A credit agreement can be lawful on its face and still produce an unfair relationship between lender and borrower. Sections 140A to 140C of the Consumer Credit Act 1974 give courts a wide power to look at the terms of an agreement, how the lender has exercised its rights and anything else the lender did or did not do, and to make orders that favour the borrower. The provisions extend across the UK, with different courts hearing applications in England and Wales, Scotland and Northern Ireland.
What the court asks
Under section 140A, a court may make an order under section 140B if it determines that the relationship between the creditor and the debtor arising out of the agreement, taken with any related agreement, is unfair to the debtor. The unfairness must arise from one or more of three things: any of the terms of the agreement or of a related agreement, the way in which the creditor has exercised or enforced its rights, or any other thing done or not done by or for the creditor, whether before or after the agreement was made. The court must have regard to all matters it thinks relevant, including matters relating to the creditor and to the debtor.
Which credit agreements are covered
Section 140C defines a credit agreement for these purposes as any agreement between an individual and any other person by which credit of any amount is provided. The power is therefore not limited to regulated agreements of a particular size. The section also treats a person to whom the creditor’s rights have passed by assignment or operation of law as the creditor, which matters where a loan has been sold on, as explained in the guide to assignment of debt. Two exclusions are written into section 140A: an order cannot be made in connection with an agreement that is an exempt agreement by virtue of article 60C(2) of the Regulated Activities Order, which covers regulated mortgage contracts and regulated home purchase plans, or in connection with an agreement entered into under the Bounce Back Loan Scheme.
Related agreements and consolidation
The court can look beyond a single contract. Section 140C treats as related agreements any credit agreement consolidated by the main agreement, any linked transaction, and any security provided in relation to the main agreement. A later agreement consolidates an earlier one if it was entered into for purposes connected with debts under the earlier agreement. Section 140A(3) also directs the court, except where inappropriate, to treat things done by an associate or former associate of the creditor as if done by the creditor.
The orders a court can make
Section 140B lists the orders available. A court may require the creditor or an associate to repay all or part of any sum paid by the debtor or a surety; require the creditor to do, or to stop doing, something specified in the order; reduce or discharge any sum payable by the debtor or a surety; direct the return of property provided as security; set aside a duty imposed on the debtor or surety; alter the terms of the agreement or a related agreement; or direct that accounts be taken. These powers can be used even where the relationship has ended, because section 140A(4) allows a determination notwithstanding that it has ended.
Who can apply and where
An order may be made only on an application by the debtor or a surety, at their instance in proceedings where the debtor and creditor are parties to enforce the agreement, or at their instance in other proceedings where the amount paid or payable under the agreement is relevant. A free-standing application is made to the county court in England and Wales, the sheriff court in Scotland and the High Court in Northern Ireland, although in Northern Ireland the county court may hear it where the credit is fixed-sum credit not exceeding £15,000 or running-account credit with a limit not exceeding £15,000. That means a borrower who is sued for a debt can raise unfairness as part of the defence rather than starting a separate claim. A different court power to adjust payments is described in the guide to time orders.
The burden of proof
Section 140B(9) provides that if the debtor or a surety alleges in such proceedings that the relationship is unfair to the debtor, it is for the creditor to prove the contrary. That reverses the usual position in which the person making an allegation must prove it.
Other routes to compare
A court application is not the only option. Many disputes are resolved through a complaint, covered in the guide to complaining to the Financial Ombudsman Service, and the Act’s wider protections are outlined in the guide to the Consumer Credit Act 1974.
FAQs
Does the unfair relationship test apply to loans that are not regulated?
Section 140C defines a credit agreement as any agreement between an individual and another person providing credit of any amount, so it is not limited to regulated agreements, although the exclusions in section 140A still apply.
Can a court reduce the amount I owe?
Yes. Section 140B allows a court to reduce or discharge any sum payable by the debtor or a surety, to require repayment of sums already paid, or to alter the terms of the agreement.
Does the lender or the borrower have to prove unfairness?
Where the borrower alleges the relationship is unfair, section 140B(9) puts the burden on the creditor to prove the contrary.
The bottom line
Sections 140A to 140C allow a court to find that the terms of a credit agreement, the way a lender used its rights, or other things done or not done made the relationship unfair to the borrower, and to order repayment, reduction of the debt or changes to the agreement. The lender bears the burden of disproving unfairness once it is alleged. Anyone considering a claim should take independent advice. This is general information, not legal advice.
Sources
- legislation.gov.uk, “Consumer Credit Act 1974, section 140A: Unfair relationships between creditors and debtors”
- legislation.gov.uk, “Consumer Credit Act 1974, section 140B: Powers of court in relation to unfair relationships”
- legislation.gov.uk, “Consumer Credit Act 1974, section 140C: Interpretation of ss. 140A and 140B”