Do the provisions of the Consumer Credit Act 1974 protecting consumers against unfair relationships apply to personal guarantors of corporate liabilities?
The recent case of Bank of Ireland (UK) Plc v McLaughlin (2015) identified two very important issues for personal guarantors guaranteeing corporate liabilities. Firstly, that the unfair relationship provisions of the Consumer Credit Act 1974 do not apply to guarantors of commercial contracts; and secondly, (where a borrower is a corporate entity), notice of sums in arrears (NOSIA's) do not need to be served.
The Defendant and his sister were equal shareholders and directors of a company. In 2006, the bank provided a loan and overdraft to the company which was secured against the business premises together with an assignment of a life policy. In 2007 the Defendant entered into a deed of guarantee and indemnity as security for the company's borrowing. At the same time the Defendant also entered an agreement with his sister and brother-in-law to acquire 75% of the company shares and became sole director. At the time the agreement was entered into, it was an attractive opportunity and gave the Defendant control of the company. However, in 2009, the company began experiencing financial difficulty and the bank sought to enforce the guarantee. The Defendant's relationship with his family became bitter and he claimed duress on the basis his sister and brother-in-law forced him to enter the guarantee. Additionally, he attempted to rely on the CCA protection against unfair relationships and alleged breach of NOSIA requirements as well as his claim that the bank had forged the documents.
This article considers the claim of an unfair relationship and breach of NOSIA requirements.
S140A of the CCA 1974 gives provision in respect of unfair relationships between a creditor and a debtor. The Court may make an order under s140B in connection with a credit agreement if it determines a relationship is unfair to the debtor because of any terms of the agreement or related agreements; or the way in which a creditor has exercised or enforced his rights or anything else done by or on behalf of the creditor.
S86B and S86C sets out the provisions in respect of the requirement of a creditor to provide NOSIA's; if an agreement is regulated and is in arrears (to an amount equal to two months or more of payments), the creditor must send a NOSIA within 14 days to the debtor. The creditor must continue to send such notices to the debtor every six months from the date of the initial NOSIA and shall do so until such times as debtor ceases to be in arrears or judgment is obtained.
The Judge ruled that:
(1) The relationship manager was not involved in any alleged wrongdoing by the Defendant's brother-in-law. He had signed the guarantee with the benefit of independent legal advice and did not complain of any duress or pressure at the time of signing. The agreement with his family was attractive at the time and gave him complete control of the company, which continued to trade successfully for two years. The collapse of the company had become due to economic downturn.
(2) The CCA is there to protect consumers, not commercial companies who obtain credit. Therefore, as the parties to the credit agreement were commercial, there was no credit agreement within the meaning of s140C(1) of the 1974 Act and the unfair relationship provisions did not apply.
Lastly, the court clarified that this was not a consumer credit agreement and was therefore unregulated. Therefore, the requirement under s86E(5) of the Act to serve default notices, only applies to regulated agreements as defined in s189. It followed that the bank had proved its claim and none of the Defendant's grounds of Defence had been made out.
Result: Judgment for the Claimant