JP Morgan Chase Bank, National Association v Northern Rock (Asset Management) Plc

By section 77A of the Consumer Credit Act 1974 ("the 1974 Act"), a section introduced by section 6 of the Consumer Credit Act 2006 ("the 2006 Act"), creditors are required to provide debtors with statements in relation to regulated fixed-sum credit agreements.

The form and contents of such statements are prescribed by the Consumer Credit (Information Requirements and Duration of Licences and Charges) Regulations 2007 ("the Regulations").

Section 6 of the 2006 Act, and thus section 77A, came into force on 1 October 2008. The Regulations came into force on the same day.

Section 77A was further amended by the Legislative Reform (Consumer Credit) Order 2008 ("the 2008 Order"). By virtue of the transitional provisions in article 5(1) of the 2008 Order, section 77A applies to agreements "whenever made".

Section 77A imposes different requirements for the provision of statements, depending on when the relevant agreement was made.

I will set out the relevant provisions in full later in this judgment, but in summary the position is as follows.

For agreements made on or after 1 October 2008, the first statement must cover a period of no more than one year which must begin either with the day the agreement was made or with the day the first movement occurs on the debtor's account. For agreements made before 1 October 2008, the first statement must cover a period beginning no later than 1 October 2008 and ending no later than 30 September 2009. In each case, subsequent statements must relate to consecutive periods not exceeding one year. Both the first statement and each subsequent statement must be given to the debtor within 30 days beginning with the day after the end of the period to which the statement relates.

If a creditor fails to give a statement, a "period of non-compliance" commences, during which (a) the creditor cannot enforce the agreement, (b) the debtor has no liability to pay interest calculated by reference to the period of non-compliance, (c) the debtor has no liability to pay any default sum which would have become payable during the period of non-compliance or after the period ends in connection with any breach of the agreement during the period.

The issue to be determined in this case is as follows: where a creditor has provided the debtor with a statement which fails to set out the information required by the Regulations ("a non-compliant statement"), when does the period of non-compliance commence?

The claimant, represented by Mr Fred Philpott, says that a non-compliant statement which does not set out the information required by the Regulations is none the less still a statement under section 77A. Thus the period of non-compliance began 30 days after the period covered by the non-compliant statement.

The defendant, represented by Mr Malcolm Waters QC, says that a non-compliant statement is of no effect. It is not a statement under section 77A at all, and thus the period of non-compliance is calculated as if no statement had been served at all. Thus the period of non-compliance began on the day following the last day on which a compliant statement could have been given.

The defendant made a number of equity release mortgage loans to individual borrowers ("the JPM Borrowers"), all of which were fixed-sum agreements regulated under the 1974 Act and were made before 1 October 2008.

On 10 January 2008 the claimant and defendant entered into (a) a mortgage sale agreement by which the defendant transferred the beneficial interest in the JPM Borrowers' agreements to the claimant, and (b) a servicing agreement under which the defendant continued to administer the JPM Borrowers' agreements.

As from 1 October 2008 when section 77A came into force, it was the defendant's responsibility to ensure that borrowers were given statements under section 77A.

The defendant gave statements to the JPM Borrowers covering consecutive yearly periods beginning on either 1 January or 1 July. Thus the first of those statements covered either, as the case may be, 1 January 2008 to 31 December 2008, or 1 July 2008 to 30 June 2009.

However, those statements did not comply with the Regulations. Amongst other things they failed to include the amount of credit provided, or to contain the prescribed form of wording which would have allowed that information to be omitted. In other words, they were non-compliant statements.

It is common ground that in respect of each of the agreements the service of a non-compliant statement started a period of non-compliance and that the period would not end until a compliant statement had been given (or until there was nothing payable under the agreement). The consequences of there being a period of non-compliance are also not in dispute, and they are as I have already summarised them in para 8 above.

The defendant was not aware that the statements were non-compliant until late 2012, when it became aware that it had also provided similarly non-compliant statements to a number of other borrowers ("the NRAM Borrowers"). The defendant had retained these agreements on its balance sheet.

The defendant wanted to bring the period of non-compliance to an end. It provided the JPM Borrowers, and the NRAM Borrowers, with new statements which were intended to remedy the deficiencies in the earlier non-compliant statements and which recalculated the opening and closing balances shown on each statement by removing interest or default charges incorrectly debited in the non-compliant statements in respect of the period of non-compliance (as the defendant then perceived that period to be).

The defendant prepared the new statements on the basis that each non-compliant statement was not a statement given under section 77A, and thus the period of non-compliance began as if no statement had been served at all, namely on the day following the last day on which a compliant statement could have been given. Since the period covered by a compliant statement had to begin no later than 1 October 2008 and end no later than 30 September 2009, the defendant assumed that the period of non-compliance began on 31 October 2009 (the day following 30 days after 30 September 2009). For this reason, the new corrective statements covered the period from 1 October 2008 to 30 September 2009.

However, the claimant asserts that the defendant's assumption about the start date for the period of non-compliance was wrong.

The claimant says that the original statements, whilst non-compliant, were nevertheless given under section 77A. This meant that the period of non-compliance commenced on a much earlier date than that assumed by the defendant, namely 31 days after the end of the period covered by the non-compliant statement. So, for example in the case of a statement which covered the period 1 January 2008 to 31 December 2008, the period of non-compliance began on 31 January 2009. This would mean that the corrective statements were themselves non-compliant, because (using the same example dates) the corrective statement did not provide the borrower with the information required by the Regulations for the period from 1 January 2008 to 30 September 2009, and the re-crediting of interest would have been incorrect, resulting in incorrect opening and closing balances being shown on the purportedly corrective statements.

The claimant therefore says that the period of non-compliance is still running and to bring it to an end the defendant must serve further compliant corrective statements with correctly recalculated figures.

I have read the witness statement of Alessandra Ferrarini, a vice president of the claimant, dated 20 September 2013, which sets out some of the history, gives examples of the non-compliant statements, and explains why a determination of this issue is necessary.

I have also read the statement of Edward Sparrow, a partner in the firm of Ashurst LLP, the defendant's solicitors, which again sets out some history and deals with the loans which are affected by these proceedings.

I need not set out any of their evidence in this judgment, helpful as it is by way of background, as it seems to me that the issue can be decided as a pure matter of construction.

The determination of the issue identified at para 9 above therefore turns on the correct interpretation of section 77A (as amended by the 2008 Order) and whether a non-compliant statement is still a statement "under this section". Those three words appear a number of times in section 77A, which I must now set out in full (omitting subsections (8) and (9) which are not relevant to the issue).

I must next set out article 5 of the 2008 Order:

Since each of the JPM Borrowers' agreements pre-dated 1 October 2008 (the date of commencement of section 6 of the 2006 Act), article 5 of the 2008 Order determines the statement period for section 77A(1B) and thus for each such agreement the first statement must begin no later than 1 October 2008 and end no later than 30 September 2009.

It is to be noted that in relation to an agreement pre-dating 1 October 2008 (an "old agreement") section 77A(1C) does not apply. Mr Philpott says that a strict reading of article 5(2)(b) would result in statements for an old agreement not having to be given at least annually at any time. That cannot, in my view, have been the intention of the 2008 Order, and my attention was drawn to the explanatory document produced by the Department for Business Enterprise and Regulatory Reform (which was disbanded in 2009 on the creation of the Department for Business, Innovation and Skills) URN 08/956 dated June 2008 which says at para 9 (referring to the 2008 Order which was then still in its draft form):

Mr Philpott says that the legislative technique of using the words "as if" creates a problem, and refers me to Bennion, Statutory Interpretation, 6th ed (2013), pp 114, 115 and 365 where the use of the words "as if" is criticised as introducing a potential ambiguity. I do not think in the present case, when considering article 5, that such a problem truly exists.

In my view, on a proper construction of article 5, sub-paragraph (2)(b) does indeed only apply to that first period, precisely because of the words "as if" which precede (a) and (b). The use of the words "as if" seems to me to mean, as a matter of construction, that (a) and (b) only apply to the first period. Thus, although the first statement for an old agreement can cover more than one year, subsequent statements are governed by section 77A(1C) and must cover a period of no more than one year.

Article 5 enabled a creditor to "self-select" the period which would be covered by a first statement, so long as that period begins no later than 1 October 2008 and ends no later than 30 September 2009. In the present case, the defendant "self-selected" the period for the first statement (for the JPM Borrowers it chose either 1 January 2008 to 31 December 2009, or 1 July 2008 to 30 June 2009). However, as I have set out earlier in this judgment, each statement was non-compliant.

Mr Philpott further criticises the interplay between article 5 and section 77A as follows.

In my view, this criticism is not made out. If an old agreement creditor fails to serve a statement at all, then the period of non-compliance starts, in accordance with section 77A(7), immediately after the end of the period in section 77A(5). Since that old agreement creditor could have self-selected the period for the first statement so long as it ended no later than 30 September 2009, but failed to serve a statement, as a matter of construction the period under section 77A(5) commences 31 days after 30 September 2009. It is not a question of reading out words from article 5, but is rather the simple application of the words actually used, and a proper reading of section 77A(5) and (1E). I see no difficulty in construing the provisions of section 77A and article 5 in this way.

In my judgment, a non-compliant statement is not a statement under section 77A at all, and the defendant's construction is correct.

I am fortified in that conclusion by the following points, which were made by Mr Waters in his written and oral submissions, with which I agree and to which I have added some observations of my own.

Mr Philpott says that the defendant is bound by its self-selection of the first period, and therefore the period of non-compliance must be calculated by reference to that period. That seems to me to be circular and does not assist in deciding whether a non-compliant statement is, or is not, a statement "under this section".

Mr Philpott's construction would also mean that a decision would have to be taken on how non-compliant a non-compliant statement was. I do not think it right, as a matter of construction, that such a decision should be required; it seems to me that it is either saved because the non-compliance is minor (regulation 41) or it is non-compliant. If a creditor intended that the statement should be compliant, and intended it to be a statement "under this section", would that be enough to make it, in fact, a statement "under this section"? Why should the creditor's intention be the test? Indeed, what test could properly and consistently be applied to decide this question? It seems to me that a statement either complies with section 77A and the Regulations, in which case it is compliant and thus a statement "under this section", or it does not, in which case it is non-compliant and not a statement "under this section" (unless the error or omission is saved by regulation 41, in which case it is treated as compliant). That is a simple and straightforward test which is easy to apply.

In addition, it seems to me that there is an analogy to be drawn with notices under section 25 of the Landlord and Tenant Act 1954. Such a notice must be in writing and in the form prescribed by the Landlord and Tenant Act 1954, Part 2 (Notices) Regulations 2004 (SI 2004/1005). Those Regulations allow rather more latitude than the 2007 Regulations, because a form "substantially to the like effect" may be used, and in general any notice which gives the proper information to the tenant which will enable the tenant to deal with the notice in the proper way will be allowed and the question will be whether the substance of the required information has been provided. But subject to that, and importantly, a section 25 notice is either valid or invalid on the day when it is given. If it is invalid, it is of no effect, even if the landlord intended it to be valid; it is as if no notice was served at all.

Elsewhere in the consumer credit legislation, errors in or late service of notices which can be regarded as de minimis can be ignored, but unless the de minimis rule saves the error, the notice is invalid.

For example, Goode, Consumer Credit Law and Practice, looseleaf ed, vol 3, para 13.64 states as follows:

In the same textbook, at para 5.168:

In my view, the position is similar when one looks at section 77A and regulation 41. Unless the error or omission is minor, there is a breach of the Regulations. It must follow that the statement is invalid, and thus of no effect for all purposes.

Mr Philpott drew my attention to the notion of "purported compliance" in the Consumer Credit (EU Directive) Regulations 2010 (SI 2010/1010) in which specified conditions have to be satisfied in relation to certain prospective regulated agreements.

By way of example, regulation 101(2) provides as follows:

The phrase "purported compliance" appears also in the Consumer Credit (Amendment) Regulations 2010 (SI 2010/1969) and the Consumer Credit (Agreements) Regulations 2010 (SI 2010/1014). Nowhere is the phrase defined, so far as I am aware.

Mr Philpott says that this is how the legislation distinguishes between compliance and purported compliance. With respect, I do not think that is right, because that regulation appears to treat them as of the same effect; the question there is whether there has been an attempt at compliance, which is not actual compliance but is deemed sufficient. The courts are relatively familiar with the concept of purported compliance in various contexts, for example, where a party has attempted to comply with an order but has not fully or properly done so, and in general terms an attempt to comply with an order which is not actual compliance will be a breach subject only to de minimis exceptions. But one is dealing in the instant case with statutory interpretation. In the case of section 77A, there is no reference to "purported compliance", a phrase which could have been used in the section had that been the intention. In any event, how could it properly be determined whether a statement under section 77A purportedly complied with that section? I do not think it can be by reference to the creditor's intention. It either complies or it does not. In my view, as a matter of construction of the words used in section 77A, the statement either does, or it does not, amount to a statement "under this section", and that turns on whether or not it is compliant with the section and the Regulations (subject to regulation 41). Even Mr Philpott recognises that looking at other Regulations which introduce the concept of purported compliance does not directly assist in construing section 77A. It seems to me that Mr Waters' construction avoids the potential problems which Mr Philpott raises. If it is non-compliant, it is in my view ineffective and the position is as if no statement had been served at all.

Mr Philpott says that the use of the words "under this section" is no more than a tag or label for a section 77A statement, compliant or not. For the reasons set out above, I do not agree.

Mr Waters says, in reliance on the judgment of Jonathan Parker LJ in Ruddy v Oakfern Properties Ltd [2007] Ch 335, para 69, that any apparent anomalies thrown up by the competing constructions advanced by each side should be resolved by construing the section in its legislative context, and having reached a provisional conclusion, by testing that meaning to see whether it would lead to such absurd consequences that Parliament cannot possibly have intended it. I respectfully agree. In my judgment, the natural construction of section 77A is that the numerous references to a statement "under this section" mean a statement which is compliant in its form and content with the requirements of the section and the 2007 Regulations. I cannot see that there are any absurd consequences of such a construction. Indeed, I am for my part not convinced that there are any real anomalies here at all.

The parties produced, for the hearing, an agreed note, which I have read. It usefully sets out the relevant legislative history, from the 1974 Act through to the 2006 Act, the Regulations and the 2008 Order. However, I did not find it of any real assistance in resolving the issue I had to decide. None the less, I am grateful to both counsel for the thorough and careful way in which this case was prepared and argued.

For the reasons set out in this judgment, I have concluded that as a matter of construction of section 77A the defendant is right and the claimant is wrong. The answer to the issue identified at para 9 is this: where a creditor has provided the debtor with a non-compliant statement, the period of non-compliance commences on a date to be calculated as if no statement had been served at all, and the period of non-compliance begins on the day following the last day on which a compliant statement could have been given.

I therefore ask counsel to agree the form of wording for a declaration which reflects my decision.

My provisional view is that costs must follow the event, and that the claimant must pay the defendant's costs of the action, to be assessed on the standard basis if not otherwise agreed. If the parties need me to resolve the question of costs in the event that such an order is not agreed, or any aspect of the declaration if that cannot be agreed, I will do so when judgment is formally handed down.