England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CHESTER COUNTY COURT
HHJ HALBERT
7PA 89134

		Royal Courts of Justice Strand, London, WC2A 2LL
		12/11/2009

Lord Justice Mummery :

The issue

1. Was it wrong for the court below to rule that the credit agreement made between the parties on 20 April 2005 (the Agreement) is unenforceable on the ground of non-compliance with a requirement of the consumer credit legislation? The answer to the question will affect other cases in the current spate of consumer credit litigation and potentially many other credit agreements.
2. The point turns on whether the Agreement included, as prescribed in the legislation, a term correctly stating "the amount of the credit." The statutory meaning of "credit", how "the amount of credit" should be calculated, and whether, once properly calculated, the amount was correctly stated in the Agreement all arise for consideration.
3. The completed application form was for a loan of £17,500. That sum appears in box C in an enclosed graphic section on the front page of the Agreement headed "FINANCIAL MATTERS" containing a display of information boxes. The designation at the side of box C is "Amount of Credit." It includes the sum of £17,500 also included in box A by the designation "Loan."
4. The complication in this case originated in the deferred obligation for payment of, and the charging of interest on, the sum of £875 which appears in box D. The designation at the side of the box is "Broker Administration Fee." The fee was added to the sum of £17,500 and produced the total figure of £18,375 appearing in box E. The designation at the side of box E is "Total Amount Financed (C+D)."
5. The borrowers agreed to repay the "Amount of Credit" together with "any amount financed under the Agreement" with interest at the rate payable by making the monthly payments stated in the Agreement over a period of 180 months. Which sum was "the amount of the credit" for the purposes of compliance with the legislation: £17,500 or £18,375? Putting the question another way, was the £875 fee itself "credit", or was it what is referred to in the legislation as a "charge for credit"? How does "credit" differ from a "charge for credit." These questions matter because the Agreement is unenforceable if the "amount of credit" is incorrectly stated.
6. Permission for a second appeal was granted by Moore-Bick LJ on the ground that the case raises a point of principle on the construction and application of the Consumer Credit Act 1974 (the 1974 Act); the Consumer Credit (Total Charge for Credit) Regulations 1980 (SI 1980/51) (the 1980 Regulations), as amended, which include provisions for determining the true cost to the debtor of the credit provided and prescribe what items are to be treated as entering into "the total charge for credit", and how their amount is to be ascertained; and the Consumer Credit (Agreements) Regulations 1983 (SI 1983/1535) (the 1983 Regulations), as amended, which, until they were superseded, governed the form and content of documents embodying regulated agreements with a view to ensuring that the debtor is made aware of the amount and rate of the total charge for credit.

Background facts and proceedings

7. On 26 March 2005 Mr Michael Walker and his wife Mrs Suzanne Walker, who applied for a loan, signed the Agreement. It was a fixed sum credit agreement regulated by the 1974 Act. It was subject to requirements as to the form of the document and as to the content of prescribed terms and information. Southern Pacific Personal Loans Limited (SPPL), who were the lenders and on whose behalf the Agreement was signed on 20 April 2005, agreed to a loan of £17,500 on the terms of the lending conditions in the Agreement. The money owing under the Agreement was to be secured by a mortgage in relation to the Walkers' home at 4 Sandringham Close, Winsford, Cheshire (the Property). The Walkers granted a second charge over the Property to SPPL.
8. The Walkers fell into arrears, which already top £40,000. They risk losing their home in the possession proceedings taken by SPPL. According to SPPL's Statement of Estimated Costs lodged in this court a grand total of £100,021 in legal costs is also claimed against the Walkers if SPPL win the appeal.
9. For their part SPPL said that, if the judge was right, the Walkers would stand to gain a windfall of over £40,000 and the clearance of the second charge on the Property. SPPL would be faced with the prospect of cases of irrecoverable loans made to other borrowers.
10. The questions of enforceability of the Agreement arose in the context of possession proceedings brought by SPPL. At first the proceedings went in SPPL's favour. On 21 June 2007 District Judge Gilham made a suspended order for possession of the Property on terms that the Walkers made the payments due and paid off the arrears by monthly instalments. The point that the Agreement did not correctly state "the amount of the credit" was not taken before the judge. The Walkers appealed and were permitted to take the new point on appeal.

Judgment below discussed

11. On 27 April 2009 HHJ Halbert allowed the appeal. He held that the Agreement was totally unenforceable and ordered the discharge of the charge registered on the Property.
12. In his findings he stated that the designation "Broker Administration Fee" was "artificial" as the fee was charged by the finance company in the absence of any intermediary. On this point SPPL applied to this court for permission to adduce fresh evidence on the appeal. It was not opposed and permission was granted. The fresh documentary evidence showed that it was inaccurate to describe the fee as artificial, as there was in fact an intermediary (Guardian Home Loans Ltd) involved in the transaction. The judge's perception of the artificiality of the fee was not, however, essential to his ultimate conclusion that the Agreement was unenforceable because it did not correctly state "the amount of the credit."
13. The judge cited the leading case of Wilson v. First County Trust Ltd [2001] QB 407 in which it was held that the court was barred from enforcing a credit agreement on the ground that the amount of credit was not correctly stated in it. In that case the lender agreed to a loan of £5,000. There was added a document fee of £250. The agreement stated that the "amount of the loan" was £5,250. The Court of Appeal held that the "amount of the credit" was £5,000 and was incorrectly stated as being £5,250. The agreement lacked a prescribed term. As it was improperly executed, the court could not enforce it against the borrower at the instance of the lender.
14. The decision in Wilson was based on the statutory meaning of "credit." That basic concept in the legislation is given the meaning set out in section 9 of the 1974 Act-

"(1) In this Act "credit" includes a cash loan, and any other form of financial accommodation.

(2) …..

(3) …

(4) For the purposes of this Act, an item entering into the total charge for credit shall not be treated as credit even though time is allowed for its payment."

15. The distinction between "credit" and "charge for credit" is essential to an understanding of how the legislation works. It was explained by Professor Goode in his work Consumer Credit Law and Practice quoted by Laddie J in Wilson v. Robertsons (London) Ltd [2005] EWHC 1425 (Ch); [2006] 1 WLR 1248 at paragraph 35. Those items financed by the creditor which form part of the "total charge for credit" must be identified and "stripped out" before the amount of credit is itself determined. After charges for credit have been stripped out the other items financed by the creditor go to make up the "amount of the credit."
16. The 1974 Act does not define a "charge for credit." It may sometimes be difficult, as observed by Peter Gibson LJ in Watchtower Investments Ltd –v- Payne [2001] EWCA Civ 1159; [2007] GCCR 3055 at paragraph 52, to draw the line between an item forming part of the total charge for credit and an item forming part of the credit itself when the borrowing is for expenditure or a purpose required or authorised by the credit agreement. In drawing the line the court must consider all the circumstances, including the documents relating to the agreement. It must ascertain the purpose of the borrowing and decide what is really the true cost to the debtor of the credit provided.
17. In the case of Wilson the Court of Appeal had no difficulty in finding that the £250 fee was a charge for lending the money. Additional loan or financial accommodation made or afforded by the lender to discharge the borrower's liability to pay that charge was "an item entering into the total charge for credit" for the purposes of section 9(4). It could not properly be treated as part of the amount of credit to which the charge related. As Sir Andrew Morritt V-C said-

"19. ….section 9(4) must be applied without too narrow an interpretation of the word "item." If a charge for credit is correctly recognised in accordance with the detailed regulations …. then any cash loan or other financial accommodation made or afforded by the creditor to the debtor for the purpose of discharging the liability for that charge should not be treated as part of the credit to which the total charge for credit relates. It may be, though it is unnecessary to any decision in this case, that the loan made to pay the charge is itself a separate credit which should be made the subject of a regulated agreement to which the Act applies, whether as a linked transaction within section 19 or otherwise". (see also Chadwick LJ at paragraph 35)

18. In this case there were two main strands in the judge's reasoning.
19. The first was the significance that he attached to the treatment of £18,375 as the figure on which the interest payable was calculated. The judge said-

!7. …. although the figure of £18,375 is not specifically described as the amount of credit, it is in fact treated as such. Interest is calculated on that total rather than on the lower figure."

20. The second was his related and more radical conclusion that the 1974 Act prohibited interest on a charge for credit, as distinct from interest on credit itself. The judge said that he accepted the argument advanced by the Walkers' counsel that-

"18…section 9(4) effectively prohibits the charging of interest on a charge for credit even if time for payment is deferred. The reason is that if it is included in the amount of credit, that contravenes the decision in Wilson, if it is not then the document does not accurately record the reality of the transaction. I really cannot improve on the way he puts it in his further submissions which were submitted on 30^th January.

"to charge interest upon any element of a regulated advance is by definition to treat that element as credit. This is equally true where that element must by law form part of the charge for credit since it cannot lead a double life (as the trial judge wrongly held it could in Wilson). Yet section 9(4) is absolutely prohibitive. It does not say that a particular element can be treated as credit for some purposes (e.g attracting interest) but not for others(e.g .identifying the aggregate advance) nor does it say that a particular element may be treated as credit by the lender but not by the court."

19. It is well established law that the court should look at the substance not the form. Counsel for the Defendants cites Watchtower Investments v. Payne CA 20.07.01

"The purpose of the court's consideration is to arrive at what in reality is the true cost to the debtor of the credit provided."

20. That is plainly right. In reality in this case there were not three elements to the repayment, the capital, the fee and the interest on the capital, but four elements , the capital, the interest on the capital, the fee and the interest on the fee. The fact that the last was included meant that the fee was treated as credit and this contravenes section 9(4)."

21. The judge went on to state that, although it was unnecessary to decide the point, the Agreement failed to comply with the requirement in paragraph 10 of Schedule 1 to the 1983 Regulations that the lender state the cost of the credit (other than interest). He said that the breach was established as, in accordance with his ruling on "the amount of credit" point, "the agreement mis-states the cost of the credit by failing to include the interest on the £875." He then declined to exercise his discretion under section 127(3) of the 1974 Act to make an enforcement order.
22. The judge concluded that the Agreement did not comply with the legislation and that it was unenforceable. I turn to look at the legislation.

The legislation

23. The 1974 Act was passed to protect consumers of credit, an aim which accounts for its substantive content and conditions its judicial interpretation. A prominent feature of protection is ensuring that the credit agreement brings to the borrower's attention the true cost of credit: see Watchtower at paragraph 21 per Peter Gibson LJ. The legislation provides for the inclusion of prescribed terms including one stating "the amount of the credit." The calculation of the amount of the "credit" depends on the scope of the basic concept of "credit." In ordinary usage "credit" connotes payment at a later time for goods or services supplied. Though the charging of interest for the use of money lent, or for not exacting immediate payment of a debt, is usually associated with credit, that is not necessarily so: interest-free credit is credit.
24. In this case what is and what is not "credit" for the purposes of the legislation is governed by the meaning of section 9 of the 1974 Act (set out in paragraph 14 above). The nub of this case is in the construction and application of sub sections 9(1) and (4). The rest of the legislation is not contentious. Its effect was usefully summarised in numbered steps by Clarke LJ in Watchtower at paragraph 60. I will concentrate on the effect of the key provisions.
25. A regulated agreement is not properly executed unless the document in the prescribed form contains all the prescribed terms. An improperly executed regulated agreement is enforceable against the debtor on an order of the court only: section 65(1). The enforcement order contemplated by the section is governed by section 127 (which could still be applied to this case, though it was repealed with effect from 6 April 2007). It provided that the court shall not make an enforcement order under section 65(1), if section 61(1) (a) was not complied with, unless a document itself containing all the prescribed terms of the agreement was signed by the debtor.
26. Under section 61(1) a regulated agreement is not properly executed unless (a) a document in the prescribed form itself containing all the prescribed terms and conforming to regulations made under section 60(1) is signed in the prescribed manner both by the debtor and by or on behalf of the creditor; and (b) the document embodies all the terms of the agreement, other than implied terms.
27. The prescribed terms to be contained in the regulated agreement document were set out in the 1983 Regulations in the paragraphs in column 2 of Schedule 6: see regulation 6(1). Paragraph 2 requires a term stating "the amount of the credit." Paragraph 5 requires a term stating how the debtor is to discharge his obligations under the agreement to make the repayments.
28. Regulation 2 of the 1983 Regulations (which still applies to this case, though it has been repealed with effect from 31 May 2005) also required that documents embodying regulated consumer credit agreements should contain the information set out in column 2 of Schedule 1 to those regulations. The required information set out in paragraph 10 of schedule 1 was the rate of any interest on the credit to be provided under the agreement and the total amount of other charges included in the total charge for credit in relation to the credit to be provided under the agreement.
29. Turning to the 1980 Regulations, Regulation 4 stated the items to be included in the computation of "the total charge for credit" in relation to an agreement. They include (a) the total of the interest on the credit which may be provided under the agreement and (b) other charges at any time payable under the transaction by or on behalf of the debtor whether to the creditor or any other person.
30. Humberclyde Finance Ltd v. Thompson [1999] GCCR 2141 at 2147 was cited for the observation of Aldous LJ that the fact that in that case interest was paid on both the loan and the cost of a waiver option did not throw light on whether the waiver option was a charge payable under the transaction within the meaning of Regulation 4(b) and therefore formed part of the total charge for credit , or was part of the credit provided. In my view that case is of limited assistance, as it was decided on the meaning of "payable under the transaction", not on the meaning of "other charges" : see Watchtower at paragraph 46.

Discussion and conclusions

31. The appeal ultimately turns on the function of section 9(4) and the effect of the distinction drawn in it, which is reflected in the Regulations, between "credit" and "charge for credit." Two main points arise from the judge's approach.

(1) Prohibition of interest on charge for credit

32. I am unable to agree with the judge or Mr Berkley QC (appearing for the Walkers) that section 9(4) effectively prohibited interest on any charge for credit, including the £875 Broker Administration Fee. Mr Berkley highlighted the mandatory terms of section 9(4) that "the total charge for credit shall not be treated as credit" (his emphasis) and asserted that interest is fundamental to credit. It followed, he said, that the operation of a regulated credit agreement does not permit interest on a charge for credit. To do so would be to treat, contrary to the prohibition in section 9(4), the charge for credit as credit. By charging interest on the fee SPPL in effect treated the fee charged as credit. The consequence was that "the amount of credit" was wrongly stated as only £17,500.
33. Mr Berkley added that, if interest could be charged on a charge for credit, then interest could be charged upon interest, and interest could be charged upon that total and so on. That would drive a coach and horses through legislation enacted for the consumer's protection by ensuring that the borrower could see at a glance what he was being offered and the true cost of what would be charged for the provision of credit.
34. The difficulty with these submissions and the conclusions of the judge who accepted them is that (a) they treat interest as a necessary feature or indicator of credit, which it is not, and (b) there is no mention anywhere in section 9(4) of interest, let alone a prohibition of it. If it was the legislative intention to prohibit interest on charges for credit, the prohibition would not have been by way of a side wind in a definition section: it is the kind of measure that would have been expressly and clearly spelt out somewhere else in the 1974 Act and it is not.
35. I agree with Mr Nicholas Elliott QC appearing for SPPL that it was not the function or effect of section 9 to prohibit anything, but rather to supply a special statutory meaning to the core concept of "credit" in the 1974 Act and to distinguish it from a charge for credit. Section 9(1) is a general definition of credit by stating in wide terms what it includes. Subsection (4) is expressly directed to what credit does not include "for the purposes of the Act." Even though time is allowed for its payment, an item entering into the "total charge for credit" is not itself "credit" for the purposes of the statute.
36. On the facts of this case, the Broker Administration Fee was an item entering into the charge for credit and was prevented by section 9(4) from being treated as "credit" or as part of credit under the 1974 Act. It does not prevent interest from being charged on it during the period allowed for re-payment. Nor was the fee converted from a charge to credit into credit, as defined in section 9(1), either by virtue of re-payment being deferred, or by virtue of a provision for the payment of interest on it during the period allowed for re-payment.

(2) Amount of Credit

37. I am also unable to agree with the judge or with Mr Berkley QC that £18,375 is the "amount of credit." Notwithstanding the designations of the boxes in the Agreement, Mr Berkley said that SPPL were in fact treating the fee as credit. In form and in substance the sum of £18,375 was the true "amount of credit" provided to the borrowers.
38. As for form, box C in the Agreement stated the amount of credit as £17,500, that being the amount of the loan. In my judgment, the fee was correctly excluded from the amount of credit. It was an item of charge for credit. It was not credit. The legislation on this point has been complied with.
39. Mr Berkley QC disputed this analysis. He said that "Amount of Credit" was just a label for box C, "a misleading signpost", which was not determinative of what was the amount of the credit. In Wilson v. First County Trust the sum of £5250 was entered as the "amount of credit", but it was not treated as determinative of what was the amount. It was necessary, Mr Berkley insisted, to look to the substance. On that approach the sum of £18375 represented to the Walkers the amount of credit. The "Total Amount Advanced" purported to be the prescribed term of "Amount of Credit."
40. In my judgment, it is wrong to treat, as the judge and Mr Berkley do, the sum of £18,375 as credit and then to assert that the "amount of credit" is incorrectly stated. The Agreement is clear. Inclusion of £18,375 in box E makes it clear that it is not the amount of credit. The "amount of credit" is the sum of £17,500 stated in box C. The fee of £875 was not added and included in that Box, as it was part of the total charge for credit, not part of credit. In accordance with the ruling in Wilson the fee was not included in the amount of credit. It appears separately in box D. The amount appearing in box E is different from the "amount of credit" as a sum and in designation. The designation is "Total Amount Financed", not, as the judge correctly noted, an expression used in the 1974 Act. It is neither prescribed nor required information. There is nothing in the 1974 Act or in the 1980 and 1983 Regulations to prevent or prohibit the inclusion in the Agreement of the total amount financed or to make its inclusion a reason for rendering the Agreement unenforceable.
41. As I would allow the appeal on the principal issue it is necessary to consider the Walkers' alternative case which was accepted by the judge.

The secondary point

42. The judge held that SPPL was in breach of the requirements of paragraph 10(2) of Schedule 1 to the 1983 Regulations which he interpreted as requiring SPPL to state "the cost of the credit (other than interest)." He referred back to his conclusion on the principal point that the Agreement mis-stated "the cost of credit by failing to include the interest on the £875." So breach was established.
43. The information requirements of Schedule 1 to the 1983 Regulations were not "prescribed terms" for the purposes of s127(3). This means that in such a case the court had a discretion whether or not to enforce under s 65. It should only dismiss an application to enforce if it was just having regard to the prejudice caused to any person by the contravention and the degree of culpability for it. The judge proceeded to consider the exercise of the discretion that arose under section 127(1) to refuse or grant an enforcement order and indicated that he would have refused such an order, as he regarded it as an attempt to circumvent the provisions of section 9(4) of the 1974 Act, which should not be encouraged.
44. Mr Berkley QC submitted that the decision was correct and that this court should not interfere with the discretion exercised by an experienced judge who had correctly balanced the relevant elements of section 127(1)
45. In my judgment, the judge misapplied the provisions of paragraph 10(2). Contrary to what the judge said, paragraph 10(2) did not require the Agreement to state the "cost of the credit." What had to be stated was the total amount of other charges included in the total charge for credit to be provided under the credit agreement. The Agreement stated that the Walkers would be charged the £875 fee. That complied with the requirements of paragraph 10(2) as it set out the total amount of other charges included within the total charge for credit.
46. I would therefore allow SPPL's appeal on that point and the issue of appellate interference with the exercise of a judicial discretion under section 127(1) of the 1974 Act does not arise for decision.

Result

47. I would allow the appeal and set aside the judge's order. The legislation is complicated. This court has had the benefit of detailed written and oral submissions from leading counsel on each side. I have been persuaded by the arguments cogently advanced by Mr Elliott QC on behalf of SPPL that the judge's construction and application of the legislation, in particular section 9(4), was not correct and that he was wrong to hold that the Agreement is wholly unenforceable.

Lord Justice Sullivan

48. I agree.

Mr Justice Owen:

49. I also agree.