The decision in CFL Finance Ltd v Laser Trust & Gertner [2021] EWCA Civ 228 raised the issue as to whether a settlement agreement with an individual, where they were given time to pay, is a provision of credit for which the provisions of the Consumer Credit Act 1974 (CCA) apply. If it does, then the settlement agreement may be unenforceable without a validation order. We consider the practical steps practitioners have started to take to address the problems this decision has highlighted.

The facts

Mr Gertner was sued pursuant to a personal guarantee that he had given for a company loan. The claim was settled pursuant to a Tomlin Order attaching a settlement agreement. The terms of settlement required Mr Gertner to pay £2m over the course of approximately two years. Mr Gertner defaulted on payment. As a result, CFL commenced bankruptcy proceedings against him. Mr Gertner alleged, inter alia, that the settlement agreement was in fact a regulated consumer credit agreement. At first instance, the Court determined this issue in favour of CFL and held that there was no credit. Mr Gertner appealed this decision. The Court of Appeal decided that:

  1. The CCA could apply to Tomlin Orders.
  2. The CCA does not apply:
    (a) Where there is only forbearance, not an agreement
    (b) To an agreement by which a creditor agrees for no consideration to allow a debtor more time to pay. (Providing consideration would include, for example, if the debtor agreed to pay interest on what they owed, some or all of the creditor's costs, or if they agreed to release a claim against the creditor), or
    (c) Where parties compromise a claim which is genuinely disputed in its entirety on substantial grounds (provided there's no question of the compromise agreement defeating the application of the CCA to the original claim), because there is no "debt" being "deferred".
  3. The CCA would apply if a debtor didn't dispute the indebtedness and the parties entered into a settlement pursuant to which, for consideration, the creditor agreed to accept instalment payments.

This leaves a risk in those instances where the existence of the debt is sufficiently clear that an agreement providing for future payment will confer credit within the CCA, even if the debtor denied that anything is due. For example, a creditor chases payment and the debtor buys time with a defence that is nonsense and then the parties settle involving one or more future payments.

Why is this important?

This judgment affects the settlement of all sorts of disputes.

If an agreement is subject to the CCA, this creates various duties and formalities for the creditor, possibly recreating duties that have long-since extinguished by termination of any original agreement. If those duties have not been fulfilled, this may have severe consequences, such as the agreement being unenforceable until remedial action is taken, and interest and charges accruing during the period of non-compliance will not be payable.

Practitioners should always consider the possibility that their clients may be entering into a regulated consumer credit agreement by settling litigation.

The risk area is not claims which are obviously genuinely disputed and then settled. Instead, it is debt claims against individuals, sole traders, partnerships (of two or three individuals) or unincorporated associations which either aren't disputed, or are disputed but on flimsy grounds, then settled for future payment(s). 

6 tips to avoid your settlement agreement becoming unenforceable

  1. We have seen practitioners suggest various ways to try to circumvent settlement agreements falling subject to the CCA. One suggestion has been to remove payment dates from settlement agreements, with payment instead falling due when it is paid. The problem with this approach is that if no payment is made, creditors cannot enforce the settlement agreement because there cannot be said to be a default (ie late payment) to trigger the right to enforce.
  2. A better approach may be to stop using the Tomlin Order format and instead use simple Consent Orders, staying claims on settlement terms, with judgment to be entered if the debtor breaches them. This is because the CCA does not apply to terms in standard court orders (ie that are not Tomlin orders). The two problems with this approach are:
    (a) There seems to be a reluctance from some Judges to make simple Consent Orders in such terms. Despite Civil Procedure Rule 40.6 expressly providing for such orders, Judges seem to believe that they have no such power and are insisting on the use of a Tomlin Order, and
    (b) Parties may prefer to keep terms confidential. This can be agreed within a Tomlin Order, but not in the terms of a standard Consent Order (which becomes a publicly accessible document).
  3. An alternative approach may be to ensure that there are fewer than 12 payments made in a period of less than 12 months and that no interest is charged. This only applies to agreements before the debt has been incurred and seems unlikely to apply very often to settlements.
  4. There are some exemptions under FSMA which can be worth checking (such as where credit exceeds £25,000 and the agreement is wholly or predominantly for business purposes).
  5. If a longer period of credit is given, one option may be to ensure that they comply with all the requirements of the CCA in respect of the pre-contractual information, prescribed form and content of the agreement and provision of post contractual notices. However, if nothing else, that would add a layer of complexity and cost and it may not be considered to be practical.
  6. If your business is going to enter into lots of these types of settlements, it may be worthwhile investigating whether it is worthwhile obtaining FCA authorisation.

The unintended consequence of the decision in CFL Finance may be to discourage settlement. It is currently being appealed to the Supreme Court.