Following the Court of Appeal’s decision in CFL Finance Ltd v Laser Trust [2021], a settlement agreement between an individual (“the debtor”) and any other person (“the creditor”), in which the debt owed is deferred, may be subject to the Consumer Credit Act 1974 (“CCA”).
It follows that a settlement agreement between a company in administration and a director of the company, which provides for the future repayment of debt owed by the director, may be subject to the CCA.
In CFL Finance Ltd v Laser Trust, the Court held that where a contractually binding settlement agreement provides for future repayment of debt, and the debt at the time is certain and not genuinely disputed in its entirety, it is a consumer credit agreement. Consequently, the unfair relationship provisions in sections 140A – C of the CCA will apply which entitles the director to a bring a claim against the company on the basis that the relationship arising out of the agreement is unfair.
If the settlement agreement is a regulated credit agreement under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (“the RAO”), the creditor may need to be authorised by the Financial Conduct Authority (“FCA”) when entering into the agreement otherwise the agreement may be void and unenforceable. In the most extreme instances, the creditor may be held criminally liable.
Is the settlement agreement a “consumer credit agreement”?
A consumer credit agreement is an agreement in which the creditor provides the debtor with credit of any amount (section 8, CCA). Credit is defined as including a cash loan, and any other form of financial accommodation (section 9, CCA). Credit is provided where a contract provides for the future repayment of debt, as set out in the leading case Dimond v Lovell [2002].
The meaning of ‘credit’ in the context of settlement agreements was considered in CFL Finance Ltd v Laser Trust. Some key points from the case include:
- The CCA will not apply to a settlement agreement in which a creditor and debtor compromise a claim which the debtor “genuinely disputed in its entirety on substantial grounds”;
- The settlement agreement will be a consumer credit agreement if, for consideration, the creditor agrees to accept payment by instalments.
It is therefore important to consider whether the debt is “genuinely disputed in its entirety on substantial grounds”. If the debtor agrees that at least some money is owed and it is immediately due, then this is unlikely to be the case. It is also prudent to determine whether the debtor is likely to give consideration, for example through a clause agreeing not to sue the creditor. If so, the settlement agreement may be a consumer credit agreement.
If the settlement agreement is a consumer credit agreement the unfair relationship provisions in sections 140A – C of the CCA will apply. These provisions entitle the debtor to bring a claim against the creditor alleging that the relationship between the creditor and the debtor is unfair because of one or more of the following:
- any of the terms of the agreement or of any related agreement;
- the way in which the creditor has exercised or enforced any of his rights under the agreement or any related agreement;
- any other thing done (or not done) by, or on behalf of, the creditor (either before or after the making of the agreement or any related agreement).
If the Court finds that the relationship is unfair, its powers are wide-ranging, including the power to reduce or discharge any sum payable by the debtor and / or set aside any duty owed by the debtor by virtue of the agreement (section 140B (1), CCA).
Is the settlement agreement a “regulated credit agreement”?
If a settlement agreement is likely to be a consumer credit agreement, it then must be considered whether the agreement is a regulated credit agreement.
To carry on regulated consumer credit activities involving a regulated credit agreement, the creditor must be authorised by the FCA (unless they fall within an exclusion or exemption under the RAO from carrying on regulated credit-related activities).
The RAO defines a regulated credit agreement as a credit agreement which is not an exempt agreement. Articles 60C – 60H set out the exempt agreements. It is necessary to consider each exemption to determine whether any apply. The exemptions that may be particularly relevant to a settlement agreement between a company in administration and a director include:
- Exemption for high-net worth individuals under article 60H, RAO;
- Business purposes exemption under article 60C(3), RAO.
It is not clear how the Court will apply these exemptions to any specific set of facts. It may be decided that the settlement agreement should include express reference to the application of a specific exemption, however this is a matter of commerciality and will depend on whether the requirements for any such exemption are met.
Is the settlement agreement a “non-commercial agreement”?
If the settlement agreement is a regulated credit agreement, it may be a non-commercial agreement. A non-commercial agreement is a “consumer credit agreement… not made by the creditor or owner in the course of a business carried on by him” (section 189, CCA). If the agreement is a non-commercial agreement, many of the CCA provisions will be inapplicable, however the unfair relationship provisions in sections 140A – C of the CCA will still apply.
The Court of Appeal in Khodari v Tamini [2009] set out a range of factors that are relevant when determining whether an agreement is a non-commercial agreement, including whether there is some degree of regularity, the reason behind the lending and the scale of the lending. In order to determine whether the loan was made in the course of business carried on by the lender, these factors need to be weighed up against each other.
Considerations when drafting the settlement agreement
When drafting the settlement agreement, there may well be ways to ensure that the agreement does not provide credit, so as not to constitute a consumer credit agreement. There may also be ways to mitigate any unfair relationship arguments being raised by the creditor in the future.
Furthermore, it may be that if there is uncertainty around whether the agreement is a regulated credit agreement, it could be amended in order to fully comply with the CCA, including the pre-contractual and post-contractual CCA requirements.
This area of law is still relatively new and complex. If you have any queries on the above or wish to seek advice on a settlement agreement providing for future repayment of debt between an individual and a company, do not hesitate to contact our Insolvency Team.
