Extortionate Credit Transactions

EXTORIONATE CREDIT TRANSACTIONS

Under sections 137 to 140 may make an application to the county court or in other proceedings to have declared an appropriate credit bargain as an extortionate credit transaction whereupon the court can re-write the agreement so as to be more equitable.

Which credit bargains is the court allowed to consider?

The court may consider any “credit bargain”. This is defined as:

(a) an agreement whereby a creditor provides an individual (the debtor) with credit of any amount, and

(b) any other transaction which must be taken into account in computing the total charge for credit (e.g. linked transaction).

Thus it can be seen that the court may consider credit transactions which do not qualify as regulated agreements because the credit provided is over the £15,000 limit. The single limitation to note is that the credit must be provided to an individual thus companies may not apply to court to have a credit bargain declared to be an extortionate credit transaction.

What are the criteria by which a court will judge a credit bargain to be extortionate

Section 138 provides that a bargain is extortionate if it requires the debtor or a relative of his to make payments which are grossly exorbitant or grossly contravenes the ordinarily principles of fair dealing, including

(a) the prevailing interest rates at the time when the bargain was made;

(b) factors affecting the debtor such as age, health business capacity and the extent to which he was under financial pressures;

(c) factors affecting the creditor, such as his relationship with the debtor and the degree of risk undertaken by him;

(d) the extent to which a linked transaction was reasonably required for the protection of the debtor or the creditor.

Generally the court will use as a rule of thumb the level of security provided as determining the issue of whether the interest charged is justified. From the cases see Ketley v. Scott [1981] I.R.C.241 it would appear that for instances of low or no security loans the courts will tolerate interest rates which would make Shylock green with envy.

The court’s powers upon a declaration that a credit bargain is extortionate

On a finding that a credit bargain is extortionate the court can:

1. direct accounts to be taken;

2. set aside obligations imposed on the debtor and/or the surety;

3. order sums to be repaid to the debtor and/ or surety;

4. order property given as security to be returned;

5. re-write the terms of the agreement of any security instrument.