High Court decision on debt loophole dashes write-off hopes for thousands

"About 100,000 people trying to have their credit card and loan debts written off by exploiting a legal loophole will have to pay the full amounts they owe after a landmark court ruling this week.

The High Court decision will mean defeat for tens of thousands of similar county court cases, which have been put on hold until the test case involving Royal Bank of Scotland (RBS) was resolved.

The ruling will also suffocate the multimillion-pound industry in debt avoidance that has expanded rapidly in the past 18 months as consumers struggling to keep up repayments are seduced by attractive claims.

Many of the UK’s 3,000 Claims Management Companies (CMCs) attract clients with promises that they can exploit legal loopholes to write off certain unsecured debts, most commonly personal loans and credit cards.

The industry depends on the CMCs establishing that the customer’s original loan agreement is “unenforceable” because it is in contravention of one or more requirements of the Consumer Credit Act 1974.

The simplest tactic that CMCs use is to demand to see a copy of the client’s original loan agreement. Under the Consumer Credit Act, if the lender cannot provide a copy within 12 days, which many banks struggle to do with older loans arranged by predecessors, the debt becomes “unenforceable”.

Where the bank can provide the documents, lawyers will advance other arguments, such as that the terms and conditions page was not signed or that certain information required by law was missing. Some CMCs have built their businesses on the promise that unenforceability means that the borrower is no longer obliged to repay the loan and lawyers say that many thousands of people have already stopped payments. Others have continued with repayments, hoping that their loans would be be cancelled.

The tens of thousands of county court claims on hold are from borrowers asking the court to cancel the debt on the basis that it is unenforceable. Ultimate Law, a Manchester-based law firm, estimates that 100,000 claims are in progress.

Given the amounts at stake, the county court referred the matter to the High Court, which considered the case of Phillip McGuffick, who was seeking to have his £17,034 personal loan from RBS declared unenforceable. The case was heard on the basis that both sides agreed that the loan was unenforceable and the judge was asked to decide what this meant.

Mr Justice Flaux ruled: “Although the [Consumer Credit Act] may render the agreement unenforceable, the agreement remains a valid and subsisting contract and rights and obligations under it continue to exist”.

Chris Busby, a partner at Eversheds, said: “The judgment said that claimants seeking to prove their credit agreements are unenforceable are still liable for monies owed. It’s a major blow to CMCs who have been suggesting otherwise.”

RBS said: “We welcome the clarity this judgment has provided. The outcome confirms the position that we have consistently adopted with customers who seek to challenge the validity of their agreements.”

Andrew Wigmore, of the Claims Standards Council, a trade body for CMCs, said that those promising guaranteed debt write-offs were operating a “scam”. He declined to comment on the RBS case but said that there were legitimate challenges to be made against loan agreements.

The Ministry of Justice, which regulates the UK’s 3,000 CMCs, has recently stepped up its campaign against unscrupulous practices in the industry. Last year it banned 116 CMCs for offences including exorbitant fees and misleading advertising. The ministry had no comment on the RBS case."

The really big question that I have to ask, will all these people get a refund?