Unfair creditor relationship? The bank wins again
Published 1 July 2015
In the recent case of Barclays Bank plc v L. Londell McMillan the High Court considered whether an unfair debtor creditor relationship existed under section 140A of the Consumer Credit Act 1974 ("CCA") and, noting observations made by the Supreme Court in the Plevin v Paragon Personal Finance Ltd case ("Plevin"), found in favour of the bank.
This case arose from the background of the Dewey & LeBoeuf insolvency, following which Barclays Bank plc ("the Bank") is seeking to recover around $15m from 50 former partners of the firm. One of these partners was Mr McMillan ("McMillan"), a former US partner of the law firm, who had entered into a loan agreement with the Bank in the sum of $540,000. The loan was made to McMillan in his capacity as partner of the law firm and in order for him to fund his equity contribution to the firm.
In his defence, McMillan argued, amongst other things, that the loan agreement gave rise to an unfair debtor creditor relationship under the CCA and therefore should not be enforced by the Court. The Court rejected this argument, concluding that the Bank had discharged its burden to show that the relationship was not unfair.
The unfairness test
When considering whether a debtor creditor relationship is unfair, the CCA provides that the Court may make such an order because of any terms of the agreement, the way in which the creditor has exercised or enforced any of its rights, and/or any other thing done (or not done) by, or on behalf of, the creditor. In considering this, the Court shall have regard to all matters it thinks relevant.
In particular the Court referred to the judgment in Plevin, which stated that it is not possible to state a precise or universal test for the application of section 140A CCA, instead it must depend on the Court's judgment of the relevant facts, and indeed the CCA is deliberately framed in wide terms with little in the way of guidance about criteria for its application.
It was however noted that in Plevin the leading judgment characterised the relationship between commercial lenders and private borrowers as inherently unequal, and noted there may be features of a transaction that operate harshly against the debtor, but neither of these factors alone necessarily means that the relationship is unfair.
In this case, in finding in favour of the Bank, the Court considered the following factors (amongst others) which pointed to the relationship not being unfair:
- As is common practice with loans for this purpose, the terms of the loan agreement were negotiated on behalf of all the partners of the firm by the firm's financial officers, who the Bank was entitled to assume were acting in the best interests of the partners;
- As an experienced and senior partner of an international law firm, McMillan was not a naïve or vulnerable consumer - the Bank could reasonably expect him to understand the clear terms of the loan agreement, and assess the financial implications of doing so;
- The Court rejected an argument that the law firm had caused McMillan to enter into the loan agreement under duress. The Bank was entitled to assume, as it did, that McMillan freely and voluntarily entered into the agreement;
- There was no question of misrepresentation by the Bank;
- Rejecting an argument that the Bank made no assessment of McMillan's ability to repay the loan, the Court found that the Bank was entitled to assume that McMillan's earnings, as a senior partner in a law firm, would put him in a position to repay the loan;
- The terms of the loan were not unusual, unfair or disadvantageous to McMillan;
- McMillan was under no obligation to obtain finance from the Bank;
- The Bank had no reasonable grounds to suspect the financial state of the law firm was such that the loan might not be repaid, and was entitled to assume McMillan, as a partner, had at least as much knowledge of the finances of the firm as was available to the Bank.
This judgment should provide further comfort to lenders that commercial lending continues to be protected by a common sense approach by the Courts. In particular, had the Defendant's case been successful, there would have followed a reassessment of law firm partners' loans.
That said, whilst the Court found evidence given by the Bank's relationship director was commendable, the Court did not seem able to rely on the evidence of McMillan, whom the Court felt was not "careful and straightforward". With this in mind, and with such a wide discretion available to the Court in applying s.140A CCA, as set out by the guidance in Plevin, lenders should continue to be wary.