Expanding the pot

None of the five facts under the Matrimonial Causes Act 1973 (MCA) on which a party can rely when petitioning for divorce expressly mentions money.

However, problems with managing money often lie at the heart of relationship breakdown and underpin an unreasonable behaviour petition.

Where one party has overspent or borrowed heavily, there may not be much if anything left for the court to divide up when making a financial order or property adjustment order.

In 2006, the courts were granted powers to reopen most types of consumer lending transaction.

Surprisingly, given their wide scope we have seen little use made of these powers by the family courts. So what does this means in the divorce context; and how could a successful application by one party to reopen a transaction lead to a larger pot of money for the family court to divide between the parties?

It’s unfair

In its December 2003 white paper, Fair clear and competitive: the consumer credit market in the 21st century, the Department for Trade and Industry (DTI) (as it was then) said its reform objectives were to “target any unfair credit transaction” to ensure that “account is taken of unfair practices as well as the cost of the credit” and that any such assessment had to be “flexible enough to accommodate all circumstances affecting the use of credit”.

The DTI said that in determining whether or not a transaction is unfair, “consideration should be given not just to how the agreement was concluded but, also, to any subsequent events that may have led to unfairness”.

This was broadened to four groups of behaviour:

• Unfair practices – For example, misleading, harassing, coercing or otherwise unduly influencing a borrower in connection with the transaction; misselling of products; unacceptable high-pressure selling techniques; or the churning of credit agreements and aggressive debt-collection practices.
• Unfair credit costs – Where credit payments substantially exceed market levels having regard not just to the original cost of the credit but also to the total sum that becomes due when a loan falls into arrears, including the level of default interest, charges and costs.
• Responsible lending.
• Other relevant circumstances – Such as:
• the circumstances of a borrower, including age, experience, business capacity, state of health, the degree to which they were under pressure and the nature of that pressure;
• whether a borrower dealt honestly in providing accurate and full information to enable a creditor to assess the risk;
• the degree of risk accepted by a lender having regard to the nature and value of any security;
• whether linked insurance transactions were reasonably required.

A gateway is provided under the Consumer Credit Act 1974 (as amended by section 19 of the Consumer Credit Act 2006) (CCA 1974) enabling the family court to hear and determine an unfair relationship claim in relation to a credit agreement entered into by the parties.

Section 140A(1) of the CCA 1974 provides: “The court may make an order under section 140B in connection with a credit agreement if it determines that the relationship between the creditor and the debtor” is unfair to the debtor.

Section 140B provides that only the county court has power to require a creditor to repay any sums or to reduce anything payable under a disputed credit agreement.

However, family law practitioners should note the saving provisions in section 140B(2) (c). These allow a court to make an order in relation to a credit agreement on an application by the debtor “in any other proceedings in any court where the amount paid or payable under the agreement or any related agreement is relevant”.

What lending is covered?

The unfair relationship provisions apply to any credit agreement with an individual. They apply to unsecured loans or credit cards and any insurance products sold alongside those credit products.

However, business loans made to a limited company and any guarantee by an individual of those debts, are out of scope. The provisions do not apply to first legal charges such as a residential mortgage but they do cover second charges and subsequent legal charges, including secured loans for home improvements, debt consolidation or bridging loans.

These could cover lending running into many hundreds of thousands or even millions of pounds. In those circumstances, there is a clear incentive for a divorcing spouse to try to reduce the amount payable to the lender to correspondingly increase the pot available for distribution by way of a financial provision order under section 21 of the MCA.

Family lawyers seeking to bring a challenge will need to stand back and make a judgement call on whether the amount of any disputed lending justifies the cost of the challenge, bearing in mind the likely adjustment that could be made – and weighing up the risk of an action not succeeding.

Proving a claim

Where a challenge is made to high interest rates or charges, lawyers would normally expect the court to want to see expert evidence from someone skilled in financial services.

However, the differing attitude of the courts to expert witnesses has so far been poles apart as to the evidence they require in these cases. The first unfair relationship case to be decided by a superior court of record was Patel v Patel [2009] EWHC 3264 (QB) which related to a series of business loans. The deputy judge decided – without any expert evidence on the issue – that the interest rates were too high because it was no longer seed capital with a lower risk for the lender.

Similarly, in Greenlands Trading v Girolama Pontearso [2019] EWHC 278, which related to a bridging loan, Mr Justice Nugee upheld the earlier ruling of the circuit judge who had concluded that 3 per cent was an industry standard default rate. He ruled that the judge was entitled to make this finding without expert evidence because an appeal on this point could not succeed as it related to a case management decision taken in relation to not needing expert evidence.

Many of the court cases relating to payment protection insurance did have an expert witness lined up to give evidence as to the prevailing levels of commission in the market. For example, in Harrison v Black Horse Ltd [2010] EW Misc 20 the judge accepted expert evidence from an individual she described as a financial expert.

Finally, there is the issue of the reverse burden of proof. Section 140B(9) of the CCA 1974 stipulates that if a debtor alleges during the course of any proceedings that the relationship with the creditor is unfair to the debtor, it is for the creditor to prove to the contrary.

So if a borrower alleges that the relationship is unfair because of high interest rates, and produces evidence of comparable interest rates in the relevant sector in support, then section 140B(9) shifts the evidential burden onto the lender to adduce the necessary evidence to contradict the debtor’s assertions. If a lender is unable to do so, it will not be able to disprove the debtor’s assertions – leaving it open for the court to make an unfair relationship finding.

It is worth noting that the DTI White Paper shows there will often be overlaps with other allegations that are frequently made when the validity or enforceability of a loan agreement is challenged. These include:

• Duress.
• Undue influence.
• Breach of fiduciary duty.
• Not understanding the nature or extent of liability.
• Misrepresentation as to the loan terms before signature.

However, it is important to stress that a court can make a finding that the relationship between a lender and borrower is unfair without the need to find that a law or rule has been broken.

• The court has wide powers to grant a remedy where it finds there has been an unfair relationship. Seven types of orders are available under section 140B:
• A lender must repay any sum paid by a debtor.
• A lender must do, or not do or cease doing anything the court specifies in connection with a credit agreement.
• A reduction or complete discharge of any sum payable by a debtor.
• The return to a guarantor of any property provided by them for the purposes of that security.
• The setting aside, in whole or in part, of any duty imposed on a debtor by virtue of the credit agreement.
• The alteration of the terms of the credit agreement.
• Direct accounts to be taken between any persons.

The court can order one or more of these orders.

Success not guaranteed

Though not family-related cases, two further cases on consumer lending in the Court of Appeal are worth noting. In Harrison the court found there was no unfair relationship.

However, this was later overruled by the Supreme Court decision in Plevin v Paragon Personal Finance Ltd [2014] UKSC 61. Then in Scotland & Reast v British Credit Trust Ltd [2014] EWCA Civ 790, Lord Justice Kitchin found there was an unfair relationship because misrepresentations that had been made were relevant to the assessment, even though a misrepresentation claim itself was time-barred.

In Plevin, the Supreme Court ruled that it was unfair for the lender not to disclose the existence of a large (71.8 per cent) commission even though the regulator’s rulebook did not require the amount of commission to be disclosed. In Nelmes v NRAM [2016] EWCA Civ 491 it was held that the lending relationship was unfair because the lender had failed to disclose to the borrower the procuration fee it was paying to a broker who had introduced the business. This “deprived the borrower of the disinterested advice of his broker” and was unfair.

Recently, the High Court ruled in Pilgrim Rock v Iwaniuk [2019] EWHC 203 (Ch) that secured commercial loan to an individual with an interest rate of 6 per cent compounded quarterly, which rose to 9 per cent in the event of default, was an unfair relationship because the interest provisions were more onerous than the terms available in the open market.

In Patel the deputy judge ruled that the lending was unfair because the lender had not reduced the interest rate when the risk he faced was lowered when the business was no longer a start-up.

It has to be stressed that the determination of whether or not the relationship is unfair is for the court to determine, based on the evidence it has – including its assessment of the credibility and recollection of the borrowers.

There are a number of reported cases where these sorts of claims have not succeeded, but the reality is that lenders have settled weak cases and continue to do so.

Time limits

There is a 12-year limitation period for an action involving a ‘specialty’ under section 8 of the Limitation Act 1980. A specialty includes contracts under seal such as a mortgage, though in practice this covers all secured loans.

However, in Rahman v Sterling Credit [2001] 1 WLR 496, the Court of Appeal ruled that the six-year time limit under section 9 of the 1980 Act applied in the case of a claim that the lending on a secured loan was unfair.

Then in Patel, the deputy judge applied a virtually open-ended period (because of the way the lending had been rolled over and replaced with further borrowing) with the effect that his ruling went back 30 years to lending originally made in 1979.

This means where lending has been rolled over for the limitation period (of six or 12 years depending on whether it was secured or unsecured lending) the limitation period could go back further than first appears.

The need for advice

The law on unfair relationships in the context of consumer lending is not straightforward and remains a fluid area. Nevertheless, in appropriate cases there is good scope for family lawyers – with the assistance of specialist financial services lawyers – to mount a challenge against a lender.

This is particularly the case where the interest rates are high compared to the market; where there have been regulatory failings; or there are other issues such as misrepresentations having been made.

If it appears a challenge is worth investigating, family lawyers need to advise the client on the merits of a potential claim and the prospects of success – and the potential value to a divorcing client should their claim succeed.

David Bowden is a solicitor-advocate at David Bowden Law davidbowdenlaw.com