CFL against Mr Gertner, which arose under a personal guarantee of a commercial loan by CFL to a company with which Mr Gertner was associated. Mr Gertner had filed a defence to the claim but it had little real chance of succeeding.

The settlement agreement provided that Mr Gertner was to make certain payments on specified dates. In default, the full sum claimed by CFL (less any payments received) would become due, with accrued compounded interest from the date of the original default. Mr Gertner made most of the payments but eventually defaulted, leading to CFL presenting the bankruptcy petition.

In 2015 Mr Gertner proposed an individual voluntary arrangement (IVA) to his creditors and CFL’s bankruptcy petition was stayed pending the meeting of creditors. The IVA was approved but CFL successfully set it aside and restored the bankruptcy petition.

In 2019 Mr Gertner proposed an alternative IVA, before the bankruptcy petition came back on for hearing. CFL sought to challenge the second IVA pre-emptively, prior to the meeting of creditors at which it was to be considered.

In response to the challenge and the petition, Mr Gertner raised the argument (amongst others) that the settlement agreement provided for him to be given credit. It was therefore, he said, a regulated agreement and due to CFL not having the appropriate license to enter into such an agreement, it was unenforceable under the CCA. It is established law that a bankruptcy order should not be made based on a genuinely disputed debt, so Mr Gertner sought to have the bankruptcy petition and the challenge to the IVA proposal dismissed.

Decisions below

Chief Insolvency and Companies Court Judge Briggs rejected Mr Gertner’s arguments and made a bankruptcy order in 2019.

On the CCA argument, he found that the settlement agreement did not provide any form of financial accommodation for the purposes of the CCA. Rather, it provided for the total settlement sum to be paid by the last of the scheduled dates for payment, meaning that was the date on which the entire payment obligation should be deemed to fall due. This was despite the fact that any failure to comply with any of the previous payments dates would be an event of default, resulting in the full sum claimed by CFL in the underlying claim becoming immediately due.

He also applied the test of looking at the “essential character” of the settlement agreement (derived from McMillan Williams v Range [2004] 1 WLR 1854) and decided that any financial accommodation given in the agreement was incidental to it and not part of its essential character. In reaching that conclusion he appeared to rely on the common ground between the parties that the debt underlying CFL’s original claim was not a CCA regulated agreement. He used that as a basis to distinguish the decision of Nugee J in Holyoake v Candy [2017] EWHC 3397 (Ch) where it was stated that the CCA could apply to an agreement appended to a Tomlin order.

Finally, he held that the settlement agreement was a genuine compromise of disputed matters and as a result, as a matter of public policy, the court should decline to interfere with its enforceability.

Mr Gertner appealed and Marcus Smith J allowed the appeal. He dismissed CFL’s bankruptcy petition, on the basis that Mr Gertner’s creditors should have been allowed to vote on his IVA proposal. Based on the evidence, it was clear that if such a vote went ahead the IVA proposal would inevitably be approved.

Although he allowed the appeal, Marcus Smith J dismissed Mr Gertner’s appeal on the CCA argument. He did not adopt the essential character test but stated that he did for the most part agree with Judge Briggs’ finding that no financial accommodation was granted by the settlement agreement, which he interpreted as replacing one set of primary obligations (those under the guarantee) with another (under the settlement agreement). He disagreed with Judge Briggs about the public policy rationale, stating:

“It seems to me that if the Consumer Credit Act were to apply to a settlement, then even an express term in that settlement would not be able to exclude the Act, still less a desire on the part of the courts to ensure that settlements were upheld.”

“Mr Gertner did not accept that because a compromise was attached to a Tomlin order that fact alone would cause a settlement otherwise subject to the Consumer Credit Act to cease to be so. In this, I consider Mr Gertner to be right.”

“I can see no reason why the fact that a contractual agreement is scheduled to a Tomlin order would cause the Consumer Credit Act to cease to apply if it otherwise did apply.”

CFL obtained permission from the Court of Appeal for a second appeal on the insolvency argument. Mr Gertner cross-appealed on the CCA argument. Prior to the hearing of the appeal CFL failed to comply with an order requiring it to pay security for costs, with the result that its appeal was struck out. The appeal hearing proceeded solely on Mr Gertner’s cross-appeal relating to the CCA argument.

The decision

The lead judgment was delivered by Newey LJ, with whom Popplewell LJ and David Richards LJ agreed.

The Court of Appeal allowed the appeal, on the basis that the CCA argument constituted a genuine dispute regarding the petition debt. They held that this alone would have been reason to dismiss the bankruptcy petition.

Newey LJ expressly disagreed that the “essential character” test was applicable, stating that the central issue was whether credit, in the form of financial accommodation, was provided. If it was, then there was no reason that a settlement agreement, whether appended to a Tomlin order or not, should be treated any differently when considering whether the CCA applies than any other type of agreement.

The essential element of financial accommodation, he said, involved “debt deferment”. However, mere forbearance would not render the CCA applicable. He held that the debt in question must be deferred pursuant to a binding agreement and a fundamental part of such an agreement is that there must be consideration.

He then considered what, in the context of the settlement of a claim, constitutes the consideration. He referred to authority to the effect that an agreement to forego a claim or a defence can constitute valid consideration if the party foregoing it honestly (and therefore subjectively) believed it to have a reasonable prospect of succeeding. Conversely:

“The giving up by a Defendant of a defence which he himself recognises to lack even a fair chance of success cannot of itself constitute consideration.”

Therefore:

“Where a creditor agrees to accept instalments in place of a claim for immediate payment to which there was, in truth, no defence, there is a common sense case for considering a debt to have been deferred and so the debtor to have been provided with “credit”.”

And:

“The debtor’s relinquishment of his “defence(s)” would not of itself have constituted consideration and, in a similar way, the settlement agreement should be seen as operating to defer an existing debt.”

He distinguished McMillan Williams v Range as a case in which there was no credit because it simply could not be said at the time the contract in question was made whether there would ultimately be any liability to repay advances received under it and therefore, any debt to be deferred.

Newey LJ concluded that because Mr Gertner probably had no real belief that the Defence he filed had any substance, there was no genuine compromise by the settlement agreement of the debt that was being claimed. As such, nothing was really settled by the agreement and it operated instead to defer the debt due from Mr Gertner. This meant that credit was advanced by the settlement agreement and it followed that there was a genuine dispute about whether failure to comply with the CCA rendered the agreement and the debt it deferred unenforceable. The cross-appeal was therefore allowed.

Comment

This decision appears to have been made with public policy considerations firmly in mind.

The analysis adopted by the Court of Appeal differs to the opinion of the judges below in that it acknowledges a distinction that has never been expressly identified in previous cases, between settlements of claims where there is no real defence and those where there is a genuine dispute between the parties.

The decision has the effect that where there is a genuine dispute, a settlement agreement in respect of that dispute will create a new set of obligations, such that no credit is provided by the creditor and the CCA does not apply. Only where there is no real dispute will a settlement constitute deferment of an existing debt, financial accommodation and therefore credit, bringing the CCA into play.

The Court of Appeal was alive to (and has sought to head off) the risk that unscrupulous lenders, whose loans are covered by the CCA might, in any case where a debtor raises an unjustified dispute about a claim for payment, simply issue a claim and then settle it on terms that are outside the CCA. That would clearly be contrary to public policy.

However, the decision also gives rise to some strange hypothetical situations. For instance, on the one hand a borrower who defaults on a debt to which the CCA applies and purely by chance can assert a defence with a real prospect of success but then settles a subsequent claim, having decided not to pursue that defence, loses the protection afforded to him by the CCA. On the other hand, a borrower who knows he has no real defence to a claim to which the CCA does not apply, can obtain the CCA’s protections by asserting a baseless defence to force a claim to be issued, then settling it on terms that provide for the debt in question to be deferred. All lenders will need to be aware of this potential trap.

The Court of Appeal acknowledged that the test for where the dividing line is to be drawn as to what constitutes a defence with a real prospect of success is a difficult issue. Popplewell LJ commented that whether a wholly objective test should be employed or whether account should be taken of the debtor’s subjective view of the merits of their position is a “point of real difficulty”. However, it was not necessary in this case to determine the question because on either test the court was satisfied that credit had been given by the settlement agreement. Further litigation or parliamentary intervention will be required before the issue is clear.

In any event, the decision is to be welcomed on the basis that it confirms that:

a) The CCA does not apply to the terms of a court order (this was not a particularly contentious issue);

b) A settlement agreement appended to a Tomlin order is different because it is a purely contractual agreement. As such, the CCA can apply to the terms of such an agreement and such an agreement can provide for the giving of credit, as defined in the CCA; but

c) Credit will only have been given in a settlement agreement (whether appended to a Tomlin order or not) where the court finds (applying a test that will have to be clarified in the future) that the agreement did not settle a genuine dispute between the parties to it.

Teacher Stern LLP acted for Mr Gertner throughout the litigation.

For further information on this article or any of the issues that it addresses, please contact either the author, Lee Donoghue or the head of our commercial dispute resolution team, Jack Rabinowicz.