Post-contract information: who is responsible after the debt sale?
When an agreement is assigned, the general rule is that the buyer acquires the “benefit” of the agreement, but not the “burden”. In other words, under English law, the buyer will not automatically be liable for performing the seller’s ongoing contractual duties under the agreement. For this reason, where the buyer is to undertake these responsibilities, the debt sale agreement should impose an obligation on the buyer to do this.
However, the CCA imposes various statutory duties on “creditors” and “owners”. For example, CCA 2006 introduced additional requirements upon creditors to provide debtors and hirers with post-contract information. These include sending debtors notices of sums in arrears in relation to their accounts, notices of default sums that have become payable (for example, default interest) and some new periodic statements.
For CCA purposes, a “creditor” includes the person to whom the creditor’s “rights and duties under the agreement have passed by assignment”[i]. This is somewhat odd since, as mentioned above, with an assignment, the contractual duties will not pass. Although not clear-cut, where there is an absolute assignment of the benefit of the agreement and notice of the assignment is given to the debtor, it is strongly arguable that, from a CCA perspective, the buyer will become responsible for giving the post-contract information. Indeed, from a practical perspective, following the sale, the buyer will usually maintain the ongoing financial data to do this and will want control of this process given the consequences of non-compliance.
Post-contract information: practical issues
The consequences of these notices/statements not being given are severe. In the case of a regulated agreement for fixed-sum credit, they include that the creditor cannot enforce the agreement if the notice/statement has not been provided in the required form. Even though the credit agreement can be later enforced once this has been complied with, buyers will not want to be faced with a situation where proceedings are struck out. This could happen where the seller had not complied with the relevant requirements prior to the sale and the breach has not been remedied. For this reason, at lowest, the buyer is likely to want suitable warranties from the seller in the debt sale agreement that such notices and statements have been given. It should be said that there are likely to be some circumstances where the notices and statements may not have been given – not necessarily because of a breach of the legal requirements by the seller, but for practical reasons. An example would be where default charges become payable immediately before completion but the seller’s procedures are set up so that it runs notices of default sums fortnightly. Therefore, the buyer will want to ensure that the debt sale agreement (and data cut provided to it) suitably address such situations. This would include the manner in which they will be flagged and the information that will be provided to the buyer to enable it to produce the appropriate notices and statements in accordance with the CCA (and others it will need to produce going forward).
Some issues to consider – sellers
Some issues to consider – buyers
Buyer takes subject to debtor’s right of set off
An important part of the relationship between the debtor and the buyer following the sale is that the debtor can raise by way of defence against a claim made by the buyer certain claims that the debtor has against the seller. This is often referred to as the buyer taking “subject to equities”.
Generally, the debtor can rely on any defence that has accrued against the seller by the time the debtor receives notice of the assignment. These defences include rights of set-off. For this reason, buyers will frequently seek a warranty from the seller that the debtor has no rights of set-off.
Default charges: relevant law
An area that has achieved significant attention and consumer awareness in the past few years is the question of recoverability by debtors of bank charges (such as overdraft charges).
Under English law, if a contract provides for a party to pay a fixed amount if he breaches the contract, this will be subject to the “rule against penalties”. In simple terms, what this means is that unless the amount specified reflects a genuine pre-estimate of the loss that the other party would suffer as a result of the breach, that amount will not be recoverable.
As a separate matter, the Unfair Terms in Consumer Contracts Regulations 1999 apply to “unfair terms” in contracts concluded with consumers (being individuals acting for purposes outside of a business). If a term has not been individually negotiated - such as where it is part of standard form contract – then it will be unfair if against a requirement of good faith, it “causes a significant imbalance in the parties’ rights and obligations to the detriment of the consumer”. A term that requires a consumer who breaches the agreement “to pay a disproportionately high sum in compensation” may be regarded as unfair[ii]. The effect of a term being unfair is that it will not be binding on the consumer.
Default charges: practical issues
First, if default charges are unpaid (or may accrue after the sale) – and are payable under a term that is either unfair or the charge is a penalty - there will be issues for the buyer with recoverability. There are various mechanisms for approaching this risk depending upon the particular circumstances. These may include adjusting the purchase price to take account of situations where there is a likelihood that there would be any such challenge or including a right for the buyer to require the seller to repurchase the debt. From the seller’s perspective, if a debtor alleges that any such term is unfair or the amounts are penal, the seller will want to have control of any ensuing claims. This is particularly the case where it may impact on other areas of its business or because of reputation concerns. It may want to be notified of any such allegations received by the buyer and to be able to repurchase the debt in such circumstances.
Secondly, is the situation where the debtor has paid default charges to the seller. The buyer will want to ensure that it has adequate protection from the seller if the debtor seeks to set off against the buyer’s claim for payment of the outstanding debt the debtor’s claim for recoverability of those paid default charges.
Unfair relationships: can the buyer be liable to actually repay monies paid to the seller?
In this context, CCA 2006 potentially makes a difference for buyers because new provisions were introduced relating to “unfair credit relationships”. The court has wide powers if it determines that the relationship between the creditor and the debtor arising out of the credit agreement is unfair to the debtor because of:
- “any of the terms of the agreement or of any related agreement;
- the way in which the creditor has exercised or enforced any of his rights under the agreement or any related agreement;
- any other thing done (or not done) by or on behalf of the creditor…”
This includes that the court may make an order requiring the creditor to repay any sum paid by the debtor by virtue of the agreement. It may make an order reducing or discharging any sum payable by the debtor. It may make an order altering the terms of the credit agreement.
As mentioned above, the term “creditor” for CCA purposes includes a person to whom the rights and duties of the person providing the credit have been assigned. Although this has yet to be tested, the risk for debt buyers includes that this means that they can be required to repay sums paid by the debtor to the originating creditor. Indeed, section 140B(3) of the CCA provides that an order may be made “notwithstanding that its effect is to place on the creditor….a burden in respect of an advantage enjoyed by another person”. Consequently, debt buyers should consider seeking an indemnity from sellers in respect of their exposure to unfair relationship claims made against them that arise as a result of any act or omission of the seller. The corollary to this is that sellers may want to seek to ensure that there are suitable contractual protections in place in the debt sale agreement so that they have sufficient involvement in the conduct of any such claims.
[i] Section 189(1), CCA 1974
[ii] Paragraph 1(e), Schedule 2, Unfair Terms in Consumer Contracts Regulations 1999
This article is a general summary only. If you would like advice on any of the issues raised by it, please contact us. Please bear in mind that the law may change from time to time and this article may not be (or have been) updated to reflect those changes. © afl Solicitors