Phillip McGuffick v The Royal Bank of Scotland plc [2009] EWHC 2386 (Comm)

Consumer Credit Act 1974 - Test Case

Andrew Moran QC

Case Report by Sandra Healy

Andrew Moran QC was involved in this case which was one of a large number of claims before County Courts all over the country concerning the effect of section 77 of the Consumer Credit Act 1974 on loan agreements and other credit arrangements regulated by that Act; it was transferred to the Commercial Court as a test case.

Section 77(1) requires a creditor, upon receipt of a written request and payment of a fee, to provide a debtor with a copy of the executed agreement and of any other document referred to in it, together with a statement signed on behalf of the creditor providing details of the total sums which have been paid, have become payable and will become payable under the agreement. Section 77(4) provides that if a creditor fails to comply with s.77(1) within the prescribed period it is not entitled to enforce the agreement.

In this case the claimant entered into a fixed-sum regulated loan agreement with the defendant bank and fell into arrears of payments. The bank served a default notice together with a standard form letter containing a threat to report information about the agreement to Credit Rating Agencies ("CRAs"). The claimant made a request for information pursuant to s.77(1) of the Act. The bank failed to comply and during the period of non-compliance with s.77(1) it advised the claimant that although it was unable to enforce repayment the agreement was not void and that any continuing default would be reported to CRAs.

The claimant issued proceedings for a declaration of unenforceability and injunctive relief relating to the reporting to CRAs. Amongst the issues for decision were two points that arise regularly in consumer credit proceedings and in relation to which there is little or no authority, these were:

• Firstly, what happens to the debtor's obligation or liability to repay during the period of non-compliance with s.77(1) and corresponding unenforceability under s.77(4); is it extinguished or does it continue?

• Secondly, does reporting or threatening to report to CRAs amount to "enforcement" within the meaning in s.77(4)?

The claimant contended that during the period of non-compliance with s.77(1) the debtor's obligation or liability to repay was extinguished and accordingly the bank ought to be deprived of its right to enforce repayment by taking coercive action - such as reporting or threatening the report to CRAs - to compel or secure performance of the extinguished obligation or liability.

Flaux J dismissed the claim and made the following important findings:

• During the period of non-compliance with s.77(1) a creditor's rights under the agreement and debtor's corresponding liability are not extinguished, s.77(4) simply provides for a restriction on their enforcement.

• Flaux J was not persuaded that that the House of Lords decision in Wilson v First County Trust Limited (No. 2) [2004] 1 AC 816 was authority for an alternative construction of s.77(4). To the extent that there are passages in the judgments of the House of Lords which suggest that unenforceability under s.65 and s 127 of the Act may correspond with the extinction of rights, Flaux J held that these were contrary to earlier authorities, which were not cited to their Lordships and were obiter and thus not binding on the court. 

• Even if wrong on his analysis of Wilson, Flaux J stated that his decision on s.77(4) would remain the same as there is a distinction between the case to which s.65 applies, where the bank's rights are always restricted from the outset and the case to which s.77(1) applies, where the agreement is valid and enforceable until the bank's failure to comply with s.77(1) and the agreement becomes fully enforceable again once the request has been complied with. Flaux J also drew support for his analysis from s.77A(6)(c)(ii) of the Consumer Credit Act 2006, which recognises that the debtor has continuing obligations during a period of unenforceability resulting from non-compliance with this provision.

• Reporting or threatening to report the state of the claimant's account to CRAs is not a coercive tool in the hands of the bank, but rather an essential aspect of responsible lending and of the licensing process. Further, reporting or threatening to report to CRAs did not come anyway near amounting to "enforcement" within the meaning in s.77(4). Flaux J referred to Rankine v American Express Services Europe Ltd [2009] CCLR 3 in support of his conclusion; in that case HHJ Browne QC concluded that bringing proceedings is only a step taken with a view to enforcement and not actually enforcement.

This decision brings welcome clarification to the rights and liabilities of the creditor and debtor during periods of unenforceability under the Act; the balance has been firmly tipped in favour of the creditor. For those debtors wanting to protect their credit rating it now appears that the only option is to keep making repayments, even if they have a legitimate complaint or perhaps (depending on the facts) even if they have obtained an order of injunction requiring delivery of the agreement.