The five-day countdown

Date: 11 April 2008
Authors: Paul Beevers
Issue: Vol 158, Issue 7316
Categories: Features, Legal services, Procedure & practice, Profession

Paul Beevers explains why lawyers acting for clients with logbook loans need to act fast

It is surprisingly easy to use a car as security for a secured loan, just like a house. Most lenders call them logbook loans. The loans are usually short term, at least initially, and at higher than average rates of interest: 200%-plus annual percentage rates (APRs) are common. For those who cannot repay their loan the car they have given as security is easily taken from them—and then gone in just five days. Originally, as the name suggests, logbook loans involved leaving the vehicle registration document of the car with the lender, as security for the loan. However, this attempt to create a pawn of the car failed to work, because a vehicle registration document, a V5, is not a document of title—see Joblin v Watkins and Roseveare Motors Ltd [1949] All ER 47 and the statement to that effect on all V5s.

To establish the right to take possession of the car lenders turned to a chattel mortgage known as a security bill of sale. Most borrowers will be familiar with a loan agreement regulated by the Consumer Credit Act 1974 (CCA 1974), but few will be aware of the Bills of Sale Act 1878 (BSA 1878) or the Bills of Sale Act (1878) Amendment Act 1882 (BSA(1878)AA 1882). Any borrower who thinks the lender will need a court order before taking the car is in for a rude shock.

DOCUMENTATION

The documentation for a logbook loan comes in two parts, the loan agreement and the security bill of sale. Given the differing requirements of the relevant legislation it is not possible to combine the two satisfactorily. The loan agreement will be a standard CCA-regulated agreement, which must contain details of any security given for the loan. The security bill of sale must comply with the requirements of the schedule to BSA(1878)AA 1882 (s 9), and the borrower’s signature must be attested in accordance with s 10, or the security is void. A security bill of sale also has to be registered in the High Court (s 8), failing which it is void. The registration provisions are in BSA 1878, s 10 and RSC O.95. The borrower’s lawyer needs to check all of this, which may require him to initially reserve the borrower’s position on the validity and enforceability of the documents when issuing proceedings.

LENDERS’ POWERS ON DEFAULT

Where the car is security for a loan regulated by CCA 1974 the lender has to serve a default notice before enforcing its security (BSA(1878)AA 1882, s 7A). The clock has now started ticking, and the borrower has just 14 days to deal with that notice. If he fails to react at this stage much valuable time will be lost.

Once the default notice has expired the lender can seize the car given as security. No court order is required before the car is seized as CCA 1974, s 92 does not apply to a security bill of sale, and so the borrower does not get an opportunity to apply for time to pay unless he takes the initiative. The security bill of sale will authorise the lender to enter the borrower’s property to take the car, and there have been instances where this power has been used to break into garages. The only protection the borrower has at this stage is BSA(1878)AA 1882, s 13 which requires the lender to wait just five days before selling the car.

ACTION THE BORROWER CAN TAKE

Section 7 of BSA(1878)AA 1882 contains a limited form of relief from forfeiture, but on its own it will not assist the borrower much, as it depends on the right to seize the car having ceased to exist, eg as a result of the debt being paid. To be effective an application for relief under s 7 has to be combined with an application for a time order under

CCA 1974, s 129. Once the court has made a time order the lender’s right to seize the car ceases to exist. When applying for a time order it is possible to apply for supplemental orders under CCA 1974, s 136 and in one of the cases, known collectively as Southern and District Finance plc v Barnes and Another [1996] 1 FCR 679, the court (at first instance) used its powers under CCA 1974, s 136 to order that no more interest be debited to the borrower’s account, which may be necessary if the borrower is to pay the debt by instalments.

The county court has jurisdiction, and there is a Practice Direction that supplements CPR 7.9 in connection with the issue of proceedings. Bearing in mind that the borrower has just five days to act once the car has been seized by the lender it will also be essential to apply under CPR 25 for an order to restrain the sale of the car pending the hearing of the application.

With rates of interest in excess of 200% APR common (and occasionally as high as 600% APR) an application to re-open the credit agreement under the new unfair relationship provisions contained in CCA 1974, ss 140a, b, and c, which came into force in April 2007, is something to be considered. Where the borrower has rolled over the initial loan into a new one, possibly more than once, until the equity in the car was used up, the earlier agreements can be reopened as well. An application can also be made even though the car has been sold, which avoids relying on On Demand Information Plc (In Administrative Receivership) and Others v Michael Gerson (Finance) Plc and Others [2002] UKHL 13, [2002] All ER (D) 116 (Apr), as the common law remedy of relief from forfeiture may not (yet) extend this far.

Bookmark this article with: