Evans & Anor v Finance-U-Limited

This is an appeal from an order of HH Judge Chambers QC made in the Cardiff County Court on 28^th May 2012. In proceedings brought by the claimants, Mr and Mrs Evans, he made a declaration that the Ford Fiesta Zeta motor car (reg. CF55TXZ) (“the car”) was released and discharged from the bill of sale dated 20^th April 2007 which the claimants had executed in favour of the defendant, Finance-U-Limited (“FUL”). He also dismissed the defendant’s counterclaim for an order for delivery up of the car.

In short, the issue between the parties was whether FUL remained able to enforce the bill of sale to recover unpaid arrears in respect of the loan which Mr and Mrs Evans took out in order to purchase the car. The purchase price of the car was £7,290 which the claimants financed by paying a cash deposit of £1,400 and by borrowing the remaining £5,890 from FUL under the terms of a loan agreement dated 20^th April 2007. The loan agreement was regulated by the Consumer Credit Act 1974 (“the 1974 Act”) and required the claimants to pay a total of £3,633.81 in respect of interest and other charges on the loan of £5,890, making a total of £10,923.84. This was repayable by a first instalment of £296.33 and subsequent payments of £196.33 per month during the term of the agreement which was 48 months.

Under clause 11(c) of the loan agreement the claimants were made jointly and severally liable for the loan and FUL was entitled to demand early repayment of the outstanding balance of the entire loan and the credit charge in certain stated events including any payment remaining overdue for more than 14 days or the bankruptcy of one or both of the borrowers: see clauses 4(a), (f) and (g).

Contemporaneously with the loan agreement, the claimants entered into a bill of sale which gave FUL security in respect of the car. The bill of sale was registered on 3^rd May 2007. It contains a covenant by Mr and Mrs Evans to pay the principal sum of £5,890 plus interest by 48 monthly instalments of £196.33 per month and entitled FUL to take possession of the car in one of the events specified under s.7 of the Bills of Sale Act (1878) Amendment Act 1882. These include a failure by the grantor to pay one of the monthly instalments due and the grantor’s bankruptcy.

On 1^st October 2007 a bankruptcy order was made against Mr Evans. At the time the claimants had paid each of the monthly instalments except that due in August 2007. The bankruptcy of Mr Evans was, of course, an event which entitled FUL to call in the loan and to enforce its security under the bill of sale. But what it did was to prove in his bankruptcy for the total amount of its claim as at the date of the bankruptcy order (£8,657.52). By the date of the proof (17^th August 2009) the debt had been reduced to £4,490.26 as a result of payments received in the interim and the claim was admitted to proof in that sum resulting in a dividend of £155.23. This was credited against the outstanding amount of the loan.

Mr Evans was discharged from bankruptcy on 1^st October 2008 but in January of that year a bankruptcy order was also made against Mrs Evans, again on her own petition. She was discharged from bankruptcy on 31^st January 2009.

At the time when FUL proved in Mr Evans’ bankruptcy both claimants had been made bankrupt and, in the case of Mr Evans, had already been discharged. But Mrs Evans had continued to make payments under the loan agreement in order to prevent the car from being re-possessed. Not every monthly instalment was paid on time but most, if not all, of the instalments due between September 2007 and March 2010 were paid. There was a further payment of £89.39 on 9^th June 2010 which reduced the balance of the amount to £3,336.89 but nothing has been paid since then.

On 15^th February 2011 the claimants issued proceedings in the County Court for a declaration that the car is their property free from any claim by FUL. Their pleaded case was that because FUL had proved in Mr Evans’ bankruptcy for the entire amount outstanding under the loan agreement (£4,490.26) and had received a dividend, it had no further entitlement to demand any payment from either Mr or Mrs Evans under the loan agreement or the bill of sale since their contractual liability has been discharged. As a consequence, FUL no longer has any right to enforce its security over the car. Although it would follow from this that the payments made to FUL between 2008 and 2010 were in fact not due, there is no claim to recover any of the monies which have been paid.

FUL served a defence and counterclaim in which it pleaded that the continued payments pursuant to the loan agreement were a pre-condition to FUL not enforcing its security under the bill of sale. It was also averred (in paragraph 3) that Mr and Mrs Evans were jointly and severally liable under the loan agreement and that no proof had been submitted in Mrs Evans’ bankruptcy. Once the payments ceased FUL became entitled to enforce its security over the car in respect of the debt still outstanding. It relied on a default notice which it had served on the claimants on 18^th February 2010 in respect of an instalment of £196.33 which it required to be paid by 8^th March 2010 but which, according to the pleading, had not been paid by that date. On this basis, it counterclaimed for delivery up of the car to meet the balance of the loan (£3,336.89) which remains outstanding.

At the trial the claimants’ solicitor (Mr Murphy) submitted to the judge (as recorded in his skeleton argument) that the effect of the bankruptcies of both Mr and Mrs Evans was to terminate their contractual liability to FUL under the loan agreement and to leave FUL to prove for the debt in the bankruptcies which, in the case of Mr Evans, it did. Although it was entitled to enforce its security under the bill of sale on the basis of the bankruptcy of the debtors, it had not done so. Rather, it had allowed Mr and Mrs Evans to continue to pay the monthly instalments due under the loan agreement and had then relied on a failure to pay as the basis of enforcing its security. Since Mr and Mrs Evans had no continuing liability to pay, a failure to pay could not constitute a breach of the regulated credit agreement and therefore the basis of enforcing the security on those grounds under s.7 of the Bill of Sales Act (1878) Amendment Act 1882.

It was submitted that the notice of default dated 18^th February 2010 was not therefore a valid and effective notice for the purpose of enforcing the security contained in the bill of sale and could not be relied on as the basis of an order for delivery up. Mr Murphy accepted in his skeleton argument that FUL could have chosen to base its counterclaim on the claimants’ bankruptcies but that since it had not done so, he proposed to make no submissions about that.

FUL’s counsel submitted to the judge that the provisions of the loan agreement and the bill of sale continued in full force and effect notwithstanding the bankruptcy of the debtors and had to be complied with if the debtors wished to retain possession of the car. The payment obligations contained in the bill of sale could not be separated from those in the regulated loan agreement and FUL was required to comply with the provisions of the 1974 Act if it wished to enforce its security. Although it could have relied on the bankruptcy of the debtors as the basis of a termination notice under s.98 of the 1974 Act, it was also entitled to rely on the debtors’ continued failure to pay the instalments due under the loan agreement for the purpose of serving a s.87 notice and entitling it to enforce its security.

After the hearing but before judgment the judge sent to both sides a list of questions. They included the questions:

“(g)

If a sum calculated under clause 4 of the bill of sale became due and owing from both claimants and the defendant proved in the bankruptcy of the first claimant for the whole of that sum less moneys subsequently received, is it alleged that the second claimant continued to be under the obligations set out in the loan agreement and the bill of sale as if the bankruptcy of the first claimant had never occurred?

(h)

If it is so alleged, why is that so?

(i)

If it is contended that the obligations under the bill of sale were joint and several please state the difference if any that it makes to any of the answers given in respect of questions (c) to (h) with the reasons why.”

FUL responded to the questions as follows:

“(g)

If a sum calculated under clause 4 of the bill of sale became due and owing from both claimants and the defendant proved in the bankruptcy of the first claimant for the whole of that sum less moneys subsequently received, is it alleged that the second claimant continued to be under the obligations set out in the loan agreement and the bill of sale as if the bankruptcy of the first claimant had never occurred?

To a point, yes. It is not suggested that the bankruptcy of the first claimant had never occurred, merely that it is not material to the position of the second claimant.

(h)

If it is so alleged, why is that so?

For the reasons given earlier.

Claiming in the bankruptcy of the first claimant had no consequence to the ability of the Defendant to claim against the second claimant. If, contrary to the position accepted by the Official Receiver that were not the case then the Defendant would have made an application as identified in paragraph 10 of my earlier submissions.

(i)

If it is contended that the obligations under the bill of sale were joint and several please state the difference if any that it makes to any of the answers given in respect of questions (c) to (h) with the reasons why.

As indicated above, the only possible construction of the bill of sale is that the obligations were either joint or joint and several. It makes no difference to the outcome of this case which construction is given, but it is assumed that without evidence to the contrary, the obligations were joint.”

The claimants’ reply to question (i) was that:

“On its face the bill of sale does not specify whether the obligations of the grantor (singular) are joint and several where the grantor is more than one person. The claimants’ position is that liability is joint but not several. It was open to the defendant to draft a bill of sale that created joint and several liability but in the absence of such drafting there is nothing to indicate that the claimants’ liability is anything other than joint. If so, the defendant has only one cause of action. By proving for the whole of the debt in the first claimant’s bankruptcy and receiving a dividend, it was no longer open to the defendant to pursue the same debt against the second claimant.”

The judge construed the bill of sale as making Mr and Mrs Evans jointly, rather than jointly and severally, liable for the debt. From this it followed, he reasoned, that the entire debt became due and payable on Mr Evans’ bankruptcy and that the loan agreement did not continue to bind Mrs Evans particularly after her bankruptcy. Although FUL could have enforced its security in the event of the bankruptcy of Mr Evans, their failure to do so disentitled them thereafter from seeking to enforce it on the basis that the loan agreement continued in force:

“15.

The defendant’s case appeared to be that the agreement and liability under the bill of sale continued against the second claimant and that, although her bankruptcy relieved her from the obligation to keep paying the instalments in respect of the car and from the liability to pay any accrued obligations, if she wanted to keep the car, she had to keep the agreement alive and honour the obligations secured by the bill of sale. When she failed to do that there was a default both under the agreement and under the bill of sale and the car became liable to be seized. Damages are recoverable in respect of the period during which the car was wrongfully withheld.

16.

During the hearing and afterwards there was much talk of the effect of the law of insolvency but I think that the answer to the case is altogether more basic.

17.

The parties are agreed that the claimants jointly entered into the loan agreement and executed the bill of sale.

18.

The bill of sale makes no express provision for the position in respect of two or more grantors of the bill. The reference throughout is to “the Grantor”. I find it conceptually impossible to divide the positions of the claimants.

19.

It seems to me to be clear that when the first claimant became bankrupt there was a default under the bill of sale and the defendant became entitled to seize the car.

20.

I cannot see how it could be argued that, in the event of the defendant seizing the car, the agreement and rights under the bill of sale continued against the second claimant. Furthermore I cannot see how it could be argued that, in the event of the defendant not seizing the car, the agreement and the rights under the bill of sale continued against the second claimant. This is because, when the first claimant became bankrupt, there automatically became due and owing the sums calculated in the way set out in the bill of sale. That was the end of it. Both of the claimants were 'the grantor'. Both became liable for the sum due on bankruptcy. There could not be a different sum due from one claimant and another from the other. Furthermore, the defendant must have proved in the bankruptcy of the first claimant on the basis set out in the bill of sale (subject to credit for sums received) and it received a corresponding dividend. All this the defendant appears to accept.

21.

When the second claimant became bankrupt the debt for which she had been jointly liable could no longer be enforced against her.

22.

There can be no good case to the effect that the defendant’s rights under the agreement and the bill of sale continued to subsist against the second claimant who, although free not to do so, chose to continue the payments in order to keep the car and that a right to seize the car arose from her failure to keep up with the instalments, not by reason of her own or the first claimant’s bankruptcy.

23.

Although the defendant’s submissions appear now to put the case upon the basis of the debt that undoubtedly became due and owing upon the default occasioned by the bankruptcy of the first claimant the contemporaneous documents do not support that case. There can be no doubt that, as against the second claimant, the defendant treated the loan agreement as continuing in being until she defaulted in paying the instalments. It was in respect of that default that the default notice was served and the claim for the car was made. But, as stated earlier and correctly accepted by counsel for the defendant, the relevant indebtedness was that which had fallen due and owing on the bankruptcy of the first claimant.

24.

I see no reason why, in principle, there would not be scope of an arrangement whereby parties faced with similar circumstances to the present ones should not (subject to statutory regulation) agree that possession of a vehicle should continue if payments were made but that would be a new agreement and not a continuation of the old one. It might also be the case that a loan agreement could make special provision for what would happen if one debtor became insolvent but not the other. But that is not the defendant’s case. It was not that there was any agreement between the parties but rather that the defendant was content to let matters rest as long as the second claimant kept making the payments.

25.

While it may well be that the defendant did once enjoy a right as against the second claimant to seize the car by reason of her failure to pay the balance of the moneys that fell due and owing under clause 4 of the bill of sale that was never the way in which the defendant treated the matter and I see no reason to suppose that, at this remove, the defendant would now be entitled to put the matter on that basis even if it were to attempt to put its house in order.”

On behalf of FUL, Mr Levy challenges the judgment on three separate grounds. First, he says the judge’s conclusion that FUL is no longer entitled to enforce its security is unreasoned. Second, he says that the judge was wrong to find that the security ceased to be enforceable simply because no attempt was made to enforce it against Mr Evans and (if this is what the judge believed) because FUL had proved for the debt in Mr Evans’ bankruptcy. And, third, he submits that if and so far as the judge relied on the principles of election, waiver or estoppel to defeat the counterclaim, he was wrong to do so.

I propose to concentrate on the second ground of appeal. There is nothing in the judgment to suggest that the judge based his judgment on any election or waiver by FUL of its existing rights whatever they may have been. Some of the difficulty in the case may be due to the fact that the judge appears (from paragraph 5 of his judgment) to have thought that it was common ground that, as a result of having proved in the bankruptcy of Mr Evans for the full amount of the outstanding debt without giving credit for the value of the vehicle, FUL could no longer rely upon the security of the bill of sale as against Mr Evans himself. There is nothing in the submissions which I have seen to indicate that this was conceded by FUL’s counsel at the trial and Mr Levy refutes any such suggestion. Such a concession would also have been wrong.

The effect of Mr Evans’ bankruptcy was that the contractual right of FUL to enforce repayment of the outstanding debt was replaced by a right to prove for the debt in the bankruptcy: see Insolvency Act 1986 s.285(3). The bankrupt’s estate is thereby preserved for the benefit of the whole body of creditors but the bankruptcy order does not affect the right of a secured creditor to enforce his security: see s.285(4). A secured creditor may, however, prove for his debt in accordance with the rules: see s.322(1). Rule 6.98(1)(e) of the Insolvency Rules 1986 requires him to include in his proof particulars of the security held and the value which the creditor puts upon it. The valuation of the security and the amount admitted to proof is then a matter for the trustee.

In this case FUL specified the security but did not put a value on it and the entire debt was admitted to proof. The consequence of the bankruptcy for Mr Evans was undoubtedly that he was released from any personal claim against him by FUL but not that FUL lost its right to enforce the security. In Whitehead v Household Mortgage Corporation plc [2002] EWCA Civ 1657 this court held that the acceptance of a dividend in insolvency arrangements (in that case an IVA) did not amount to an agreement or election by the creditor to treat as unsecured that part of the debt in respect of which the dividend had been paid. Chadwick LJ at paragraph 24 said this:

“I accept, of course, that those provisions of the bankruptcy code have no direct application to the position in a voluntary arrangement. The effect of the arrangement has to be determined by construing its terms in the context of the events which have happened. But those provisions are, I think, helpful in that they show how the problem which arises in the present case is dealt with under the bankruptcy code. The problem arises where a secured creditor who has not realised his security is required to decide whether to participate in a distribution of assets which are available to meet the claims of unsecured creditors. It is plain that, unless he abandons his security, he can only participate in that distribution on the hypothesis (which may turn out to be wrong) that part of his debt is unsecured; and then only by putting a value on his security so as to quantify that part for the purposes of the calculation and payment of dividend. It would be possible, in principle, to require him to make an irrevocable election; to permit him to participate in a distribution of assets available to meet the claims of unsecured creditors only on the basis that he does abandon his security in respect of that part of the debt which is treated, for the purposes of the distribution, as unsecured. But that is not the solution to the problem which has been adopted in bankruptcy. It has been thought more satisfactory to allow the secured creditor whose security may not be sufficient to satisfy the whole of his debt to participate in a distribution of assets available to meet the claims of unsecured creditors on a provisional basis. If it turns out, on a realisation of the security, that he has been paid too much out of the assets available to meet the claims of unsecured creditors, then he must repay the overpayment; but he is allowed to apply the proceeds of realisation in or towards satisfaction of his secured debt. In the absence of an express term in the voluntary arrangement itself - or agreed between the supervisor and the secured creditor at the time when the creditor claims in the arrangement - I think that the court should be slow to imply a term which would lead to a result which differs in so material a respect from that to which the statutory code would have led in the bankruptcy for which the voluntary arrangement was proposed as a substitute.”

FUL was not therefore required to renounce its security as the price of being able to prove for the balance of the debt nor was that the effect of it proving for the entire amount due. It therefore retained its right to enforce the security following Mr Evans’ bankruptcy but did not exercise that right whilst Mrs Evans continued to meet the instalments.

The judge’s reasoning in the paragraphs from his judgment I have quoted earlier seems to proceed on the basis that the satisfaction of her husband’s contractual liability through the payment of a dividend automatically released Mrs Evans (as joint debtor) from any further liability. This is, I think, a misconception. Although Mrs Evans would undoubtedly have been discharged from liability had her husband paid what was due, the effect of s.285(3) of the Insolvency Act is merely to limit the creditor’s right of recovery against the bankrupt debtor to proving in the bankruptcy. Even if that fails to secure a 100% return, the bankrupt remains immune on discharge from further proceedings and is released from the debt (see s.281(1)) but the debt continues as against the joint debtor until extinguished by payment or release by the creditor. This is confirmed by s.281(7) Insolvency Act 1986 which provides that:

“Discharge does not release any person other than the bankrupt from any liability (whether as partner or co-trustee of the bankrupt or otherwise) from which the bankrupt is released by the discharge, or from any liability as surety for the bankrupt or as a person in the nature of such a surety.”

In the present case nothing in fact turns on this point because the effect of Mrs Evans’ own bankruptcy was likewise to protect her from any personal claim by FUL. But the issue for the judge was not whether FUL could still pursue either Mr or Mrs Evans for the money: obviously it could not. The issue was whether, as the judge put it, their bankruptcy was the end of it.

It is, of course, common ground that Mrs Evans was not obliged to continue to make the monthly payments which she did in the sense that any failure to pay could not result in any further liability on her part. But the arrangement which continued de facto between her and FUL was that, so long as the payments were kept up, FUL continued to stay its hand in relation to the enforcement of the security.

The argument which Mr Murphy deployed at the trial was much more limited in scope than that on which the judge seems to have decided the case. As already mentioned, he did not directly address the question whether FUL could still enforce its security based on the bankruptcy of one or other of the claimants by serving an appropriate form of notice. His case was that the debt under the regulated loan agreement had ceased to be payable by Mr and Mrs Evans following their bankruptcy and could not therefore be relied upon to serve a default notice under s.87 of the 1974 Act based on a failure to pay one of the instalments. What FUL should have done was to serve a s.98 (non-default) notice terminating the agreement on grounds other than breach which is a pre-requisite to the enforcement of the creditor’s right to enforce its security during the term of the agreement.

Mr Levy submits that although FUL could undoubtedly have proceeded in February 2010 to enforce its security on the basis of the prior bankruptcy of both debtors, it was entitled to treat both the loan agreement and the bill of sale as continuing for the purpose of defining its rights against Mr and Mrs Evans. Discharge from bankruptcy released both Mr and Mrs Evans from the debt due under the loan agreement but preserved FUL’s right to enforce its security for the payment of the debt. Although the claimants therefore ceased to have any continuing contractual liability for the payment of the instalments, their non-payment can, he submits, be relied upon for the purpose of establishing FUL’s entitlement to realise its security.

I have doubts about this. I think the difficulty with the argument arises when one comes to consider the operation of the 1974 Act. If the loan agreement continues even for the limited purposes relied on by Mr Levy, it must, I think, follow that it continues as a regulated agreement. As of February 2010 this necessitated the service on the claimants of either a s.98 notice or a s.87 default notice which in this case was based on the non-payment of one of the instalments. The default notice therefore had to (and did) specify the nature of the breach relied on and what action was required to remedy it. Section 88(1) of the 1974 Act specifies in terms that:

“The default notice must be in the prescribed form and specify—

(a)

the nature of the alleged breach;

(b)

if the breach is capable of remedy, what action is required to remedy it and the date before which that action is to be taken;

(c)

if the breach is not capable of remedy, the sum (if any) required to be paid as compensation for the breach, and the date before which it is to be paid.”

Since neither Mr nor Mrs Evans had any continuing contractual liability for the payments, a notice based on the non-payment of the January or February 2010 instalment was, in my view, inappropriate. What FUL should have done was to proceed by way of a s.98 notice which is what Mr Murphy suggested in his skeleton argument at trial. Mr Evans (who appeared in person on this appeal) also took the point that he had in fact paid the instalment of £196.33 specified in the notice by 8^th March 2010 in compliance with the notice. If this is correct then this might provide another reason why FUL is not entitled to an immediate order for delivery up of the car.

In this case, however, matters are complicated by the fact that the term of the regulated loan agreement was expressed to be 48 months and therefore expired on 20^th May 2011 when the last payment fell due. Section 76 of the 1974 Act provides that:

“76 Duty to give notice before taking certain action.

(1)

The creditor or owner is not entitled to enforce a term of a regulated agreement by—

(a)

demanding earlier payment of any sum, or

(b)

recovering possession of any goods or land, or

(c)

treating any right conferred on the debtor or hirer by the agreement as terminated, restricted or deferred,

except by or after giving the debtor or hirer not less than seven days’ notice of his intention to do so.

(2)

Subsection (1) applies only where—

(a)

a period for the duration of the agreement is specified in the agreement, and

(b)

that period has not ended when the creditor or owner does an act mentioned in subsection (1),

but so applies notwithstanding that, under the agreement, any party is entitled to terminate it before the end of the period so specified.

……”

Similarly s.98 provides:

“(1)

The creditor or owner is not entitled to terminate a regulated agreement except by or after giving the debtor or hirer not less than seven days’ notice of the termination.

(2)

Subsection (1) applies only where—

(a)

a period for the duration of the agreement is specified in the agreement, and

(b)

that period has not ended when the creditor or owner does an act mentioned in subsection (1),

but so applies notwithstanding that, under the agreement, any party is entitled to terminate it before the end of the period so specified.

…”

Because the term had expired by the date of the trial in December 2011, FUL was entitled by then to recover possession of the car free from the statutory requirement to give notice either under s.76 or under s.98. The arguable defects in the form of notice given were not therefore relevant to whether the judge could make an order for delivery-up on the counterclaim. The only issue was whether FUL retained the benefit of the security under the bill of sale and was entitled contractually to enforce its security according to its terms.

Although there is much to be said for the judge’s view that following the claimants’ discharge from bankruptcy FUL could not base its contractual right to enforce the security on a failure to pay one or more of the instalments, the pleaded defence and counterclaim was wide enough, in my view, to support FUL’s reliance on the bankruptcy as an alternative basis for recovering the car which had not been waived by subsequent events. Had FUL’s counsel asked the judge to consider that alternative, the judge would have been bound to make an order for delivery up. It was not necessary for FUL to base its counterclaim on a breach of the agreement so that there could not be any technical objection based on the form of notice following the expiry of the loan agreement. And the judge was wrong to hold (if he did) that FUL’s entitlement to rely on its security had been lost by it proving in Mr Evans’ bankruptcy for the entire debt.

It follows that Mr Levy is entitled to ask this court to set aside the judge’s order and to make an order for delivery up on the basis of one or other of the two bankruptcies. The fact that this was not the ground upon which FUL put its case at the trial goes only to costs.

I would therefore allow FUL’s appeal against the judge’s declaration that Mr and Mrs Evans own the car free from any claims by FUL. The judge was wrong to reach the conclusion that it has lost its rights to enforce the bill of sale based on the claimants’ bankruptcy. I would also make an order for the delivery up of the car.

I agree.

I also agree.