There’s an all too common assumption that all creditors are unreasonable and that all “consumers”, regardless of means and assets, need protection, and more importantly, that the Court cannot be relied upon to be impartial, says Graham Penn. There’s an all too common assumption that all creditors are unreasonable and that all “consumers”, regardless of means and assets, need protection, and more importantly, that the Court cannot be relied upon to be impartial. In any consumer case, creditors are quite rightly required to act reasonably and proportionately when seeking to collect debts that are properly due to them from their customers. However, I was once told that there are far too many default judgments obtained in the Courts and if debtors could not be relied upon to defend claims against them, then creditors themselves, must show more proportionality – meaning that creditors actions should be in proportion to the sums outstanding, circumstances of the debtor, and so on. However most respectable creditors do show sufficient proportionality, simply because it is bad business not to. In the vast majority of cases, most finance creditors would correctly say that they have in the past, and do still, act reasonably; after all they will have complied with the notice and termination requirements under the Consumer Credit Act; they will have tried to obtain payment in accordance with OFT guidelines; and only then issued proceedings and obtained a judgment of the Court. 

It is not as if there has been no opportunity for a debtor, if able, to pay or at least offer terms, explain their financial difficulties or raise any dispute that they might have. In the absence of a dispute, difficulty, or adequate proposals for payment of the judgment, how could taking perfectly legal action to enforce that judgment not be reasonable? There has been considerable criticism of the actions of judgment creditors who then apply to the Court for a Charging Order which secures the debt against a property owned by the debtor, and also those who, in a very few cases, might then seek a Court Order for Sale of the property if payment still cannot be obtained The Coalition agreed to introduce more protection against “unreasonable charging orders”, to ensure that Courts have the power to insist that possession is always a last resort and to ban Orders for Sale on debts less than £25,000. As a result, the Ministry of Justice consulted on whether to implement a minimum limit on applications for Orders for Sale in relation to Consumer Credit Act regulated debts. The publication in draft form of The Charging Orders (Orders for Sale: Financial Thresholds) Regulations 2012 followed that consultation and proposed the financial threshold below which an Order for Sale may not be made should be set at £1,000, rather than £25,000. The Regulations are not yet in force but as the limit is at a far lower level than was being recommended, it is instructive to look at the consultation which reinforces the view that the current practice followed by most finance creditors is reasonable and that were it not, the Court can be relied upon to intervene. 

 It was recognised that orders for sale are rare (0.5% of charging orders resulted in an Order for Sale being made in the year September 2009-2010) and that a proportion of those Orders – actually probably a large proportion - are suspended on terms that regular payments are made.  In addition, consideration was given to established public policy that those who can afford to pay should pay. However a threshold of £25,000 could either cause a large increase in creditors taking bankruptcy proceedings, or in the alternative, to irresponsible borrowers running up significant unsecured debts up to the proposed limit of £25,000 and then walking away from them, even though there was substantial equity in their property. More importantly however, following an application for an Order for Sale, it would seem to have been accepted that judges exercise their discretion and only grant an Order for Sale where it is fair and proportionate to do so in accordance with case law. In my experience, the last thing any creditor wants is to repossess a property. They want payment of their account; but if a debtor will not pay and in many cases will not even respond, then sometimes an application will be made as the last resort. The decision is only made when there are no other alternatives and with the full knowledge that the Court will have to be persuaded that the remedy is fair and appropriate in all the circumstances. 

So will this change the position with regard to Charging Orders themselves? The committee reading took place on 10th January 2013 and accepted the proposed changes by 10 votes to 6. The Under-Secretary for State, Helen Grant noted that in all cases on application for an Order for Sale a judge will consider “the proportionality of the debt as set against each of the parties’ assets and commitments” (inter alia) and that a responsible creditor who has obtained a court judgment has “the right to enforce that judgment. Without effective enforcement, we risk jeopardising the authority of the court and public confidence in the justice system as well as a negative impact on the economy if lenders are not confident that they can recoup money that is rightly owed to them.. On the face of it therefore a Claimant who has a judgment is entitled to seek a Charging Order, just as they may instruct a bailiff to levy execution, seek an Attachment of Earnings Order, or take any of the other enforcement proceedings available. The Civil Procedure Rules (CPR) in place since well before the consultation, clearly state that the decision to grant a final Order is at the discretion of the Court and that the burden of showing why an Order should not be made rests upon the debtor. Nevertheless as a result of the recent waves of criticism, some creditors have been reluctant even to seek a Charging Order. On the other hand, on 11th January 2013 the OFT issued a press statement stating that it had imposed requirements on RBS and NatWest to “address concerns about the way some customer debts are enforced via charging orders.” Whilst acknowledging that charging orders are a legitimate way to secure and ultimately recoup unpaid debts, there were problems with the way that RBS and NatWest were using them. Without knowing details of the problems it is difficult to comment, but one such concern was that many were used “to secure relatively small amounts of debt, sometimes below £5000.” Whether that was a major factor or incidental to other problems is unclear. Undoubtedly many creditors would disagree that £5000 is a relatively small amount. If the threshold below which a Charging Order may not be enforced by an Order for Sale is set at £1000 then at the very least one might think that there is acknowledgment on the part of the Committee and the Ministry that a Charging Order can be made for any debt above £1000.  

The statement from the OFT seems to be at odds with that. The net result is that whilst there is ministerial recognition that debtors can rely upon the Court to protect them where necessary and prevent capricious applications by unreasonable creditors, there is still the possibility that there might effectively be  a separate ban on reasonable creditors with valid judgments being able to enforce them via the Court by established methods set out in the CPR. if those creditors hold a consumer credit licence. Many will feel that a debtor who has not complied with a valid Default and Termination notice served under the Act, and has failed to make any satisfactory offer of payment should not be able to ignore a judgment with impunity because the debt is below £5000. The position is tricky to say the least but many creditors seem to be taking the view that if there appears to be equity in the property and no other method of enforcement is available or likely to succeed (and some will only rarely wish to try their luck with a warrant of execution) then they will still seek and probably obtain a charging order. It is an area that will however be subject to more scrutiny For more information contact Graham Penn on 01293 596900 or email graham.penn@stevensdrake.com