Following a recent high-profile county court ruling, District Judge Graeme Smith outlines the powers available to the court when dealing with regulated consumer agreement disputes


It is not often that a county court case is reported on the national television news. However, that happened on 28 October 2004 when Judge Howarth gave judgment in the case of London North Securities v Meadows, Lawtel, 25 November 2004.



The facts, stated by the judge to be unique, involved a liability that had risen from £5,750 (the amount advanced in 1989) to more than £300,000 by the date of the trial. The money was due pursuant to an agreement regulated under the Consumer Credit Act 1974 (CCA), and was secured by a charge over the home of Mr and Mrs Meadows.


The press coverage focused on the level of the amount claimed, the interest rate (APR of 34.9%) and the finding that the loan was an extortionate credit bargain. In fact, Judge Howarth's principal finding was that the amount of credit had been misstated and, therefore, the agreement was unenforceable. However, he went on to make findings on the other defences raised.


The case is a useful reminder of the powers available to the court when considering the enforcement of regulated agreements, particularly those that are secured on land.


Regulated agreements do not have the protection of section 36 of the Administration of Justice Act 1970, which permits the court to adjourn, stay, suspend or postpone the date for delivery of possession of a mortgaged property where it appears that the mortgagor is likely to be able to pay the sums due within a 'reasonable period'. Section 38A of the Act provides that section 36 shall not apply to regulated agreements. These are generally agreements for £25,000 or less, subject to certain exemptions set out in section 16 of the CCA and the Consumer Credit (Exempt Agreements) Order 1989.


In particular, agreements for the purchase or improvement of houses secured by a mortgage and provided by a bank or building society are exempt. Borrowers under regulated agreements must rely on the court's powers under the CCA. A lender requires a court order before possession can be obtained under section 126 of the CCA.


Assuming the agreement is properly executed, what powers does the court have? First, the court may re-open an extortionate credit bargain, and has a wide power to vary the terms of the agreement to reduce the amount payable to that which is 'fairly due and reasonable' (section 139 of the CCA). This power applies to all credit agreements where the borrower is an individual, not just to regulated agreements.


To be 'extortionate', the agreement must require payments that are 'grossly exorbitant', or 'otherwise grossly contravene ordinary principles of fair dealing' (section 138(1) of the CCA).


The court will have regard to interest rates prevailing at the time the agreement was made and factors including the age, experience, business capacity and state of health of the borrower, any financial pressure suffered by the borrower at the time the agreement was made, the lender's relationship to the borrower, and the degree of risk accepted by the lender having regard to the value of the security.



In London North Securities, Judge Howarth described the appropriate test as being 'very high', saying 'if the agreement is simply exorbitant but not grossly exorbitant, it is not extortionate'. Having heard expert evidence, he concluded that 34.9% APR was not unusual in the non-status market in 1989. However, he went on to consider the terms of the agreement entitling the lender to charge the same rate of interest on costs and charges, and to compound the interest. He concluded that this combination of factors meant that the agreement was extortionate.



Pursuant to Paragon Finance plc v Nash [2001] EWCA Civ 1466; [2002] 1 WLR 685, the court will consider the circumstances at the time the agreement was made, and so will not take into consideration changes that may occur later, such as a variation in the interest rate. Thus the charging of a concessionary rate may not prevent the agreement from being extortionate, but it may affect the remedy (if any) that the court gives.



The court may order the lender to repay monies paid under the agreement, although this is subject to a six-year limitation period. Otherwise, the limitation period for re-opening the agreement is 12 years from the date of the agreement (see Rahman v Sterling Credit Ltd [2001] 1 WLR 496). The borrower must make an application in proceedings brought by the lender or by separate proceedings; the court has no power to make an order in the absence of an application.



Second, the court may make a 'time order' pursuant to section 129 of the CCA, providing for 'the payment of sums owed by such instalments and at such times as the court thinks reasonable having regard to the borrower's means'.



However, there are important restrictions on this power. It can only relate to sums 'owed' (which, when possession has been sought, the Court of Appeal in Southern & District Finance plc v Barnes [1995] The Times, 19 April, held meant the whole amount under the agreement, not merely the arrears). The power to include sums that fall due later is restricted to hire purchase and conditional sale agreements. The court in Barnes said time orders should normally only be made for a specific period of time, to address the borrower's temporary financial difficulty.



However, in Equity Home Loans v Lewis, heard with Barnes, the court upheld a time order that completely restructured the payment of the loan.



In London North Securities, the judge indicated he would have made a time order of three to four years, including interest at a 'reasonable' rate. This illustrates the court's third power, under section 136, which is to include in an order 'such provision as it considers just for amending any agreement or security in consequence of a term of the order'. As the wording indicates, this power can only be exercised 'in consequence' of an order made under some other provision of the CCA; it is not a free-standing power.



The court has a wide power under section 135 to make conditional or suspended orders. It appears that this includes the power to suspend beyond the original period of the agreement (except in the case of possession of goods under a consumer hire agreement).


The provisions of the CCA are complex, but they do provide extensive powers which defaulting borrowers can ask the court to exercise in their favour.



District Judge Graeme Smith sits at Liverpool County Court