BACKGROUND AND SUMMARY
Mr Doyle (the “Appellant”) had a credit card issued to him by MBNA Europe Bank Limited (“MBNA”) in 1997 under a running credit card agreement (the “Agreement”). In terms of clause 8f of the Agreement, MBNA were entitled to demand the full outstanding balance of the facility in certain circumstances, subject to MBNA sending the Appellant any notice that may be required by law. The Appellant defaulted on his credit card payments, and accordingly MBNA served a default notice on the Appellant under section 87(1) of the Consumer Credit Act 1974 (the “CCA”) (the “Default Notice”). In terms of s87(1) of the CCA, service of a notice on the debtor is necessary before the creditor can become entitled, by reason of any breach by the debtor to, inter alia, terminate the agreement or demand early payment of any sum. The Default Notice stated that the Appellant was in breach of the Agreement in that his account was in arrears and that, in order to remedy such breach, a payment of approximately £4300 (Four Thousand Three Hundred Pounds) had to be paid by on or before 21 December 2009 (the “Initial Repayment”). It also stated that the account balance was approximately £26,500.00 (Twenty Six Thousand Five Hundred Pounds) (the “Outstanding Amount”). The Default Notice further stated that, if the Appellant failed to make the Initial Repayment on or before 21 December 2009, further action might be taken against him, namely that his account would be closed, the Agreement would be terminated and court proceedings might be taken to recover the whole amount owed by him. Sometime shortly after MBNA had served the Demand Notice on the Appellant, MBNA underwent a restructure and the Appellant’s credit card debt was included in a portfolio (along with other debts) which MBNA had sold to a third party, which debts were subsequently sold again to PRA Group (UK) Limited, the Respondent in the matter (the “Respondent”). No payment was made by the Appellant and proceedings were brought by the Respondent to recover the Outstanding Amount on 31 October 2015. Section 5 of the Limitation Act 1980 (the “LA”) provides that ‘an action founded on simple contract shall not be brought after the expiration of 6 (six) years from the date on which the cause of action accrued.’ Proceedings in this case were brought within 5 (five) years and 10 (ten) months since the date specified in the Default Notice, namely 21 December 2009. The Appellant submitted that the Respondent’s claim was barred by expiry of the limitation period since the last payment, in terms of the Agreement, was due and owing in or during April 2009 but the proceedings were not issued until October 2015. Further, the Appellant argued that the Default Notice was irrelevant to the question of limitation, as it was a mere procedural requirement for recovery of the Outstanding Amount. The preliminary issue before the Central London’s County Court (the “Court”) was whether the cause of action for the Outstanding Amount arose when the Appellant first defaulted in his payments or only when the Appellant failed to comply with the Default Notice stipulated by section 87(1) of the CCA and required by clause 8f of the Agreement. At first instance, the Court ruled in favour of the Appellant on the basis that the cause of action arose at the time of the breach of the Agreement (that is on default) and that the service and expiry of a Default Notice was merely a procedural step before proceedings could be issued. The Respondent, unsatisfied with the Court’s ruling applied for an appeal. The appeal was granted.
England and Wales Court of Appeal (Civil Division) (the “Appeal Court”) dismissed the Appellant’s appeal and held that effect of s87(1) of the CCA is that (i) the cause of action arises after the time specified in the default notice, (ii) a creditor cannot take any action until that time has expired and (iii) a cause of action cannot arise until such a notice has been served.
The Appeal Court’s reasoning was that the wording in S87(1) of the CCA not only provides that a Default Notice is necessary before commencement of proceedings but until the expiry of the period to remedy the default specified in the Default Notice, there is no right to treat the Agreement as terminated or demand payment of the Outstanding Amount. Furthermore, the Appeal Court held that the Default Notice was not merely a procedural step, as it qualifies the substantive rights of the Respondent and, this interpretation is supported by the wording of s89 of the CCA which specifies that if the debtor takes action to remedy the breach specified in the Default Notice that the breach shall be treated as not having occurred, which reverses the legal rights and obligations of both parties. The Appeal Court added that the contractual precondition in clause 8f of the Agreement must also be construed as having the same meaning and legal effect.
The Appellant argued that using default notices pursuant to s87(1) of the CCA to recover stale debts would allow lenders to artificially extend the 6 (six) year limitation period bypassing the protections given by the LA. In this regard, the Appeal Court said it was no different from the case of a loan repayable on demand. The Appeal Court noted that s87(1) of the CCA was rather intended to confer a benefit in favour of the debtor, as it provides a debtor in default with the opportunity to remedy such default for that period.
This decision has provided clarity as to when the cause of action arises in respect of unsecured consumer credit agreements. Whilst on the face of it, the decision may appear to give lenders carte blanche to delay serving a notice, this is not the case, and the courts further have wide powers under s140A & s140B of the CCA to remedy any unfairness to a debtor, if a delay is found to result in unfairness.
Written by Michal Asoulin and Daniella Brocco