When might a settlement agreement, which provides time to pay the sums made payable within it, be caught by Consumer Credit Act 1974, as a s.8 regulated credit agreement (or s.140 credit agreement)?

This issue will be considered in light of:

(1) CFL Finance Ltd v Laser Trust (also known as CFL Finance Ltd v Gertner) [2021] EWCA Civ 228; [2021] 4 All ER 717; [2021] Costs L.R. 231 ('CFL 288'), Court of Appeal (David Richards LJ; Newey LJ; Popplewell LJ), wherein, only Newey LJ gave a substantive judgment; and

(2) Consumer Credit Act 1974 ('CCA').

A few further authorities are provided at the end. 

This article will assume that: (a) in the underlying claim, the claimant alleged the defendant owed the claimant some money; (b) in the settlement agreement reached, embodied in the form of a Tomlin Order (with terms in the attached schedule), the defendant agreed to pay the claimant a sum of money, not immediately, but somehow deferred, whether the whole was deferred, or the whole was payable in instalments, the instalments payable over time.

SUMMARY 

The central decision in CFL 288 was concisely set out by Newey LJ, at paragraph 45, wherein, he said:

'Drawing some of the threads together, it seems to me that the following can be said:

i) The CCA does not apply to an agreement by which a creditor agrees for no consideration to allow a debtor more time to pay;

ii) A debtor will not have provided consideration merely by giving up a defence which he himself recognised to lack even a fair chance of success. In the absence, therefore, of other consideration, the CCA cannot be applicable;

iii) The CCA does not apply either to an agreement by which a "creditor" and "debtor" compromise a claim which the "debtor" genuinely disputed in its entirety on substantial grounds, provided at least that there is no question of the agreement defeating the application of the CCA to the original claim. In that situation, it cannot be said whether the "debtor" in fact owed the "creditor" anything before the compromise was agreed. That being so, the compromise cannot be considered to defer a debt even if it provides for the "debtor" to make payments in the future. The "debtor" must be regarded as undertaking the obligations for which the compromise provides not to defer a debt but in exchange for the "creditor" giving up a claim that might or might not have been well-founded;

iv) If, in contrast, a debtor does not dispute that he is indebted to the creditor and the two enter into an agreement pursuant to which, for consideration, the creditor agrees to accept payment by instalments, it appears clear that the debtor is provided with "credit" within the meaning of the CCA and, hence, that the agreement is a "consumer credit agreement" under s 8 of the CCA.'

The Court of Appeal in CFL 288 declined to locate the exact dividing line however, holding that it was: (a) not necessary; and (b) they had not had the benefit of adversaial argument on the point (paragraph 52).

CFL 288 - THE FACTS

It might be helpful to start with setting out some facts in CFL 288.

2 Phases

There were 2 phases to consider:

(a) underlying proceedings, resulting in a settlement agreement ('SA') - contains in a schedule to a Tomlin Order; and 

(b) enforcement of that SA, following non-compliance with the terms in the SA; 

Underlying Proceedings

The underlying proceedings involved a tripartite situation:

(1) lender/creditor CFL Finance Ltd ('CFL')

(2) borrower/principal debtor ('Lanza')

(3) guarantor ('Mr Gertner'). The guarantee contain a limit, of '...£3,500,000 … plus all interest and costs' (paragraph 2)

Lanza defaulted; CFL issued proceedings against Mr Gertner in November 2010 for: (a) £1.7 million; plus (b) interest (c.£1.8m) (paragraph 3). 'Mr Gertner disputed CFL's claim in its entirety in a defence dated 15 July 2011.' (paragraph 4). 'Mr Gertner alleged that CFL's then chief executive officer had entered into the loan to Lanza without due authority and that, as a result, "the Loan is irrecoverable and cannot be demanded either from Lanza or from the defendant".' (paragraph 4). 4 further defences were deployed (paragraph 4).

On 5 August 2011, CFL applied for summary judgment against Mr Gertner, but on September 26 the litigation was settled by way of a Tomlin order (paragraph 5). In the usual way, the Tomlin Order consisted of: (a) order by consent, staying the underlying proceedings (save for enforcement of the terms of the SA in the schedule to the Tomlin Order; and (b) a schedule to the Tomlin Order, containing the settlement terms (i.e. the SA). The SA, in short, provided that Mr Gertner agreed to pay CFL £2,000,000, as follows:

(a) £325,000 within 1 month; and

'(b) £1,675,000 by 8 quarterly instalments of £209,375 each and commencing three months after the signing of this [SA] with such payments being made to CFL as follows' 

The first of the 8 quarterly instalments was due on 26 December 2011; the last on 26 September 2013. 

The SA contained an accelerated payment clause (para. 5). 

'Mr Gertner paid sums totalling just over £1.5 million under the [SA], but he none the less failed to comply by any means fully with para 2 with the result that para 5 was applicable according to its terms.' (paragraph 6)

Enforcement of that SA

On 11 September 2015, CFL served a statutory demand on Mr Gertner, for over £11 million, founded on non-compliance with the SA. On 6 October 2015, CFL presented a bankruptcy petition. On 15 July 2019, ICCJ Briggs gave judgment in CFL's favour and made a bankruptcy order against Mr Gertner. Mr Gertner (and an opposing creditor), successfully appealed, to Marcus Smith J, the bankruptcy order. Marcus Smith J set aside the bankruptcy order and stayed the petition pending further order (paragraph 8). However, in reaching this decision, Marcus Smith J rejected appeal arguments that debt/SA was unenforceable because it was a regulated agreement under the Consumer Credit Act 1974 ('CCA'). CFL appealed Marcus Smith J's decision, but also, Mr Gertner cross-appealed. For reasons not relevant, CFL's appeal fell away, leaving only Mr Gertner's cross appeal (paragraph 10). 

In the Court of Appeal, only Mr Gertner was represented; CFL did not attend (leaving the Court of Appeal without having heard adversarial argument, from both sides, on the issue before it)(paragraph 11). 

THE LAW

Statutory Framework 

Under the heading 'The Statutory Framework', Newey LJ in CFL 288, at paragraphs 12 to 20, set out the CCA statutory framework (to the extent material):

'The CCA makes extensive use of the terms "consumer credit agreement" and "regulated agreement". Section 8(1) explains that a "consumer credit agreement" is "an agreement between an individual ('the debtor') and any other person ('the creditor') by which the creditor provides the debtor with credit of any amount" and during the material period s 8(2) provided for a consumer credit agreement to be a "regulated agreement" unless it was an "exempt agreement" under ss 16, 16A, 16B or 16C. The only exemption that it is relevant to note for present purposes is that then conferred by s 16B, which related to agreements "entered into by the debtor or hirer wholly or predominantly for the purposes of a business carried on, or intended to be carried on, by him" and under which a creditor was to provide credit exceeding £25,000 or a hirer was to make payments exceeding £25,000.

The meaning of "credit", a key term, is the subject of s 9 of the CCA. Section 9(1) states that "credit" "includes a cash loan, and any other form of financial accommodation".

Section 11 of the CCA divides regulated agreements into "restricted-use credit agreements" and "unrestricted-use credit agreements". By s 11(1), a "restricted-use credit agreement" is:

"a regulated consumer credit agreement –

(a) to finance a transaction between the debtor and the creditor, whether forming part of that agreement or not, or

(b) to finance a transaction between the debtor and a person (the 'supplier') other than the creditor, or

(c) to refinance any existing indebtedness of the debtor's, whether to the creditor or another person,

and 'restricted-use credit' shall be construed accordingly."

"Finance" is defined in s 189 to mean "to finance wholly or partly", and an example of a restricted-use credit agreement is given as example 13 in Schedule 2, which s 188 stipulates is to have effect for illustrating the use of terminology employed in the Act. Example 13 reads as follows:

"Facts. Q, a debt-adjuster, agrees to pay off debts owed by R (an individual) to various moneylenders. For this purpose the agreement provides for the making of a loan by Q to R in return for R's agreeing to repay the loan by instalments with interest. The loan money is not paid over to R but retained by Q and used to pay off the moneylenders.

Analysis. This is an agreement to refinance existing indebtedness of the debtor's, and if the loan by Q does not exceed £5,000 is a restricted-use credit agreement falling within s 11(1)(c)."

Different species of "restricted-use credit agreements" and "unrestricted-use credit agreements" are termed either "debtor-creditor-supplier agreements" or "debtor-creditor agreements" by ss 12 and 13 of the CCA. Section 13 provides:

"A debtor-creditor agreement is a regulated consumer credit agreement being -

(a) a restricted-use credit agreement which falls within s 11(1)(b) but is not made by the creditor under pre-existing arrangements, or in contemplation of future arrangements, between himself and the supplier, or

(b) a restricted-use credit agreement which falls within s 11(1)(c), or

(c) an unrestricted-use credit agreement which is not made by the creditor under pre-existing arrangements between himself and a person (the 'supplier') other than the debtor in the knowledge that the credit is to be used to finance a transaction between the debtor and the supplier."

As the law stood in 2011, s 21 of the CCA stated that a licence was required in order to carry on, among other things, a "consumer credit business". By s 40, a regulated agreement was not enforceable against the debtor by a person acting in the course of a consumer credit business if the person was not licensed. Further, a regulated agreement made by a creditor in the course of a consumer credit business at a time when he did not have a licence was enforceable against the debtor only if the Office of Fair Trading made an order under s 40(2). "Consumer credit business" meant, by s 189, "any business being carried on by a person so far as it comprises or relates to (a) the provision of credit by him, or (b) otherwise his being a creditor, under regulated consumer credit agreements".

Sections 60–66 of the CCA deal with the making of regulated agreements. Sections 61–64 lay down requirements which must be satisfied for a regulated agreement to be properly executed, and s 65 states that an improperly-executed regulated agreement is enforceable against a debtor on an order of the court only.

Part VI of the CCA, comprising ss 75–86, is concerned with "matters arising during currency of credit or hire agreements". At the relevant times, s 77A obliged the creditor under a regulated agreement for fixed-sum credit to give the debtor periodic statements and barred the creditor from enforcing the agreement during a period of non-compliance. Where a creditor under a regulated agreement fails to give the debtor notice of arrears in accordance with s 86B, enforcement against the debtor is likewise precluded during the period of non-compliance.

Section 140A of the CCA, making provision in respect of "unfair relationships between creditors and debtors", is not limited to regulated agreements but extends to "credit agreements" generally. By s 140C, a "credit agreement" is "any agreement between an individual (the 'debtor') and any other person (the 'creditor') by which the creditor provides the debtor with credit of any amount".

Section 173 of the CCA forbids contracting-out.'

The Issues 

Newey LJ identified in the (cross) appeal, 2 issues:

i) Does the CCA apply to the schedule to a Tomlin order?

ii) Did the Settlement Agreement provide Mr Gertner with "credit"?

Issue i) relates to an issue of law; issue ii) to the facts in the CFL 288 underlying proceedings, specifically. 

Does the CCA Apply to the Schedule to a Tomlin Order?

A couple of initial points were made:

(1) A Tomlin Order consists of the Court Order, and the attached schedule. In the attached schedule, are the terms of the settlement agreement/compromise [the author would add, the compromise/settlement is the whole Tomlin Order (both parts), since it is the global (i.e. all parts) Tomlin Order that the parties agree will constitute the settlement their dispute];

(2) the CCA bites on agreements. The Court Order part of a Tomlin Order, is, to state the obvious, a court order. The CCA does not bite/apply to the Court Order part of the Tomlin Order, including terms embodied in the Court Order. 

Newey LJ in CFL 288 said, at paragraph 26:

'The CCA bites on agreements. Thus, under s 8 of the CCA a "regulated agreement" or any other "consumer credit agreement" requires, as the terms suggest, "an agreement between an individual … and any other person". That being so, it was common ground before Marcus Smith J that the CCA would not apply to terms simply embodied in a court order, and [counsel for Mr Gertner] also accepted this before us.'

(2) The Tomlin Order involves a contract; the terms in the schedule to the Tomlin Order are an agreement between the parties.

Newey LJ in CFL 288 said, at paragraph 26:

'...a Tomlin order involves a contract. As McCombe LJ explained in Watson v Sadiq [2013] EWCA Civ 822 at paras 49–50, "the terms of the schedule to an order in Tomlin form amount to a contract between the parties" and the schedule "is not an order of the court at all". In the same vein, Hamblen LJ observed in Vanden' Recycling Ltd v Kras Recycling BV [2017] EWCA Civ 354; [2017] CP Rep 33 at para 45, "a consent order is an order of the court whilst the scheduled terms to a Tomlin order are a contractual agreement". Although the order itself will be approved by the judge making it, the terms contained in the schedule "are not something for approval by a judge" and "are not ordered by the court and are not enforceable without a court order" (see the White Book at 40.6.2).'

Pausing there, Newey LJ commented, at paragraph 26, that:

'On the face of it, therefore, there is nothing to prevent the Settlement Agreement being a "regulated agreement" if it involved the provision of "credit" to Mr Gertner by CFL.'

Newey LJ recorded that Marcus Smith J had said that 

'...he could "see no reason why the fact that a contractual agreement is scheduled to a Tomlin order would cause the Consumer Credit Act to cease to apply if it otherwise did apply".' (paragraph 30)

To this, Newey LJ said, 'I agree.' (paragraph 30)

In doing so, Newey LJ rejected ICC Judge Briggs': (a) approach of seeking to identify the 'essential character' of the Settlement Agreement; and (b) reliance on an extract from Goode, Consumer Credit Law and Practice, paragraph 24.81 (and a speech of Lord MacDermott)[6]. Newey LJ said, at paragraph 30:

'There is no analogy with the rent agent or solicitor whom Lord MacDermott had in mind in the passage quoted in para 24.81 of Goode, and, if the Settlement Agreement operated to defer debt, the deferment did not "merely [arise] incidentally from the parties' accounting arrangements". Neither, in my view, does it help to seek the "essential character" of the Settlement Agreement. If the Settlement Agreement provided "credit" within the meaning of the CCA, I do not see why the fact that it served to settle the proceedings CFL had brought against Mr Gertner should preclude application of the CCA . The present case is very different from McMillan Williams v Range, where it could not be said when the contract at issue was made whether the defendant would ultimately owe anything and the claimants' payments were sensibly seen as remuneration for services.' 

Newey LJ stated that 'The key question, accordingly, is whether the Settlement Agreement involved the provision of "credit" to Mr Gertner by CFL.' (paragraph 31)

Did the Settlement Agreement Provide Mr Gertner with "Credit"?

CCA statutory definition of 'credit'

What is the statutory meaning of 'credit'? 

'...by s 9(1) of the CCA "credit" "includes a cash loan, and any other form of financial accommodation".' (paragraph 32)

On the facts in CFL 288, Mr Gertner contended:

(a) not that the Settlement Agreement provided for him to receive a "cash loan"; rather, that

(b) the Settlement Agreement involved the provision to him of a "form of financial accommodation" (paragraph 33)

Essence of credit

As to this, Newey LJ in CFL 288 said, at paragraph 34:

'The "essence of credit", as is pointed out in para 24.7 of Goode, Consumer Credit Law and Practice, is debt deferment. As to when debt is regarded as deferred, Goode advances at para 24.25 the general principle that "debt is deferred, and credit extended, whenever the contract provides for the debtor to pay, or gives him the option to pay, later than the time at which payment would otherwise have been earned under the express or implied terms of the contract". In Dimond v Lovell [2002] 1 AC 384, Sir Richard Scott V-C said in para 57 of his judgment in the Court of Appeal that the principle propounded in Goode "correctly expresses the test for identifying 'credit' for the purposes of the Act of 1974". When the case reached the House of Lords, Lord Hobhouse commented at 405 that the Goode test "will not always be a satisfactory one to apply", going on to observe:

"Many commercial agreements contain provisions which could be said to postpone (or advance) the time at which payment has to be made. Frequently, there will be reasons for this other than the provision of credit. Payment may be postponed as security for the performance of some other obligation by the creditor. Payments may be made in advance of performance in order to tie the paying party into the commercial venture. Payment provisions may like any other aspect of the transaction be part of its commercial structure for the division of risk, for the provision of security or simply the distribution of the commercial interest in the outcome of the transaction." 

However, Lord Hoffmann, with whom Lords Browne-Wilkinson, Nicholls and Saville agreed in this respect, quoted the Goode formulation at 394 without voicing any disapproval of it before holding that the agreement at issue provided "credit" and so was a regulated agreement within the meaning of the CCA. In Dimond v Lovell, a person whose car had been damaged as a result of another's negligence hired a car while her own was being repaired on the basis that the hire company would have the conduct of any litigation necessary to recover damages in respect of the accident and payment of the hire charges would be postponed until any such claim had been concluded. Lord Hoffmann said at 395:

"In my opinion there was no misuse of language when the contract described clause 5(i) as a credit facility. The only obligation of 1st Automotive [i.e. the hire company] under the agreement was to provide the vehicle. In the absence of credit, it would have been entitled to payment during or at the end of the hire. All the provisions about the pursuit of the claim were express or implied conditions that deferred the right to recover the hire and therefore constituted a granting of credit."

Credit and refinancing transactions

Newey LJ in CFL 288 said, at paragraphs 35:

'There is no doubt that the term "credit" extends to refinancing transactions. That is clear in the light of s 11(1)(c) of the CCA and example 13 in Schedule 2, which show that an agreement "to refinance any existing indebtedness of the debtor's, whether to the creditor or another person" can be a "regulated consumer credit agreement" and a "restricted-use credit agreement". It is to be noted, moreover, that s 11(1)(c) refers to the refinancing of "any existing indebtedness" (emphasis added). It is not restricted to the refinancing of indebtedness within the scope of the CCA.' [bold in italics in original]

Mere forbearance on an underlying claim, does not attract CCA application

Newey LJ in CFL 288 said, at paragraphs 36:

On the other hand, mere forbearance will not of itself attract the CCA. As noted above, a "consumer credit agreement" is an agreement by which credit is provided and so, for the CCA to apply, debt deferment must take place pursuant to an agreement. More than that, it seems to me that Goode must be correct when it states in para 24.24 that, "Even if the supplier agrees to a delay in payment, there is no credit agreement unless he receives consideration for consenting to the delay, as by stipulating for interest". Absent consideration, a creditor's agreement to delay could not effect a contractual variation and would be binding on the creditor, if at all, only by way of promissory estoppel. That being so, it would seem to avail a debtor nothing to deny the enforceability of the agreement to delay: the contractual liabilities would remain. The upshot, in my view, is as stated in para 24.24 of Goode:

"[I]f a person allows delay in settlement of a debt without binding himself to grant time to the debtor, there is no agreement for credit. This is so whether the delay in the demand for payment arises from inadvertence or inactivity – as where the supplier is simply dilatory in sending out his accounts – or is an intentional indulgence, as where the supplier agrees to allow further time to pay or to accept payment by instalments. Only where this deferment is not just an indulgence but contractual is there an agreement for credit; and, again, to establish a contract it is necessary to show that the supplier received some consideration for agreeing to the delay."' [bold added]

A promise to forgo either a claim or a defence can constitute consideration

Newey LJ in CFL 288 said, at paragraph 37:

'A promise to forgo either a claim or a defence can, of course, constitute consideration (see e.g. Chitty on Contracts, 33rd ed., at 4-048). The principle extends to the renunciation of a claim which was in fact invalid "so long as it was a 'reasonable claim' (i.e. one made on reasonable grounds) which was in good faith believed by the party forbearing to have at any rate a fair chance of success" (Chitty on Contracts , at 4-053). Thus, in Cook v Wright (1861) 1 B & S 559 Cockburn CJ, Wightman J and Blackburn J said at 569 that "unless there was a reasonable claim on the one side, which it was bonâ fide intended to pursue, there would be no ground for a compromise" and in Callisher v Bischoffsheim (1870) LR 5 QB 449, Cockburn CJ said at 452:

"Every day a compromise is effected on the ground that the party making it has a chance of succeeding in it, and if he bonâ fide believes he has a fair chance of success, he has a reasonable ground for suing, and his forbearance to sue will constitute a good consideration."

Likewise, a defendant's abandonment of a defence advanced on reasonable grounds which he believed to have a fair chance of success must amount to consideration. Moreover, it can be seen from Simantob v Shavleyan [2019] EWCA Civ 1105 that forbearance of a defence that is later held to have had no real prospect of success under the test in Swain v Hillman [2001] 1 All ER 91 is capable of amounting to good consideration. On the other hand, the giving up by a defendant of a defence which he himself recognises to lack even a fair chance of success cannot of itself constitute consideration.'

When relevant agreement made, not known whether there will be debt

'Credit' is not provided by an agreement (we are here, not confined to settlement agreements), where, when the agreement is made, it is unknown whether the 'debtor' will ultimately ow anything. Newey LJ in CFL 288 said, at paragraph 38:

'A further point is that there is authority indicating that there is no provision of "credit" if, at the time the relevant agreement is made, it is not known whether the "debtor" will ultimately owe anything. In McMillan Williams v Range [[2004] EWCA Civ 294; [2004] 1 W.L.R. 1858]], the Court of Appeal endorsed the principle stated in the headnote of Nejad v City Index Ltd [2001] GCCR 2461:

"Where it is completely uncertain whether the arrangements between parties will give rise to a debt at all, there is no 'credit' merely because those arrangements postpone any obligation to pay until such time as the future possible indebtedness has crystallised."

...moreover, Ward LJ went on to say in para 16 of his judgment:

"At the time this agreement was made it was not known whether there would be a surplus or a shortfall when the calculation came to be made at the end of two years or on the earlier termination of the agreement. Thus, as it seems to me, one was unable to tell at the material time whether the supply of the benefit, assuming the monthly advances to be such a benefit, attracted a contractual duty of repayment in money which was being significantly deferred. Unless there was a debt, there was no credit."'

(Newey LJ then considered the case of Holyoake v Candy [2017] EWHC 3397 (Ch), but ultimately held (paragraph 44) it related to a different situation. Holyoake involved the underlying claim being subject to the CCA, and unscrupulous creditors attempting to use compromises as a way to dodge the strictures of the CCA i.e. using the settlement agreement to defeat the application of the CCA to the original claim)

The upshot of the above, was that, for CCA to bite, the Settlement Agreement must be both:

(1) an 'agreement', which, to be contractually binding, must have involved an exchange of consideration; and where the consideration is said to be giving up a position in a dispute, consideration is only given if the person/party giving up a position in a dispute, is giving up, either:

(a) a reasonable claim, which he bonâ fide intended to pursue; or

(b) a defence, advanced on reasonable grounds, which the defendant believed to have a fair chance of success (even if objectively, it is later held to have had, no real prospect of success); and

(2) 'credit' - typically a deferment of debt. Refinancing transactions can involve a debt deferment. 

Newey LJ then set out, in a key paragraph, how he saw the law, at paragraph 45. Before setting out paragraph 45, it is relevant to know that, at paragraph 50 to 52, there is further consideration of where the dividing line exactly is:

'Drawing some of the threads together, it seems to me that the following can be said:

i) The CCA does not apply to an agreement by which a creditor agrees for no consideration to allow a debtor more time to pay;

ii) A debtor will not have provided consideration merely by giving up a defence which he himself recognised to lack even a fair chance of success. In the absence, therefore, of other consideration, the CCA cannot be applicable;'

Pausing there, as will be apparent, paragraphs 45(i) and 45(ii) above relate to whether there is an 'agreement' (see point (1) above). Note, consideration can come from forgoing a defence, but it can also be provided, in other ways, such as paying (some of) the 'creditor's costs of the underlying claim. 

Continuing paragraph 45:

'iii) The CCA does not apply either to an agreement by which a "creditor" and "debtor" compromise a claim which the "debtor" genuinely disputed in its entirety on substantial grounds, provided at least that there is no question of the agreement defeating the application of the CCA to the original claim. In that situation, it cannot be said whether the "debtor" in fact owed the "creditor" anything before the compromise was agreed. That being so, the compromise cannot be considered to defer a debt even if it provides for the "debtor" to make payments in the future. The "debtor" must be regarded as undertaking the obligations for which the compromise provides not to defer a debt but in exchange for the "creditor" giving up a claim that might or might not have been well-founded;

iv) If, in contrast, a debtor does not dispute that he is indebted to the creditor and the two enter into an agreement pursuant to which, for consideration, the creditor agrees to accept payment by instalments, it appears clear that the debtor is provided with "credit" within the meaning of the CCA and, hence, that the agreement is a "consumer credit agreement" under s 8 of the CCA.'

As will be apparant from paragraph 45(iii) and 45(iv), when analysing whether 'credit' has been granted by the Settlement Agreement, such that the CCA will bite, consideration must be given to the the underlying claim/defence, and the merits of any defence to the underlying claim. A Settlement Agreement only involves the granting of 'credit' (even when payments under the settlement agreement are spread out over time), where the underlying claim, was not genuinely disputed in its entirety on substantial grounds. To put this the other way around, the CCA will not bite, because no 'credit' was granted, where the underlying claim was genuinely disputed in its entirety on substantial grounds. Where, in the underlying proceedings, the claim was genuinely disputed in its entirety on substantial grounds, there is some doubt about whether any money was originally owed to the party that became the creditor under the Settlement Agreement. That 'some doubt' is enough to mean, that the Court views the underlying proceedings as not involving credit/debt. On that basis, in the underlying claim, the 'debtor' did not owe the 'creditor' any money, so, if there was no credit/debt, in the underlying proceedings, then there cannot have been a deferment of that debt, by the Settlement Agreement. So there was no 'credit' granted by the Settlement Agreement. 

Taking the need for, and the circumstances when there will be, both: (a) consideration for 'agreement'; and (b) 'credit', for the CCA to bite, together, this generates a very narrow set of circumstances, when the CCA will bite a Settlement Agreement. The circumstances when the CCA will bite are:

(1) the settlement agreement was an 'agreement' - necessitating, for contractually binding agreement, the exchange of consideration. And there is only consideration from the defendant in the underlying claim, where the underlying claim defendant had had, a defence, advanced on reasonable grounds, which the defendant believed to have a fair chance of success (even if objectively, it is later held to have had, no real prospect of success); and

(2) the underlying claim cannot have been genuinely disputed in its entirety on substantial grounds; 

'genuinely disputed' and 'the defendant believed to have a fair chance of success' seem centred on the same thing, the defendant's belief in the fair merits of the defence. The difference might be around the objective position of the merits and 'substantial grounds'. If objectively, there was no substantial grounds to the defence, yet, subjectively: (a) the defendant had 'genuinely disputed' the entirety of the claim; and 'the defendant believed to have a fair chance of success', this might be a circumstance, when the CCA would bite. 

Scenario: Consideration given (in some other way) + defence lacked substance

Newey LJ posed himself the question:

'What then is the position where a "creditor" and "debtor" enter into an agreement settling a claim to recover a debt where the "debtor" has denied any liability, the grounds of defence lack substance but the "creditor" nevertheless receives consideration in some way?'

So, to put the latter two, the other way around, what is the position where:

(a) the 'creditor' received (a different type of) consideration, for the purposes of constituting a settlement 'agreement' (so there was a settlement agreement); and 

(b) the underlying claim defence, lacked substance;

As to (a), Newey LJ noted that, in CFL 288, '...Mr Gertner undoubtedly gave consideration under the Settlement Agreement since he undertook to pay £50,000 as a contribution to CFL's costs.' (paragraph 46). So in CFL 288, there was an 'agreement'.

Here, in essence, Newey LJ was asking himself whether Marcus Smith J's analysis had been correct, where Marcus Smith J had taken the view, no matter how unmeritorious the defence in the underlying claim had been, the Settlement Agreement was a new set of obligations, and so there was no 'credit' being given, for CCA purposes. As will be seen, Newey LJ held that Marcus Smith J was wrong on this point. Newey LJ said that, there must be a line, below which, the merits of the underlying claim defence, had so poor, as to mean, in essence, there was a debt due to the 'creditor', prior to the settlement agreeement, which was then deferred by the terms of the settlement agreement (and so, 'credit' was given by the settlement agreement terms). 

At paragraphs 47 to 50, Newey LJ said:

'Marcus Smith J's analysis implies, I think, that the CCA could not apply to any contractually binding settlement agreement, regardless of whether the "debtor's" defence had substance. He thought it decisive that any obligation that Mr Gertner might have had to pay under his guarantee had been extinguished and replaced by a fresh promise under the Settlement Agreement and added that the "position is exactly the same irrespective of the strength or weakness of CFL's claim under the guarantee". That view might be said to chime with the desirability of upholding bona fide compromises to which there was reference in Binder v Alachouzos. 

On the other hand, where a creditor agrees to accept instalments in place of a claim for immediate payment to which there was, in truth, no defence, there is a common sense case for considering a debt to have been deferred and so the debtor to have been provided with "credit". Further, the approach favoured by Marcus Smith J runs the risk of undermining the protection afforded to debtors by the CCA . His reasoning would seem to mean that a debtor could lose protection which he would otherwise have enjoyed under the CCA by asserting any defence, however hopeless, and, presumably, by doing so in preissue correspondence rather than a formal defence. There could even be cases such as were postulated in one of Mr Gertner's skeleton arguments, where "unscrupulous" creditors "avoid the CCA protections altogether by commencing proceedings as soon as a debt is not paid and then swiftly compromising proceedings by a settlement agreement" which "would be immune from legal challenge under the CCA no matter how extortionate its terms were".

It is worth, I think, mentioning a somewhat analogous situation. In the context of bankruptcy and winding-up proceedings, the court looks to whether the alleged debt is "disputed on grounds which appear to the court to be substantial" (see rule 10.5(5)(b) of the Insolvency (England and Wales) Rules 2016 ), the subject of a "genuine triable issue" (see e.g. Markham v Karsten [2007] EWHC 1509 (Ch), at para 45 ) or "disputed in good faith on substantial grounds" (see e.g. Revenue and Customs Commissioners v Changtel Solutions UK Ltd [2015] EWCA Civ 29; [2015] 1 WLR 3911, at para 36 ). Where the debt on which a winding-up petition is founded is so disputed, the petitioner is not viewed as a "creditor". Thus, in Stonegate Securities Ltd v Gregory [1980] Ch 576 Buckley LJ said at 580:

"In my opinion a [winding-up] petition founded on a debt which is disputed in good faith and on substantial grounds is demurrable for the reason that the petitioner is not a creditor of the company within the meaning of s 224(1) [of the Companies Act 1948 ] at all, and the question whether he is or is not a creditor of the company is not appropriate for adjudication in winding up proceedings."

My own conclusion, in the end, is that Marcus Smith J was mistaken in thinking that the CCA could not apply to the Settlement Agreement "irrespective of the strength or weakness of CFL's claim under the guarantee". It seems to me that there must come a point at which the existence of a debt is sufficiently clear that an agreement providing for future payment will confer "credit" within the meaning of the CCA regardless of whether the debtor has denied that anything is due. Suppose, for example, that a creditor chases for a payment, that the debtor tries to buy time by putting forward a defence that he knows to be obvious nonsense, and that the parties then enter into an agreement under which the debtor undertakes to pay at a future date. The agreement would, I think, fairly be viewed as deferring debt and so providing "credit", and that would be so whether the agreement is made in advance of any litigation or only after the creditor has issued proceedings. In such a case, the CCA should apply to the same extent as if the debtor had not gone through the motions of disputing liability. The debtor's relinquishment of his "defence(s)" would not of itself have constituted consideration and, in a similar way, the settlement agreement should be seen as operating to defer an existing debt.'

Exact location of the dividing line 

Returning to the issue of: where exactly is the dividing line: (a) Newey LJ said this was not an issue upon which it was necessary for the Court of Appeal in CFL 288 to conclusively determine - being conscious it had not received adversarial argument from both sides on this; and so, (b) ultimately, Court of Appeal in CFL 288 did not determine the point. Newey LJ only set out some observations, which were given, at paragraphs 51 and 52:

'There is room for argument as to quite where the dividing line is between a debt (in relation to which the CCA could apply) and a mere claim (to which it could not). One possibility is that a debt should be considered to exist when the only defence advanced is clearly invalid in law. Arguably, Parliament might be expected to have had in mind a purely objective test of that kind when enacting the CCA. On the other hand, there is also, to my mind, a case for saying that it is enough to prevent the CCA from applying to a settlement agreement that the debtor believed a defence he was advancing to have substance. Such an approach could be said to reflect the desirability of upholding bona fide compromises. On this footing, a contractually binding settlement agreement under which a creditor agrees to future payment should be regarded as providing for the debtor to be given "credit" within the meaning of the CCA where the debt was disputed only on grounds which (a) the debtor did not himself believe to have even a fair chance of success and (b) did not objectively have a real prospect of succeeding. Very often, of course, it might be hard for a debtor to deny that defences which he had himself put forward had had substance. That could obviously be the case where, for example, a defence had turned on facts within the debtor's own knowledge and the debtor had confirmed his belief in the relevant facts by appending a statement of truth to a defence or by saying so in a witness statement. If, however, it could be seen that there was no serious defence to a debt claim, in the sense that no defence that the debtor was advancing had a real prospect of succeeding or was believed by the debtor to have a fair chance of success, debt would be regarded as deferred, and the debtor given credit, if a settlement agreement for which there was consideration provided for some or all of the claim to be paid only in the future.

Not having had the benefit of adversarial argument, I do not think we should express a concluded view on exactly where the dividing line lies unless that is necessary to resolve Mr Gertner's cross-appeal, and I do not think it is.' 

Popperwell LJ simply agreed (paragraph 57) with Newey LJ's judgment. David Richards LJ also agreed with Newey LJ's reasons for allowing Mr Gertner's (cross) appeal (paragraph 58). However, David Richards LJ added, at paragraph 58:

'The issue which he discusses in his judgment at [51] is a point of real difficulty which, for the reasons he gives, it is not necessary to decide on this appeal. Both of the approaches which he identifies have substantial merits and I express no view as to which is to be preferred.'

To make the above clearer. Newey LJ was trying to identify the dividing line between, the claimant in the underlying claim, having, prior to the settlement agreement, held:

(a) a debt; or 

(b) a mere claim.

A (deferred payment) settlement agreement reached in respect to:

(a) 'a debt' - would involve 'credit', and so, the CCA would bite; 

(b) 'a mere claim' - would not involve 'credit', and so, the CCA would not bite. 

As to the dividing line between (a) and (b), Newey LJ saw two possible approaches the law might take:

(1) '...a debt should be considered to exist when the only defence advanced is clearly invalid in law. Arguably, Parliament might be expected to have had in mind a purely objective test of that kind when enacting the CCA.' (the 'defence ... clearly invalid in law' dividing line)

(2) '...it is enough to prevent the CCA from applying to a settlement agreement that the debtor believed a defence he was advancing to have substance. Such an approach could be said to reflect the desirability of upholding bona fide compromises.' In other words, the claimant in the underlying proceedings held, the moment before the settlement agreement was entered into, not 'a debt', but only 'a mere claim', if 'the debtor believed a defence he was advancing to have substance.' (the 'debtor believed a defence he was advancing to have substance' dividing line).

CFL 288 left underdetermined, which dividing line, was the dividing line the law adopts. It will be for another case, to determine which the law adopts.

On the facts in CFL 288, Mr Gertner's cross appeal was allowed. ICCJ Briggs had been wrong to hold that the debt on which CFL's bankruptcy petition was founded, was not disputed on genuine and substantial grounds (paragraph 54). Newey LJ said, at paragraph 54:

'There is... both (a) a compelling case for saying that the defence which Mr Gertner put forward to CFL's £1.7 million claim was clearly invalid in law and had no real prospect of succeeding and (b) a very real possibility that Mr Gertner did not himself believe the defence to have even a fair chance of success. That being so, there is a genuine triable issue as to whether the Settlement Agreement provided Mr Gertner with "credit" within the meaning of the CCA and, hence, is at present unenforceable for non-compliance with one or more of ss 40, 61–64, 77A and 86B of the CCA.'

In essence:

(a) having found there was consideration for the settlement agreement (the £50,000 paid towards CFL's costs);

(b) Mr Gertner's defence (to the principal sum; as distinct from the interest), in the underlying claim, had been clearly invalid in law and had no real prospect of succeeding; 

(c) subjectively, there was a very real possibility that Mr Gertner did not himself believe the defence to have even a fair chance of success

(d) so, there was a genuine triable issue as to whether the Settlement Agreement:

(i) provided Mr Gertner with "credit'; and so

(ii) is enforceable, at all, for non-compliance with one or more of ss 40, 61–64, 77A and 86B of the CCA.

It is to be recalled that CFL could, but had not, brought a claim (or application, internal to the existing claim, using the Tomlin Order provisions) for judgment against Mr Gertner, for non-compliance with the Settlement Agreement. By opting not to seek judgment for non-compliance with the Settlement Agreement, CFL had taken a risk that it was ineligible to bring the bankruptcy petition (because its status as a Mr Gertner's creditor, was not sufficiently free from doubt). To show that ineligibilty, that ground of opposition to the bankruptcy petition, Mr Gertner (merely) had to show that there was a genuine triable issue as to the enforceability of the Settlement Agreement. The Court of Appeal held that the first instance judge had been wrong to hold that the debt on which the bankruptcy petition was founded, was "not disputed on genuine and substantial grounds" (paragraph 54).

Further Authorities

(1) in LFC Horkstow Ltd v Wallis (also known as Re Wallis) [2023] EWHC 2205 (Ch); [2024] BPIR 144 ('Wallis'), ICC Judge Agnello KC on 7.9.23, heard a bankruptcy petition, wherein, the respondent deployed 5 grounds of opposition. The 3rd ground of opposition was 'There is a genuine triable issue as to whether the Petitioner agreed to provide the Debtor with “credit” within the meaning of the Consumer Credit Act 1974 (“ CCA ”), and in doing so created a credit agreement which does not comply with the requirements of the CCA and is therefore unenforceable' (paragraph 6(c))

ICC Judge Agnello KC dealt with the 3rd ground of opposition (from paragraph 6(c)) briskly, as it failed for lack of evidence upon which to make factual findings to substantiate it. At paragraph 8, ICC Judge Agnello KC said:

'In relation to the issue pursuant to the Consumer Credit Act 1974 , in my judgment, there was a complete lack of evidence before me relating to the underlying proceedings which resulted in the settlement agreement. The grounds of opposition rely on CFL Finance Ltd v Laser Trust [2021] EWCA Civ 288 , but the evidence fails to provide any details as to the underlying claim and whether there was merit in the defence and counterclaim so as for me to be able to form any judgment whatsoever relating to whether there is a bona fide issue relating to the agreement being caught pursuant to the Consumer Credit Act 1974. Accordingly, in my judgment, this ground of opposition has not been established and fails.'

(2) in Johal v Johal [2021] EWHC 1315 (Ch), HHJ David Cooke (sitting as a Judge of the High Court) on 18.5.21, under the heading 'Relavant Law', said, at paragraphs 21 and 22:

'In closing, [counsel for the defendants] agreed with the submission of [counsel for the claimants] that an agreement not to pursue a claim may be good consideration to support a binding contract, even if the claim is doubtful and even if it is later found by the court to have been without merit, as long as, at the time of the agreement, the party advancing the claim believed in good faith that it had a reasonable chance of success. In contrast, giving up a claim that the person advancing it knows to be invalid or does not believe to have a reasonable prospect of success is no consideration. [Counsel for the claimants] referred to Simantob v Shavelyean [2019] EWCA Civ 1105 at para 49 ; the point was restated by the Court of Appeal recently in CFL Finance Ltd v Laser Trust [2021] EWCA Civ 228 at para 37.

That being so, on the issue of consideration, I do not have to decide whether a claim by Hardeep or Jugar to a beneficial interest in the business would have succeeded but only whether Hardeep and Jugar put forward such a claim in good faith and believed that it had a reasonable prospect of success.'

(3) in Heritage Travel and Tourism Ltd v Windhorst [2021] EWHC 2380 (Comm), Mr Richard Salter QC (sitting as a Deputy Judge of the High Court) touches on the fact that the terms in the schedule to a Tomlin Order, are a contract, and that 'its enforceability was to be determined in accordance with the general law of contract.' (paragraph 15), before stating:

'In that connection, [counsel for the defendants] relied upon the following observations of Ramsey J in Community Care North East v Durham CC [[2010] EWHC 959 (QB), [2012] 1 WLR 338 at [28]]

The terms of the schedule [to a Tomlin Order] are not an order made by the court. The court obviously has the ability to interpret that agreement on well known principles of interpretation.. and would have to do so when it was asked to take any enforcement action under the standard liberty to apply for that purpose in the Tomlin order. Likewise the court has the ability to deal with the terms of that agreement in the same way as any other contract. That would include, for instance, a claim for rectification or a claim that the agreement was unenforceable for some reason. If the court decided that the agreement should be rectified or that it was unenforceable then the court may well take the view that they would vary or revoke the terms of the order part of the Tomlin order, to take account of that determination..'

Footnote referring to CFL 228 at paragraph 26.

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CONCLUSION 

 

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SIMON HILL © 2026*

BARRISTER 

33 BEDFORD ROW

Simon Hill practices in the following areas: insolvency, company and business law, with some tax and property law.

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