Article by: Katie Wilkinson
The Court of Appeal’s decision in CFL Finance Ltd v Gertner  EWCA Civ 228, handed down in February 2021 decided the issue of whether Tomlin Orders are theoretically capable of extending ‘credit’ within the meaning of the Consumer Credit Act 1974, so that the settlement agreement is caught by the legislation. Confirming the decision of Marcus Smith J, the Court of Appeal agreed that Tomlin Orders were theoretically capable of extending “credit”.
The Defendant had guaranteed a loan provided by the Claimant to a company named Laser Trust Ltd (‘Laser Trust’). Laser trust defaulted on the loan and the Claimant brought a claim against the Defendant on the basis of the terms of guarantee. The claim was defended on various bases, but ultimately settled by way of Tomlin Order.
The Tomlin Order provided for the outstanding debt due under the guarantee to be repaid by by way of instalments, with all capital and interest becoming payable on default. The Defendant repaid £1.5 million (out of an agreed £1.7 million) pursuant to the terms of the Tomlin Order, but then defaulted. As a result, the entirety of the remaining capital and interest became due.
The Claimant issued a bankruptcy petition against the Defendant and at a subsequent hearing of the petition he argued that the Tomlin Order was unenforceable as a regulated credit agreement pursuant to the provisions of the CCA. The argument failed and a bankruptcy order was made.
On appeal ( EWHC 1241 (Ch)), Marcus Smith J set aside the bankruptcy order on the ground that the proceedings should have been stayed to allow Mr Gertner’s other creditors to consider a voluntary arrangement. In relation to the CCA point it was held that a Tomlin Order was theoretically an agreement capable of falling within the scope of the CCA, but that the Defendant’s agreement did not.
An appeal brought by CFL was against Marcus Smith J’s decision to set aside the bankruptcy order. The Defendant cross-appealed on the CCA point. CFL’s primary appeal was subsequently dismissed upon its failure to provide security for costs. The only effective appeal was therefore the CCA point brought by the Defendant.
The Court of Appeal was faced with two questions:
1. DOES AN AGREEMENT WITHIN A TOMLIN ORDER CONSTITUTE AN ‘AGREEMENT’ UNDER THE CCA?
The Court of Appeal decided that an agreement within a Tomlin Order could constitute a regulated credit agreement under the CCA.
2. DID THE SETTLEMENT AGREEMENT PROVIDE THE DEFENDANT WITH ‘CREDIT’?
The Court of Appeal set out that:
- Where a creditor allowed a debtor more time to pay, for no consideration, the CCA would not apply;
- An agreement which provided for the payment of additional interest, costs or the debtor giving up their defence would constitute consideration provided that the debtor genuinely believed that the defence had at least a fair chance of success;
- If a debtor genuinely disputed a claim on substantial grounds the CCA would not apply as the creditor would not be “deferring a debt”, but instead would be entering into a compromise with the debtor in relation to a claim which may or may not have succeeded;
- If a debtor does not dispute that a debt is owed, and the two parties enter into an agreement to defer payment of the debt, possibly by way of instalment payments, then if consideration has been given by the debtor, this will amount to the provision of ‘credit’ and would be a ‘consumer credit agreement’ under the CCA.
There has to exist a ‘debt’ in order for credit to be given. However, in circumstances where a debtor disputes that a debt is payable, but the grounds of dispute are clearly weak in law or in fact, creditors must take extra care to determine whether they are ‘deferring a debt’ by way of the Tomlin Order. If the Tomlin Order is found to be caught by the CCA and associated regulations, the agreement will be unenforceable as the creditor will not have (or is unlikely to have) the appropriate regulatory authorisations.