Charging Orders (Orders for Sale: Financial Thresholds) Regulations 2012

Lord Beecham Excerpts

Tuesday 8th January 2013 Grand Committee

In conclusion, the Government’s commitment to provide protection to debtors holds strong. We believe that the implementation of these regulations will deliver this protection without a disproportionate effect on the successful recovery of debt by responsible creditors. We have taken all stakeholders’ opinions into consideration and have tailored our approach in the light of this to ensure that we are introducing the most appropriate threshold level. I therefore commend this draft order to the Committee and I beg to move.

[Lord Beecham]

My Lords, the Minister has outlined the position in relation to charging orders and orders for sale but has omitted—with respect—a couple of highly relevant factors. The first is that we are here dealing with consumer credit arrangements and the lender has already priced in the possible risks of not recovering his money. Therefore, we are seeing something like double jeopardy, with the debtor having in any event to pay a higher rate of interest than would normally be the case—and would certainly be the case in the event of a secured loan—and also having now to face the possibility of an order for sale based on a charging order.

I have to confess that I certainly had not taken note of the regulation introduced last October which allows charging orders to be made—not the order for sale, but the initial charging order—even before the debtor has defaulted on the loan agreement. In other words, it is effectively at the option of the creditor to convert an unsecured loan into a secured loan, even before any default has been made. That is surely not a satisfactory proceeding. The coalition is to be commended for its original agreement to establish a significant threshold. Moreover the last Labour Government, who I am bound to say facilitated some of these proceedings, are to be congratulated on not in fact proceeding with their original intention of making orders rather like these and explicitly withdrawing from advancing such orders in 2009.

The accompanying Explanatory Notes and evidence base for this order disclose quite clearly that there is a significant number of cases under £25,000, but there is not much in the way of detail. Indeed, paragraph 211 of the report openly admits that the data set is very limited, meaning that any conclusion drawn from it is not robust. What is significant is that at the moment something like 10% of applications for charging orders are below £1,000. That is not a large number; in fact, it is almost so insignificant as to make one wonder why the Government are bothering at all to proceed with these regulations. The number of charging orders made for loans above £25,000 is very small indeed—some 6.7%—and there are not a large number of cases altogether. However, what is significant is that it would appear that in 2009-10 ultimately 566 orders for sale were granted, which was double the number of orders made as recently as 2005. Therefore, on the face of it, there is a growing trend to rely on these orders.

One reason advanced for not having a threshold higher than £1,000 is that it is open to a creditor to pursue bankruptcy proceedings on any debt exceeding £750. However, that of course then raises the question of whether that is a reasonable level in itself. Why have the Government not addressed the level at which bankruptcy proceedings might be instituted and aligned it properly with a reasonable level, particularly bearing in mind, as I said, that the risk has already been priced into the cost of the loans by these creditors? These are not normally small concerns; they are consumer credit agreements and it is often large firms that lend money in this way.

It seems that the Government are missing an opportunity to carry out one of their more welcome pledges in the original coalition agreement and that they will achieve virtually nothing in the way that these regulations have been put forward. Furthermore, looking at the timing, it is rather surprising that the regulations referring to charging orders were put through quite separately from these regulations. It seems to me that in principle they are linked and that it would have been better if the two had been considered alongside each other at the very least, because the former has clearly paved the way for quicker action by creditors, who see an opportunity to collect their debt via this process.

Citizens Advice has long campaigned on this issue and it produced a report called Out of Order some three years ago. It raised some interesting points not only on the matters that we are discussing today but also by asking what the Government might do about non-consumer credit agreements, for which these protections, such as they are, are not available. I am bound to admit that this is somewhat beyond the scope of these regulations but I ask the Minister to indicate—if he can today but, if not, perhaps subsequently by letter—whether the Government are looking at non-consumer credit agreements. Clearly, particularly in the present economic climate, there is a risk of many more debtors falling into greater difficulty and creditors pursuing them by these means. That might lead not only to difficulty for borrowers and their families but ultimately, in the event of orders for sale proceeding, to a greater charge on the public purse.

Of course, as the noble Lord pointed out and as the Explanatory Memorandum and other documents indicate, judicial discretion has to be considered, although it has to be said that, in the view of Citizens Advice, it is by no means clear that that discretion will be frequently exercised in the face of pressure from creditors. Citizens Advice takes the view that orders for sale should be permitted only where there is a willing default—that is, where it is not a question of somebody having a capacity to maintain the payments but where they decline to do so. Citizens Advice agrees that where a wilful default is made by people who can afford to meet the debt, a charging order and an order for sale will be an appropriate last resort. The trouble is that, as matters have developed, it is more likely to come about much earlier than as a last resort for people without the capacity to pay and, equally, without any wilful component in their behaviour, thereby exposing vulnerable people to what might well be regarded as predatory action by less than scrupulous creditors. That would be an unfortunate outcome which I am sure the Minister—because I remember some of his remarks when we discussed this in debates on the Crime and Courts Bill—would have little sympathy with but it may perhaps be an unanticipated consequence of the regulations before us.

[Lord McNally]

My Lords, I am very grateful to the noble Lord, Lord Beecham, for that constructive response. I know from our exchanges during the Crime and Courts Bill of his long-standing interest in this area and I understand why he continues to probe on the matter. The Government remain committed to providing more protection for debtors and we are taking appropriate action to ensure that that happens. When we debated this on the Floor of the House, and again today, the noble Lord pointed out that the coalition agreement talked about a £25,000 limit and we now talk of £1,000. I suppose that the honest answer is that that was the outcome of the consultation. We now feel that the balance of what we wanted to do is better met by the guideline of £1,000 rather than £25,000, not least because we were advised that the higher limit could steer creditors more in the direction of bankruptcy solutions, with the impact that I indicated on house ownership, rather than a settlement under these regulations.

We were also very much influenced by the judiciary, which believes that a very low threshold, with a great deal of judicial discretion, provides a far more guaranteed protection for the creditor than the protection afforded by a higher level—

[Lord Beecham]

For the debtor.

[Lord McNally]

For the debtor, yes; I am sorry.

With these things it is always a matter of judgment. The judgment that we have come to, and the level we have set it at, is the result of consultation, with the aim of striking a right and proportionate balance that will give power and flexibility to the judiciary and a degree of protection for the lower levels of debt.

The noble Lord asked about early enforcement of parts of the Tribunals, Courts and Enforcement Act 2007. Following the Solving Disputes consultation paper we implemented Section 93 of the TCE Act. It closes an existing loophole, providing a greater degree of security to creditors and encouraging debtors who are in financial trouble to make more reasonable yet affordable offers to pay.

The Government consulted on introducing this section in 2010 in their Solving Disputes in the County Courts paper. Some 74% of respondents supported its introduction, arguing that it offers protection both for creditors, for whom a charging order is often the only effective long-term solution to recovering a liability, and for the debtor. By commencing Section 93 of the Act we have given creditors a certain ability to convert unsecured loans to secured loans. I am sorry—I had better clarify that. One of the criticisms that has been made is that we have given creditors the ability to convert unsecured loans to secured loans by extending the use of charging orders in this way. We do not believe that that is true. Charging orders are used to secure an unpaid judgment debt, not a loan. Legitimate judgment creditors who have obtained a valid judgment through the courts should have the right to enforce the judgment by the most appropriate means available.

The availability of charging orders is also likely to dissuade frustrated creditors from opting to use bankruptcy law against debtors. A successful bankruptcy decision against a debtor would expose him, as I said, to his house and all his properties being repossessed. I have tried to be frank with the Committee, as has the noble Lord, Lord Beecham, and I understand the campaign waged by Citizens Advice on this matter—indeed, it may have influenced the original coalition agreement. However, after consultation, and in trying to get the balance right, we have come up with this solution. We will of course keep the matter under review. As to matters outside the credit regime, I was passed a helpful note which tells me that we will write to the noble Lord on the issue he raised.

[Lord Beecham]

My Lords, I would be grateful if the Minister could clarify a couple of matters. He referred to the order allowing charging orders to be applied for, but is he aware that under the regulations enacted last October it would be possible to do that without the debtor having at that stage defaulted? That would seem to convert an unsecured loan into a secured one.

My second question relates to responses. Am I right in thinking that the balance of responses reflects the fact that most of those responding were creditors rather than debtors, their representatives or organisations interested on behalf of debtors?

[Lord McNally]

My Lords, the balance reflected the interests of the responders. The noble Lord is quite right: the creditors had one set of priorities and those speaking out of concern for debtors had others. That is the nature of consultations, as the noble Lord will be aware. I also pray in aid the strong view of the judiciary that it wants to retain as much judicial discretion as possible. In my remarks I listed the clear considerations that a judge takes and the fact that these matters come before a judge.

On the issue of whether it is pre-emptive, as it were, under the measures that we took last October, as I explained, it gives debtors who are in financial trouble the opportunity to make more reasonable and affordable offers to pay. The noble Lord appears to be saying that adjustments can be made only after disaster has struck, but that is not my reading. If I am not right in my interpretation I will write to the noble Lord. However, it seems to me that it provides an opportunity to intervene in a constructive way when people are running into difficulty.

[Lord Beecham]

My Lords, I am grateful to the Minister. However, as I understand it, the order does not require the debtor to be in any difficulty or to have made any default at all before the charging order can be applied for. That does not mean, of course, that the order for sale would automatically follow, but it is a precursor to that and can arise even before any default has taken place. We are unable to take this much further today, but I invite the Minister to look at the situation in due course.

Motion agreed.