Tomlin orders, Gertner and consumer credit: are solicitors are risk?

In the landmark case of CFL Finance Ltd v Laser Trust and Another [2021] EWCA Civ 228, the Court of Appeal held that a Tomlin order effecting a settlement of claim which provided for the payment of sums in instalments, had the potential to engage the provisions of the Consumer Credit Act 1974 (CCA).

The Law Society understands that this decision may the subject of further consideration by the Supreme Court.

The relevant facts giving rise to the Court of Appeal’s judgment are as follows:

• Mr Gertner guaranteed an agreement pursuant to which CFL advanced £3.5 million to a company called Lanza Holdings Ltd. Lanza defaulted and CFL duly issued proceedings against Mr Gertner for £1.7 million in arrears on the principal loan and £1.8 million in interest. Mr Gertner disputed the claim in its entirety.
• CFL and Mr Gertner entered into a settlement embodied in a Tomlin Order, in which they agreed that Mr Gertner would pay £2 million by way of staged payments and a contribution towards costs of £50,000 in default of which the sums sought in the proceedings would become immediately due and payable in full. Mr Gertner paid just over £1.5 million but then failed to make any remaining payment by the requisite due dates.
• CFL then served a statutory demand and, subsequently, presented a bankruptcy petition. That petition was the subject of judgments from Chief Insolvency and Companies Court Judge Briggs and then, on appeal, Mr Justice Marcus Smith. Marcus Smith J, in his judgment, rejected Mr Gertner’s argument that the Tomlin order was unenforceable under the CCA on the grounds that there was no provision of credit in the Tomlin order. Mr Gertner appealed.

The Court of Appeal held that:

• The CCA would not apply to a consent order given that it is not an “agreement between an individual … and any other person”.
• There is no reason why the CCA regime could not apply to a Tomlin order per se. The question was whether the agreement embodied in the Tomlin order would otherwise fall within the purview of the CCA.
• A key question will be whether the agreement involved the provision of a “form of financial accommodation” so as to fall within the definition of “credit” in s.9(1) of the CCA. That includes refinancing transactions (s.11(1)(c) CCA).

The risk that a Tomlin order falls foul of the CCA regime given the Court of Appeal’s judgment is real. That risk will eventuate in respect of a Tomlin order where:

• The debtor is an ‘individual’ (which includes a sole trader, a partnership comprising three partners or fewer or an unincorporated association – s.189(1) CCA). It will not apply if the debtor is a limited company or a large partnership.
• The creditor provides ‘financial accommodation’ – this will include an agreement in which a debtor, who does not dispute that he is indebted to the creditor, is given additional time to pay in return for, for example, the payment of additional interest, a contribution towards costs or agreeing to compromise a claim or defence considered to have at least a chance of success. This would not, however, include:
  • Mere forbearance on the part of the creditor (not being an agreement).
  • A creditor’s agreement to delay payment in the absence of any consideration (such as, for example, an agreement to pay additional interest or costs). In the absence of consideration the agreement would not effect a contractual variation (note that a promise to forgo a claim or defence in return for delayed payment will amount to consideration (so long as that claim or defence is not regarded by the claimant or defendant as lacking even a fair chance of success)).
  • An agreement by which the parties compromise a claim which the debtor genuinely disputed in its entirety on substantial grounds providing that there is no question of the agreement defeating the application of the CCA to the original claim. 
• No relevant exemption applies. For these purposes the most relevant are likely to be articles 60C and 60H of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. Article 60C provides an exemption for credit exceeding £25,000 provided to a borrower wholly or predominantly for the purposes of a business carried on, or intended to be carried on, by the borrower. Article 60H provides an exemption where the credit exceeds £60,260 provided to a high net worth borrower where the requisite statement has been entered into.

If a Tomlin order is entered into and it does produce a regulated consumer credit agreement it may be unenforceable. Whether or not it will be depends on a myriad of factors, including whether the agreement is a non-commercial agreement (which affects the form of the agreement and whether the creditor is required to hold the necessary Financial Services and Markets Authority authorisation) and whether certain pre-contractual information and notice provisions have been given. The safest course, if there is any doubt about whether the CCA applies, is to embody the agreement as a consent order rather than a Tomlin order.