England and Wales High Court (Queen's Bench Division) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		07/02/2013

Mr Justice Males :

Introduction

1. The main issue raised by this application concerns the meaning of "credit in the form of a cash loan" in consumer credit legislation.
2. The claimant in this action is Santander UK Plc (formerly Abbey National Plc). I shall refer to it as "the bank". The defendants are Mr Keith Harrison and Mrs Susan Harrison, of Bigadon Home Farm at Buckfastleigh in Devon. I shall refer to them as "the borrowers", and to their home as "the property". In this action, the bank is claiming possession of the property on the ground that the borrowers are in arrears with their mortgage. It seeks also to recover the amount of the outstanding loan, which was £541,288.71 as at 29 July 2010, that being a few days after this action was commenced.
3. This apparently straightforward claim is resisted on a number of grounds. The current version of the Defence, a Re-Re-Amended Defence and Counterclaim dated 2 February 2012, is 45 pages long and runs to 345 paragraphs. Much of it is not at all easy to follow, despite an order made by HHJ Salomonsen on 17 December 2011 in the Torquay and Newton Abbott County Court striking out an earlier version of the Defence and ordering the borrowers to serve a new Defence following a hearing at which the judge had explained carefully to the borrowers what it was that they needed to do.
4. Service of the current version of the Defence was met by an application made by the bank on 28 February 2012 to strike it out pursuant to CPR 3.4, alternatively for summary judgment pursuant to CPR 24, on the grounds that the borrowers had no real prospect of successfully defending the claim. However, the application for summary judgment was abandoned as CPR 24.3(2)(a) prohibits summary judgment in proceedings for possession of residential property against a mortgagor.
5. At the hearing of the bank's application on 11 June 2012 HHJ Salomonsen decided to determine by way of preliminary issue two issues, referred to as "the capitalisation issue" and "the securitisation issue" which, depending on how they were decided, would mean that many of the other issues would fall away. By a judgment handed down on 16 August 2012 he determined both issues in favour of the bank. The borrowers now seek permission to appeal. On 27 November 2012 Burnett J ordered that there should be an oral hearing of the application for permission, with the appeal to follow immediately if permission was granted. That is the application which I have heard.
6. Although the appellants' notice ranges widely over the whole case and the grounds extend to 42 pages, Mr John Pugh who is counsel for the borrowers on this application, but who did not appear below when they were representing themselves, has made clear that the application for permission and (if granted) the appeal is confined to two substantive issues, together with a challenge to the judge's order as to costs.

Background

7. In 2006 the bank made a loan of £500,000 (plus fees of £499) to the borrowers, pursuant to an offer letter dated 26 June 2006. The loan was subject to the bank's standard mortgage conditions and was secured by way of a first charge over the property. A deed to this effect was signed by the borrowers, and by Mr Harrison's mother who was a joint proprietor of the property with the borrowers. At that time the property was valued at £900,000.
8. The borrowers failed to keep up the loan repayments and by June 2008 they were in arrears to the extent of £8,968.92. On 9 June 2008 the bank wrote to them offering to capitalise the arrears by adding them to the outstanding capital balance and increasing the monthly repayments correspondingly. The borrowers accepted that offer. However, the borrowers continued to fail to make payments in accordance with the revised terms, and this action was begun on 23 July 2010.

The capitalisation issue

9. The borrowers' case is that as a result of the capitalisation of arrears in 2008, the loan agreement is now regulated by the Consumer Credit Act 1974 and is unenforceable against them, because the bank has failed to comply with various requirements of the Act relating to the form of regulated credit agreements and the service of default notices. The borrowers say that these failures are not capable of being remedied, with the consequence that the loan is irrecoverable and the mortgage security is worthless. Their argument proceeds as follows.

The borrowers' argument

10. First, the borrowers say that although in general mortgages of residential property secured by a first legal charge are regulated under the Financial Services & Markets Act 2000, regulation under that Act only applies if at least 40% of the land is used or intended to be used as or in connection with a dwelling: see article 61 of the Financial Services & Markets Act 2000 (Regulated Activities) Order 2001. Although the bank alleges that at the time when they entered into the 2006 loan the borrowers represented that at least 40% of the land was so used, the borrowers contend in this action that this was not the case, and that the loan was therefore not regulated under the FSMA 2000. The judge considered that this issue was not suitable for preliminary determination and there is no application for permission to appeal from that decision.
11. Second, the borrowers recognise that the loan agreement concluded in 2006 was not initially regulated under the Consumer Credit Act 1974 because at that time the Act did not apply when the amount of credit extended was in excess of £25,000. Accordingly, their position is that initially there was no statutory regulation at all, and the loan and mortgage were governed by the common law.
12. Third, the borrowers say that because the June 2008 agreement to capitalise the arrears was not regulated under the FSMA 2000, it was not exempt from regulation under the Consumer Credit Act 1974 (as it would be if the FSMA applied as the two regimes are mutually exclusive), and was therefore potentially subject to regulation under the 1974 Act once the £25,000 financial limit was removed. That occurred on 6 April 2008 pursuant to section 2 of the Consumer Credit Act 2006.
13. Fourth, the borrowers say that the capitalisation agreement was so regulated because it was a "modifying agreement" within the meaning of section 82(2) of the 1974 Act. Although the removal of the £25,000 limit applied to new agreements entered into after the relevant date, transitional provisions provided that it did not apply to the variation of existing agreements, which therefore continued to be unregulated by the Act, unless as part of the variation "credit in the form of a cash loan is provided." The borrowers say that the effect of the capitalisation agreement was to provide credit in the form of a cash loan. Whether that is so is the critical question on this application.

The bank's response

14. In response, the bank contends that under the capitalisation agreement no extra cash or available funds were provided to the borrowers. The agreement was merely a rescheduling of existing payment obligations, which does not constitute the provision of a cash loan. That, says Mr James Ross for the bank, is the short answer to this application. The judge agreed.
15. The bank makes two further points in response. The first is that as a result of oversight on its part the arrears, which should have been added to the amount of the outstanding loan, were not in fact added, and have now been written off, so that on any view there was no additional credit or cash loan extended to the borrowers. The second is that the capitalisation was not in fact carried out pursuant to a new or modifying agreement, but was carried out pursuant to the bank's existing powers in its standard conditions. The judge did not determine the first of these two points, but he decided the second in favour of the bank.

The bank's alternative points

16. I will deal with these two further points at once. As to the first, I am doubtful whether this issue of fact is suitable for determination by way of preliminary issue and in my judgment it is unnecessary to determine it. The judge did not find it necessary to do so either. I will proceed on the basis that the borrowers are correct to say that the arrears were in fact added to the amount of the outstanding loan.
17. As to the second point, and in respectful disagreement with the judge, while I would accept that the bank could have capitalised the arrears pursuant to express powers contained in its standard conditions without seeking the consent of the borrowers, it did not in fact do so. It preferred to follow a consensual path, seeking and obtaining the agreement of the borrowers to the capitalisation of the arrears and the revised instalment amounts which would apply henceforth. No doubt there were good commercial reasons for acting in that way, not least that new arrangements entered into consensually might have a better prospect of being followed, even if that hope was disappointed in this case.

Credit in the form of a cash loan

18. I turn therefore to the question whether the effect of the capitalisation agreement was that credit in the form of a cash loan was provided to the borrowers. First, however, I should set out the relevant legislation.
19. Section 82(2) of the Consumer Credit Act 1974 provides as follows:

"(2) Where an agreement (a 'modifying agreement') varies or supplements an earlier agreement, the modifying agreement shall for the purposes of this Act be treated as –

(a) revoking the earlier agreement, and

(b) containing provisions reproducing the combined effect of the two agreements,

and obligations outstanding in relation to the earlier agreement shall accordingly be treated as outstanding instead in relation to the modifying agreement."

20. The capitalisation agreement varied or supplemented the earlier 2006 agreement (it appears that the earlier agreement need not be an earlier regulated agreement so long as it is not an exempt agreement), and therefore qualifies as a "modifying agreement." The effect, therefore, is that if this section applies the 2006 agreement would be treated as revoked and replaced by an agreement reproducing the combined effect of the two agreements. At all events, I will assume this to be the position.
21. Accordingly, say the borrowers, the modifying agreement was made after the £25,000 financial limit had been abolished, and was therefore regulated by the 1974 Act.
22. Whether this is so depends on the meaning and effect of paragraph 4(1) of the Consumer Credit Act 2006 (Commencement No. 4 and Transitional Provisions) Order 2008. This provides that:

"Section 2(1) of the 2006 Act (removal of financial limits etc.) has no effect for the purposes of the application of section 82(2) of the 1974 Act (variation of agreements) where an agreement –

(a) varies or supplements an existing agreement; and

(b) would not, apart from section 82(2) of the 1974 Act, be treated as an agreement under which credit in the form of a cash loan is provided."

23. Thus, although the capitalisation agreement varied or supplemented an existing agreement, the removal of the financial limit pursuant to section 2 of the 2006 Act was not to affect the agreement as varied unless the variation was an agreement under which credit in the form of a cash loan was provided.
24. I would accept that the effect of the capitalisation agreement was to provide the borrowers with credit. Before that agreement was made, the amount of the arrears was immediately due and payable. Indeed it was outstanding. The effect of the agreement was that the amount of those arrears was no longer immediately due and payable, payment having been deferred by agreement. That constituted the provision of credit in respect of the sum of £8,968.92 which henceforth would be repaid over the course of time as part of the future instalments.
25. However, it is not sufficient that the capitalisation agreement provided the borrowers with credit, unless the credit was provided in the form of a cash loan. There is no definition of what is meant in this context by "a cash loan", although section 189 of the Consumer Credit Act 1974 provides that cash includes money in any form, while section 9 of the Act provides that:

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

26. Evidently, therefore, the provision of credit includes the making of a cash loan, but is not limited to this. The statute recognises a distinction between a cash loan and other forms of financial accommodation, although the word "other" suggests that a cash loan is itself one form of financial accommodation. This is in accordance with the ordinary meaning of these terms. One form of financial accommodation is the giving of further time for payment of an existing debt. As a matter of everyday language, that would not normally be regarded as the provision of a cash loan, although there may be some circumstances in which it could be so described.
27. Mr Pugh referred me to be explanatory notes which accompanied paragraph 4(1), which state that:

"Article 4 of the Order provides that section 2(1) has no effect where an agreement varies or supplements an agreement made before 6 April 2008 for the provision of credit exceeding £25,000, and either does not itself provide for further credit to be advanced or is itself an exempt agreement under the Consumer Credit Act 1974."

28. However, these notes are not authoritative, as they themselves make clear, and I cannot read paragraph 4(1) of the Order in this way.
29. It seems to me to be clear that paragraph 4(1) draws a distinction between credit which takes the form of a cash loan and credit which does not. I would accept that "cash", and therefore "cash loan", are terms which are capable of being given and in some contexts should be given a wide meaning, but the question is what they are intended to mean in the context of these transitional provisions. Clearly, it was not intended that any variation of an existing unregulated credit agreement, or even any variation of an existing unregulated agreement which provided further credit to the borrower, should be brought within the statutory regime for regulation of consumer credit agreements. The touchstone chosen for bringing an existing unregulated agreement within the scope of regulation under the Act was that it should constitute the provision of a cash loan. That must have been intended to operate as a limiting factor.
30. In my judgment the mere restructuring of an existing agreement by allowing the debtor further time to pay without making any new funds available does not constitute the provision of a "cash loan" for the purpose of paragraph 4(1). It constitutes the giving of a form of financial accommodation, but not the making of a cash loan. I reach that conclusion for two reasons.
31. First, it accords with the natural meaning of the words and gives effect to the distinction between the provision of credit which takes the form of a cash loan and the provision of credit which does not. The borrowers' submissions could give no real content to that distinction. In the end their case was that although the giving of further time to pay might be a form of financial accommodation which did not amount to the provision of a cash loan, if the arrears outstanding were added to the capital amount outstanding, that would necessarily constitute the making of a cash loan. I do not accept this. Unless unpaid arrears are written off altogether, allowing further time to pay inevitably means that such arrears must be added to the amount which the borrower will eventually have to pay. However, although the timing of the borrower's repayment obligations is altered, the overall effect of such an agreement is neutral. The increase in the capital outstanding is matched by the elimination of an immediate liability to pay the outstanding arrears.
32. Second, in this context the consequences of interpreting "cash loan" as the borrowers propose would be startling, as their case in this action demonstrates. They contend in effect that a routine deferral of an instalment due under an unregulated credit agreement, even if perfectly valid and enforceable when it was concluded, could cause the whole agreement to become unenforceable, for example if it had not been concluded in the form which would have been necessary if the agreement had been regulated from the outset. That would represent a trap to any lender under an existing unregulated agreement who agreed to assist a borrower experiencing cash flow difficulties and can hardly have been intended. I consider that it was not the purpose of the legislation to apply the provisions applicable to regulation under the Consumer Credit Act 1974 to existing unregulated agreements unless new money was being advanced, in which case it would be reasonable to expect the lender to comply with the statutory provisions applicable to agreements concluded after the removal of the £25,000 financial limit.
33. As there appears to be no authority on the meaning of "credit in the form of a cash loan" in paragraph 4(1) of the 2008 Order and the point may be of some general importance, I am prepared to give permission to appeal from the judge's order on the capitalisation issue. However, in my judgment the answer to that question is clear. I agree with the judge that no cash loan was provided and dismiss the appeal.
34. The consequences of this decision are that all of the borrowers' defences which depend on the loan agreement being regulated under the Consumer Credit Act 1974 fall away.

The securitisation issue

35. It is the borrowers' case that the bank's rights under the loan agreement have been assigned to a third party pursuant to a securitisation agreement with a third party called Holmes Trustees Ltd. This is said to be relevant in two distinct ways. First, the borrowers say that as a result of the assignment the bank does not have title to sue in this action. Second, they say that the securitisation of the loan may be relevant to their defence pursuant to sections 140A and 140B of the Consumer Credit Act 1974 that their relationship with the bank arising out of the loan agreement is unfair, because the bank failed to comply with their requests for further accommodation when they were unable to keep up the repayments. It is common ground that this defence does not depend on the agreement being subject to regulation under the Act, although it will not arise if the agreement is exempt by virtue of being regulated under the FSMA 2000: see section 140A (5).

Securitisation – the facts

36. It is common for banks and other lenders to assign their rights under loan agreements, including loans relating to residential property subject to mortgages, under a block discounting agreement or securitisation. The bank acknowledges that it enters into such arrangements, although it says that they do not involve any legal assignment of its right to receive payments or any alteration of its interest in the securities which it holds. The borrowers accept that the bank remains the registered holder of the legal charge over the property secured by the mortgage in this case.
37. The borrowers have obtained the publicly available statutory accounts for Holmes Trustees Ltd for the year ended 31 December 2009, which describe the principal activity of the company as being to hold the legal interest in certain property on trust for the beneficial owners, who are the bank and another group company called Holmes Funding Ltd. The trust property is described as a portfolio of mortgage loans secured on residential property. Not surprisingly, the accounts do not identify the individual loans comprised in the portfolio.
38. In (I am told) August 2010 the borrowers made a request of the bank pursuant to the Data Protection Act to be provided with information relating to them held by the bank. The bank's response, dated 21 February 2011, made clear that so far as the bank was concerned it had collated and was providing the information to which the borrowers were entitled under the Act, but was not purporting to do any more than this. The information thus provided included two items which the borrowers say are relevant. The first was a document which stated that the "lender code" for the borrowers' account was "70 Holmes Trustees Ltd". The second was two account entries dated 28 March 2007 which show the balance then outstanding of £496,119.22 first being reduced to zero and then immediately being reinstated. From this information, the borrowers infer that on this date the bank assigned their loan to Holmes Trustees Ltd.
39. The borrowers have also obtained a mortgage sale agreement dated 12 November 2010 between the bank as "Seller", Holmes Funding Ltd as "Funding" and Holmes Trustees Ltd as "Mortgages Trustee". This is an amended and restated version of earlier agreements going back to July 2000, and the borrowers suggest that it is therefore likely that the terms on which the bank assigned their loan to Holmes Trustees Ltd were the same or substantially similar. However, the only provision of this very detailed agreement to which I was taken in argument was clause 8.4, which provides in summary that if the bank agrees with a borrower to make what is called a "Further Advance" or a "Product Switch", it may be required to repurchase the relevant loan and its related security.

Securitisation – title to sue

40. The borrowers' argument that the matters set out above mean that the bank no longer has title to sue in this action proceeds as follows.
41. First, they say that there has been a legal assignment of the bank's rights under the loan agreement pursuant to section 136 of the Law of Property Act 1925. This provides:

"(1) Any absolute assignment by writing under the hand of the assignor (not purporting to be by way of charge only) of any debt or other legal thing in action, of which express notice in writing has been given to the debtor, trustee or other person from whom the assignor would have been entitled to claim such debt or thing in action, is effectual in law (subject to equities having priority over the right of the assignee) to pass and transfer from the date of such notice – (a) the legal right to such debt or thing in action; (b) all legal and other remedies for the same; and (c) the power to give a good discharge for the same …"

42. Second, they say that receipt of the information referred to at [38] above pursuant to their data protection request constituted express notice in writing to them of the assignment for the purpose of section 136.
43. Third, they acknowledge that if the loan agreement is not regulated by the Consumer Credit Act 1974 its assignment will not affect the bank's right to sue for possession and enforce the mortgage as the legal holder of the registered charge (see Paragon Finance Plc v. Pender [2005] EWCA Civ 760, [2005] 1 WLR 3412 and the old case of Morley v. Morley (1858) 25 Beav 253). However, they say that regulation under the Act makes all the difference because the effect of assigning the loan is that the assignee becomes "the creditor" under the Act and is therefore the only person who can serve the default notice which is necessary under section 87 "before the creditor or owner can become entitled, by reason of any breach by the debtor … of a regulated agreement, … to recover possession of any goods or land, or … to enforce any security".
44. The short answer to this argument is that, as I have already held when dealing with the capitalisation issue, the loan agreement was not an agreement regulated under the 1974 Act. However, even if the agreement were so regulated, I cannot see that the title to sue issue could make any difference to the outcome of this action. Since the bank accepts that no default notice complying with the Act was served on the borrowers by anyone, the claim would fail if the agreement were regulated under the Act regardless of whether the bank or an assignee has title to sue. For this reason, I refuse permission to appeal on this issue.
45. It is therefore unnecessary to examine further the three steps in the borrowers' argument set out above. I would, however, add two further observations.
46. The first is that even on the assumption that there was an "absolute assignment by writing under the hand of the assignor (not purporting to be by way of charge only)" of the bank's rights under the loan agreement, I am not persuaded that information which was only discovered pursuant to a data protection request is capable of constituting notice of an assignment for the purpose of section 136 of the Law of Property Act. Notwithstanding the decision of the Court of Appeal in Van Lynn Developments Ltd v. Pelias Construction Co Ltd [1968] 1 QB 607, by which of course I am bound, that no particular formality is required for notice of assignment to be given so long as the notice makes it plain that there has in fact been an assignment, I would not regard information provided in this way as constituting "express notice in writing … given to the debtor" when in fact the person providing the information which is said to constitute such notice makes clear that it is doing nothing more than providing information to which the recipient is entitled pursuant to a data protection request. On any view, however, the information provided in this case does not satisfy the Van Lynn test because it does not make plain that there has been an absolute assignment of the loan agreement. That is merely an inference which the borrowers draw, which may possibly be correct, but is not a matter of which they have been given notice.
47. The second is that I should not be taken to accept the borrowers' submission that in the case of a legal assignment only the assignee can serve the default notice required under section 87 of the Act. I would accept, in respectful agreement with the analysis of Hamblen J in Jones v. Link Financial Ltd [2012] EWHC 2402 (QB), that when notice of a legal assignment has been given, it is the assignee to whom the debtor is thenceforth liable for the debt and that the assignee can only enforce the debt if the applicable statutory duties laid down in the Act have been performed. However, I would at least wish to leave open whether such an assignee would be able to rely on notices served or information provided by the assignor. Moreover, in a case such as the present (but unlike Jones v. Link Financial Ltd) where it is the assignor who remains entitled to enforce the mortgage as the legal holder of the registered charge, there would appear to be every reason why the assignor should also be the person to serve any default notice.

Securitisation – unfair relationship

48. As indicated above, it is the borrowers' case that the bank treated them unfairly within the meaning of section 140A of the Consumer Credit Act 1974 because it did not comply with their requests for further accommodation when they were unable to keep up the repayments in circumstances where, they say, a reasonable lender would have been prepared to do so. They assert that the reason, or at least a reason, why the bank acted unfairly may have been (they do not assert that it actually was) because it was constrained to do so by the terms of its agreement for securitisation of the loan. However, when I asked Mr Pugh to identify by reference to the securitisation agreement dated 12 November 2010 referred to at [39] above the terms which gave rise to this concern, he could only refer to clause 8.4. He accepted that it was a fair summary of the borrowers' case to say that the relationship was unfair because the risk of being required to repurchase the loan under clause 8.4 might have led the bank to refuse an accommodation which they were not contractually obliged to make but which they might have been prepared to make if they had not sold the loan in the first place. I say nothing about the ultimate merits or otherwise of the borrowers' case on unfair relationship, but put in this way it seems unlikely in the extreme that the fact of securitisation will add anything to it.
49. That seems even more unlikely in view of the bank's evidence that those of its employees who deal with customer relations and debt recovery would be unable to determine from the account data available to them whether a particular customer account had been securitised. I acknowledge, however, that at present this is second-hand evidence, which has not been tested.
50. The borrowers contend, nevertheless, that the burden is on the bank to prove that the relationship was fair, that such an issue can only be determined at a full trial (relying on the decision of Peter Smith J in Bevin v. Datum Finance Ltd [2011] EWHC 3542 (Ch)), and that the numerous paragraphs in their Defence in which they expound the case summarised above should not be struck out.
51. I accept that the burden is on the bank, once the issue is raised, to prove that the relationship is fair. That is the effect of section 140B(9) of the 1974 Act. However, it is unnecessary to consider whether the borrowers have done sufficient to raise the issue of unfair relationship generally, because (subject to the issue referred to at [10] above whether the FSMA 2000 applies) Mr Ross for the bank accepts that they have. It is unnecessary also to consider whether or in what circumstances it is ever possible to strike out an unfair relationship defence, because that is not what Mr Ross is seeking to do. He accepts that it will be open to the borrowers at trial to argue that they have been treated unfairly because of the bank's refusal to comply with their requests and that the bank will need to produce disclosure and witness evidence to discharge the burden of proving that its treatment of the borrowers was fair. He accepts further that if such disclosure or evidence were (contrary to the bank's stated position) to suggest that constraints arising as a result of securitisation of the loan had played a relevant part in the bank's decision-making, or that customers whose loans had been securitised were treated differently from those whose loans had not been, it will be open to the borrowers to rely on that fact and to seek appropriate specific disclosure even if the judge's order striking out the relevant paragraphs of the borrowers' pleading stands.
52. In these circumstances I regard the judge's order striking out those paragraphs, which are both speculative and unnecessary and are part of a pleading which is already inordinately prolix, as a sensible case management decision. The judge was right to regard them as "no more than an attempt to unearth some fresh material, which might in some way assist" the borrowers. If they were allowed to remain, they would no doubt be used as a launching pad for speculative disclosure requests, which would further delay these already delayed proceedings. I refuse permission to appeal on this issue.

Costs of the hearing below

53. The judge ordered that the borrowers should pay the bank's costs of and incidental to the bank's application dated 28 February 2012. Although he did not give a separate judgment dealing with costs, he made clear in the course of argument that he regarded the bank as the successful party and that his order was in accordance with the principle that costs should follow the event.
54. The borrowers say, however, that the bank was only partly successful, because its application was brought to strike out the whole Defence and Counterclaim, and that the judge's exercise of discretion was therefore wrong in principle.
55. In my judgment the judge was clearly right to regard the bank as the successful party and, very familiar with this action as he was, cannot have overlooked that the application had been to strike out the whole Defence. The inescapable inference is that he did not regard the points on which the bank had not succeeded as having materially affected the costs incurred. That was a view which he was entitled to form. Even if I am wrong about that, so that the judge's exercise of discretion has to be set aside, I would exercise my discretion the same way. Accordingly, I refuse permission to appeal.

Conclusion

56. On the capitalisation issue I give permission to appeal but dismiss the appeal. On all other issues permission to appeal is refused.