Case Preview: Southern Pacific Securities 05-2 Plc v Walker and another
11 Tuesday May 2010
A one-day hearing is due to take place this Thursday 13 May 2010 to decide the two issues on appeal from the Court of Appeal in this case: (1) the correct definition of an “amount of credit” under the Consumer Credit Act 1974 (the “Act“); and (2) whether the Act allows interest to be charged on a sum which is not the total amount of the credit, but is a charge for credit.
On 26 March 2005, the appellants, a husband and wife (“W“), applied for a loan from the respondent lender (“S“). The parties entered into a fixed sum credit agreement (the “Agreement“) on 20 April 2005, under which S loaned W £17,500, which was secured by a mortgage against W’s home. The Agreement was regulated by the Act and the supporting regulations, in particular the Consumer Credit (Agreements) Regulations 1983 (the “Regulations“).
Accordingly, in order to be enforceable, the Agreement had to contain all those terms prescribed by the Regulations (unless the court ordered otherwise). The Regulations provide that terms stating “the amount of credit” (Paragraph 2 of Schedule 6) and how the debtor is to discharge their obligations under the agreement (Paragraph 5 of Schedule 6) must be included in consumer credit agreements. The Agreement also needed to contain the rate of any interest on the credit (Paragraph 10 of Schedule 1 to the Regulations).
W fell into arrears of over £40,000 and S’s relevant legal costs were approximately £100,000. Pursuant to the Agreement and on the basis of the outstanding debt and legal costs, S claimed possession over W’s home, and a suspended possession order was granted by a District Judge Gilham on 21 June 2007.
This order was subsequently appealed in Chester County Court where, on 27 April 2009, Judge Halbert found that the Agreement was unenforceable and ordered the discharge of the charge on W’s home. This finding was made on the basis that the Agreement did not correctly state the amount of credit. Section 9(1) of the Act provides that “[in] this Act “credit” includes a cash loan, and any other form of financial accommodation”. The Agreement set out the “Amount of Credit” as £17,500, the “Broker Administration Fee” as £875 and the “Total Amount Financed” as £18,375. Judge Halbert reasoned that, as interest was payable on the higher figure, this figure was being treated as part of the amount of credit. He also reasoned that the Act prohibited interest on a charge for credit, separate from interest on the credit itself. Judge Halbert accepted the argument of W’s counsel that to charge interest upon “any element of a regulated advance is by definition to treat that element as credit” and interpreted section 9(4) of the Act in the light of this argument. Section 9(4) of the Act provides that “[f]or the purposes of this Act, an item entering into the total charge for credit shall not be treated as credit even though time is allowed for its payment”. Therefore, Judge Halbert considered that the Agreement was contrary to section 9(4) of the Act because charging interest on the charge for credit was to treat the charge for credit as credit itself, and, in accordance with Wilson v First County Trust Limited  EWCA Civ 278, the Agreement was declared unenforceable.
The issues to be considered
The two issues that are now before the Supreme Court were decided in the Court of Appeal  EWCA Civ 1218 as follows:
1. Definition of “amount of credit”
Mummery LJ disagreed with Judge Halbert and held that the “Amount of Credit” was correctly stated in the Agreement by the clear division and labelling of the different elements making up the “Total Amount Financed”, an expression which was not one used in the Act and was accordingly not prohibited by the Act.
2. Prohibition of interest on the charge for credit
Mummery LJ again disagreed with Judge Halbert and held that (a) interest was not a necessary feature nor an indicator of a credit amount and (b) section 9(4) of the Act did not mention interest and therefore did not prohibit it. Mummery LJ further reasoned that if legislative intention had been to prohibit interest on charges for credit, this would have been expressly dealt with, which it is not. Mummery LJ concluded that the £875 fee, although prohibited from being treated as “credit” under section 9(4) of the Act, was not prevented from accruing interest, nor did it convert into credit itself.
Sullivan LJ and Justice Owen agreed with Mummery LJ’s judgment, and S’s appeal was allowed and Judge Halbert’s order set aside.
W applied for permission to appeal against the decision of the Court of Appeal, which was granted by the Supreme Court on 3 December 2009. The appeal will be heard by Lords Walker, Brown, Mance and Clarke and Sir Dyson and its outcome will be of significance to the high volume of consumer credit litigation currently and potentially proceeding through the courts, as well as to the structure and content of consumer credit agreements going forward.