20 Mar 2013

The Importance of the 'Default Notice'

The Importance of the 'Default Notice'

Jane Gordon, Dispute Resolution Solicitor, looks at the importance of statutory compliance in cases of default on Consumer Credit Agreements.

Jane Gordon, Dispute Resolution Solicitor, looks at the importance of statutory compliance in cases of default on Consumer Credit Agreements.

Following a recent tender success, we took over a case that already had a Debate assigned on a point of competency. The borrowers were challenging the Default Notice that had been served on them by the outgoing panel firm following their failure to make payments under their Consumer Credit Agreement. Although the case was ultimately dismissed, it highlighted the importance of ensuring that Default Notices are compliant with the relevant legislation.

Consumer Credit Agreements (CCAs), governed by the Consumer Credit Act 1974, form the basis of many loan agreements and often there may also be a standard security granted over a property in respect of the loan.

In order to terminate a CCA and thereafter carry out enforcement action, such as repossession of the property, the creditor must serve on the borrower a ‘Default Notice’. If this notice is not complied with within 14 days of service, the agreement is held to be terminated and the creditor may take steps to recover their loan, be that through unsecured debt recovery or enforcement of their standard security.

Such a Notice must be in a statutory prescribed form, as dictated by the 1974 Act itself, as well as the Consumer Credit (Enforcement, Default & Termination) Regulations 1983 (as amended). The rules governing the content of the Default Notice are stringent, and this case highlighted the importance of complying with the Regulations.

The case involved two CCAs that had been granted on the same day, by the same borrowers and both had granted a standard security over the borrowers’ property to secure the loan. However, the loans were for different amounts, and both had different monthly instalments to pay.

The borrowers subsequently defaulted on their payments, and the lender wished to take action. A Default Notice was served upon the borrowers in respect of both loan agreements. Although the loan account numbers were separately stated on the Notice, both outstanding balances and arrears balances were aggregated for the purposes of the Notice.

In terms of the 1974 Act, the Notice must properly identify the agreement, identify the parties to the agreement and give clear specification of the matters complained of.

The Default Notice was not complied with, a Calling up Notice was served and action was thereafter raised. The action was defended on the basis that the Notice was invalid as it did not comply with the 1974 Act and the 1983 Regulations, and therefore the subsequent court action was challenged as invalid. This challenge was eventually upheld by the Court and the action dismissed.

What is interesting to note is that, even where the service of one Default Notice in respect of two CCAs did not prejudice the borrowers, the Court was still not willing to accept the Notice as valid. Even if the Notice had specified both sets of arrears and outstanding balances, and even if the borrowers had then addressed one set of the arrears, as the client held a standard security for both loan agreements, they would still have been able to raise court action to enforce their security. There was therefore no prejudice to the borrowers in providing an aggregated figure in one Default Notice.

However, it was the Court’s position that the Notice did not sufficiently identify both CCAs, even though both account numbers were clearly stated and the borrowers ought to have been aware of them. Further, the Court’s view was that as the Notice only specified the aggregated arrears, it therefore also did not accurately specify the nature of the breach.

In short, clients must take care to ensure that the terms of their default notices are such that they comply precisely with the 1974 Act and 1983 Regulations in order to avoid potential challenges. 

Jane Gordon, Solicitor

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