Alan McIntosh: Is time up for Time Orders?
Alan McIntosh discusses a recent case in Greenock Sheriff Court in which he was involved that raised some interesting questions about the effects of Time Orders under section 129 of the Consumer Credit Act 1974. A hearing is scheduled for later this month.
The facts of the case are quite common these days for money advisers to come across: a consumer takes out a car on a hire purchase agreement and after a period of time misses a couple of instalments. The hirer then serves a default notice under s.87 of the 1974 Act and once it expires, terminates the agreement and demands the return of the vehicle and full payment of all sums owed under the agreement.
The question is: where a time order is granted and complied with, what effect does it have? My argument is it remedies the default, reverses the termination of the agreement by the lender and restores the parties to the position they were in prior to the default – with the consumer being entitled to exercise all their contractual and statutory rights again.
This would mean a consumer faced with an action for payment of money, for say £8,000, and for the return of a car, could apply for a time order; and then offer in one lump sum, or by instalments, the contractual monthly amount plus something towards the arrears, so that when the arrears are cleared and they have paid half the amount owed under the agreement, they can voluntarily terminate the agreement (s.99), return the car and have no further liability (s.100), subject to the normal caveats about the car being returned in a reasonable condition.
What are time orders?
Time orders are not a new remedy. They have now been on the UK statute books for over 40 years. However, despite this and that they were originally introduced to increase protections for consumers, they remain a relatively little-used remedy, particularly, by consumers experiencing financial difficulties.
Historically, where they have been used, it has primarily been in relation to second secured loans. This is confirmed by a quick perusal of the existing case law on them, both Scottish and from other parts of the UK.
In Scotland, their use has declined further because of the reforms introduced by Mortgage Rights (Scotland) Act 2001 and more recently the Home Owner and Debtor Protection (Scotland) Act 2010, which introduced greater protections for consumers (although, unlike time orders, these don’t allow the courts the powers to reduce interest rates payable on loans).
The growth in car finance agreements
However, the recent explosion in the use of hire purchase (HP), conditional sale and personal contract purchase (PCP) agreements in the new car market (over 90 per cent of new cars are now purchased using finance), makes a case for time orders to be used more frequently, especially when it is considered that where someone defaults on an agreement, it usually leads to the hirer terminating the agreement and the consumer becoming liable for the full amount owed, including optional lump sums that are due at the end of the agreement.
Consumers lose possession of their cars and are often left with a substantial residual debt. Frequently, this is compounded by the fact that the increased use of these types of agreements has led to large quantities of second hand cars flooding the market, reducing the price that is obtained by the hirers and the funds that are available to offset against the outstanding debt owed.
How could time orders be a solution?
However, where a consumer goes into arrears with their agreement and an arrears or default notice is served on them, they do have the option of applying to the court for a time order under s.129 of the Consumer Credit Act 1974.
Time orders allow sheriffs a lot of discretion if they consider them “just”.
They can make an order allowing the consumer to pay by instalments “any sum owed”, at such times and intervals as they consider reasonable, having regard to the means of the consumer.
The benefit of this is that, unlike time to pay direction under the Debtors (Scotland) Act 1987, time orders are not just instalment decrees but allow the consumers to keep the car and avoid a court order being granted against them.
When deciding whether or not to grant an order, courts can look at the age and level of experience of the consumer and not just their means. They can also look at what needs the consumer has and why they wish to retain the car. They may also look at the circumstances that preceded the consumer entering the agreement and the conduct and behaviour of the consumer and the hirer during the operation of the agreement. They may also look at the conduct of the consumer and the hirer following the termination of the agreement.
Any Sums Due
Existing case law suggests it could be for the full amount owed, or just the arrears outstanding, should the consumer not have defaulted.
The court, therefore, can make an order for the full amount owed, which may be important where a consumer applies for an ancillary order under s.136 of the 1974 Act, as that allows the court to amend the terms of the agreement and also possibly reduce the interest rates applicable to the agreement.
Equally, the court may just allow the time order to apply to the arrears that would have been owed on the agreement had the consumer not defaulted. The consumer, therefore, may propose to pay the normal monthly contractual amounts and something towards the arrears, allowing them to remedy the circumstances that led to the default in the first place. This would then allow the consumer to resume their contract, as originally intended, once they have done so.
What is the effect of a time order?
This area is less clear. My argument is the effect of a time order is as follows: where it is granted and complied with in full, the default should cease and both parties should be returned to the position they were in prior to the default because the circumstances that caused the default have been remedied.
It would clearly be nonsensical if after a time order was granted and complied with the lender was still able to demand the full amount owed. If that was the case, why not just grant a time to pay direction under the 1987 Act. Also, the point of a time order, unlike a time to pay direction, is that it allows the consumer to retain possession of the vehicle if they wish. Why then should a hirer still be able to recover it?
Furthermore, as the right to demand full payment of monies owed and to recover the vehicle stem from the effects of an expired default notice under s.87, where the consumer has remedied the circumstances that led to the default, surely those rights should be removed.
Termination of the agreement
Another issue arises where the lender on the back of the default notice has terminated the agreement. What should the effect of the time order be on the termination of the agreement? This is an important question as the effect of the termination by the hirer is the consumer loses some of their contractual protections, including the right to early terminate the agreement themselves under s.99 of the 1974 Act and the protections that flow from that under s.100, which provides where they do and have paid more than half the amount owed, they should have no further liability.
My argument is that because the right to terminate the agreement flows from the expired default notice under s.87 of the 1974 Act, if the default itself is remedied by the time order, the hirer’s rights under s.87 should be removed so they cannot demand full payment, cannot recover the vehicle and the termination of the agreement should be reversed (where the consumer is still in possession of the vehicle, this is possible).
The consumer should then be at liberty to exercise their rights, should they choose, under s.99 (early termination) and rely on the protections afforded them under s.100 where they have paid more than half the amount owing under the agreement.
Alan McIntosh is a senior money adviser. The views expressed here are his own.