CAB backs limitations period reduction

[Amethyst]

Limitation periods and debt recovery – impact of reforms

Citizens Advice’s views for the Ministry of Justice

July 2009

Introduction

Citizens Advice welcomes the opportunity to submit a response to the Ministry of Justice’s
consultation on the impact of proposed reforms to limitation periods

The Citizens Advice service is a network of over 400 independent advice centres that provide free,
impartial advice from more than 3,000 locations in England, Wales and Northern Ireland.

In 2008/09, the Citizens Advice service in England and Wales helped nearly two million clients with
about six million problems, including 1.9 million enquiries about debt from 575,000 clients. Of the
debt enquiries, nearly 250,000 concerned liability for debt, including whether the debt was statute-
barred.

CAB evidence about limitation periods

Over the past ten years or so, Citizens Advice Bureaux have seen increasing numbers of clients who
have been pursued for a statute barred debt. In the late 1990’s, these were almost exclusively
related to debts remaining after the sale of their repossessed property at a loss. At the time, caselaw
about which limitation period applied to mortgage shortfall debts was unclear.

Our 1999 report, The long shadow, highlighted the impact on borrowers who were first contacted
about their debt, often running to many thousands of pounds, years after repossession. We
recommended that the Limitation Act should be changed to introduce a six year limit on recovery of
mortgage shortfall debts following repossession and sale of the property. Shortly after publication of
the report, the Council of Mortgage Lenders agreed that their members would commence all action to
recover mortgage shortfall debts within six years of the sale of the property. This policy was used
and watered down in the FSA’s Mortgage Conduct of Business rules (MCOB 13.6.4 (R) (2)) when
regulation of first charge mortgages came into force from 31 October 2004.

Nevertheless, we continue to receive evidence of people being pursued for mortgage shortfall debts
where the property was sold more than six years ago. In some cases, the debt may have been
acknowledged by part-payment by one party to the debt since the sale, but the other party is no
longer in contact with them and is unaware that the debt is no longer statute-barred. For example:

A CAB in Gloucestershire saw a lone parent on benefits in June 2009, who had recently been
contacted by a debt purchase firm asking her to repay a debt on a mortgage taken out by her
then-husband in 1989. The client told the CAB that she did not recall ever signing this
mortgage. Her ex-husband had been in prison twice for fraud and so he might have forged
her signature, which he had done previously. The client originally wrote to the company to
inform them that the debt was statute-barred. However, they sent her a mortgage account
showing that a payment was made by her husband in April 2007. The client had subsequently
asked the company three times to send a copy of the mortgage agreement to show that she
was liable. They replied to each letter but had not produced any agreement. The client told
the CAB that she felt physically sick every time the post arrives, and dreaded opening any
letters from the debt recovery company

In other cases, debt collection companies seem to be trying their luck in getting the debtor to pay up.

A Sussex CAB reported that a debt purchase company contacted a divorced woman in 2008
about a shortfall debt on a property which was repossessed in 1990. The company told the client that they could not trace her ex-husband and so were looking to the client to pay the
outstanding amount and interest, even though the debt seemed to be statute-barred. The
client told the company that she was in receipt of income support, and so had no means of
paying, but the company sent her forms to complete. This frightened her so much that she
collapsed and was taken to hospital.

In the past six years, bureaux have seen a growing number of cases where lenders, or rather debt
purchase companies on their behalf, have contacted borrowers about very old unsecured debts. In
many of these cases, the lender appears not to have made any attempt to contact the debtor in the
meantime. These companies often use harsh debt collection practices, including threatening court
action, as the following cases show:

A Dorset CAB reported that a woman in poor health was in the process of divorcing her
husband following domestic violence. A succession of debt collection companies had been
pursuing her in the last few months for a debt of £2,966 which she thought might relate to a
loan agreement taken out by her first husband from whom she was divorced 11 years ago, but
she had no knowledge of it. She had received a letter from a debt purchase company headed
'Notice before Proceedings' and threatening court action to recover the debt. She then
consulted the bureau. The adviser rang the signatory of the letter who was very aggressive
and said he would suggest his clients petitioned for bankruptcy if the debt was not paid. He
also claimed the client had lived at an address which she denied living at, and said that she
had made payment in 2007, which she also denied. The adviser asked the company to
provide proof, but the company did not do so, and subsequently wrote to the company stating
the debt was statute-barred. On receipt of this letter, the company rang the bureau and was
extremely rude and aggressive, saying the client was lying to us and had made the payment in
2007 and lived at the address they claimed (even though the CAB had documentary evidence
to the contrary. The client then received a letter from the debt purchase company threatening
to commence bankruptcy proceedings.

A man sought advice from a CAB in Cambridgeshire about court action for debt which had
taken place whilst he had been away for a while visiting his mother. When he rang the court,
they told him judgment for £299 had been entered against him, and to contact the creditor for
further information. When the client rang the company who had bought the debt to say he
knew nothing about it, they told him that they had in fact broken a £800 debt into three to get it
through the court more easily. The client thought the debt might be at least eight years old
and might be a bank overdraft which he thought he had paid off and then closed the account.
He had had no contact with the bank since then and did not receive a pre-action letter.

A Hampshire CAB reported that their client had received a letter from a debt purchase
company about a debt of £3,600 which was about 11 years old. The letter from the debt
purchase company and the phone call the client subsequently made to them was very
aggressive and threatening e.g. sending around people to his address and threatening court
proceedings.

Overall comments

Citizens Advice warmly welcomes the proposed reduction in the limitation period for unsecured
debts. We agree with the Ministry of Justice’s view that the current law is arbitrary and that a greater
degree of consistency in limitation periods is necessary. Three years is ample time for creditors to
trace debtors these days, and it is also a reasonable amount of time for debtors to expect their
creditors to start pursuit of the debt, especially given the development of electronic communications
and electronic accounting. We believe that pursuit of the debtor should not involve court action,
where the debtor offers reasonable and affordable repayments. The credit industry should remember
that, in any case, repayments will reset the Limitations Act clock. A reduction in the limitations period
should be no reason for creditors to take court action rather than accept reasonable repayments.

As some of the cases above show, where creditors delay contact with the debtor about very old
debts, the debtor may not remember owing the money, or may believe that they have paid it off but
no longer have any paperwork. It is particularly difficult for adviser to get to the bottom of the client’s
problem when the debt has been sold to a debt purchase company and the purchaser cannot, or will
not provide further information to the debtor, as the following case shows:

A Sussex CAB reported that an elderly couple on guarantee pension credit sought advice
about a statutory demand for statute-barred credit card debt which they received in September
2008. On bureau advice they sent a cheque for £1 to the company acting for another
company who had bought the debt and requested a true copy of the alleged agreement. The
company who sent the statutory demand quickly passed the debt back to the debt purchase
company, to whom the CAB we wrote pointing out that in threatening legal action on a statute-
barred debt was an offence under the Consumer Protection from Unfair Trading Regulations
2008. Since then, the CAB wrote and phoned the debt purchase company about this issue,
but they did not reply to the CAB, writing to the couple instead and threatening court while the
request for a true copy was outstanding. They also alleged that the clients owed two further
debts to the same credit card company. So far they had provided one true copy of an
agreement dated 1995; they twice claimed on the telephone to have copies of the other
agreements and proof of payment within the past six years but have failed to provide them.

In some cases it seems that creditors sometimes deliberately delay the recovery of debts (and the
issue of claims in respect of them) so that the debts can increase by the accrual of default interest
and default sums. Reducing the limitation period from six to three years would at least, to some
extent, reduce this happening.

Given the amount of electronic data held about individuals and the increase in firms offering tracing
services, it is now much easier to trace debtors. We fail to see why creditors need six years to do
this rather than three years. As stated in paragraph 37 of the consultation, creditors can always issue
claims to a debtor’s last known address.

We would point out that many of the cases Citizens Advice Bureaux see relate to collection activity
on a statute-barred debt only. Few actually result in court action being taken. In these situations, the
new proposals will not make any difference to the pressure debtors feel when they are subject to
harsh practices used to collect statute-barred debt. We therefore hope that the Office of Fair Trading
will take the opportunity when these proposals are enacted to revise and strengthen its Debt
Collection Guidance in respect of the collection of statute-barred debts.

As the questions posed in the consultation paper seem to be relevant only to creditors and debt
collectors, rather than advice agencies helping debtors, we will confine our comments to the
arguments made in the consultation paper.

Detailed comments on the paper

Paragraphs 3 and 27 – 29 – enforcement of judgments

We are disappointed that the consultation does not consider introducing time limits for the
enforcement of judgments. Currently, there are no time limits for the enforcement of judgments,
other than by way of execution of goods (see CPR Schedule 2 CCR Order 26 rule 5 and CPR
Schedule 1 RSC Order 24 rule 2(1) which requires judgment creditors to apply for leave to enforce
judgments where 6 years or more has passed since the judgment was entered.

Therefore, creditors can wait indefinitely to enforce judgments and this can be very unfair to judgment
debtors. It would be far better for creditors to have to apply for leave to enforce by execution where
three or more years have passed since the judgment was entered and for all methods of enforcement
to come under the same regime. This would require amendment to the CPR.

We welcome the proposals at paragraph 28 in relation to a reduction on the limitation period for
bringing actions on a judgment. We would, however, like to point out to the Ministry of Justice, that
we believe that a bankruptcy petition on an unpaid judgment is an incorrect example of an action on a
judgment. In the case Ridgeway Motors (Isleworth) Ltd v Alts Ltd [2005] EWCA Civ 92, the court
held that although a winding up petition was ‘proceedings in a court of law’, insolvency proceedings,
whether corporate or personal, were neither an action on a judgment under s24(1) nor the
enforcement of an existing judgment under Lowsely v Forbes. We would therefore welcome
clarification from the Ministry of Justice on whether they intend to bring petitions based on unpaid
judgments within the definition of ‘action on a judgment’ under section 24(1) of the Limitations Act. If
the MoJ does intend to do this, Citizens Advice would welcome it.

Paragraph 17 – sums recoverable under statute

This paragraph relates to sums recoverable under statute (section 9 of the Limitations Act 1980). It
states that the Ministry of Justice does not think that many private sector debts will be subject to this
but ignores the fact that claims for that unfair relationships under the Consumer Credit Act 2006
come under this provision, as do some claims by trustees in bankruptcy.

We would like to draw to the Ministry of Justice’s attention that in respect of unfair relationships
claims and claims by trustees in bankruptcy (e.g. where there have been undervalue transactions or
preferences), it is not satisfactory that that claims for the recovery of money are (currently) subject to
a 6-year limitation period as sums recoverable under section 9, yet claims for other relief, e.g. for the
amendment to future obligations in an unfair relationship claim and the recovery of property by a
trustee, are subject to a 12-year limitation period under s8(1) as specialties (see paragraph 1. This
is an area that has been subject to much litigation. Citizens Advice therefore believes the law in this
area should to be simplified and made more consistent.

Paragraph 19 – secured debts

It is disappointing that that secured debts are outside the scope of this consultation, yet in the annex
it is proposed to reduce the limitation period under section 20(1) for the recovery of principal/capital
from twelve to ten years but to increase the limitation period in respect of interest under section 20(5)
from six to ten years.

While it is the reduction of the limitation period under section 20(1) is welcome, we believe it would be
preferable to bring it in line with Scottish law which sets a five-year limitation period. We are
particularly concerned about the proposal to increase the time limit for enforcing interest on secured
debts to ten years. In many of the shortfall debt cases bureaux have dealt with, it seems that the
lender has left contact with the debtor for many years before any action is taken in respect of them.
This seems to us to contradict some of the basic aims of limitation law – to encourage claimants to
take action within a reasonable time and to protect defendants from stale claims. Increasing the
limitation period for the recovery of interest is likely to have the opposite effect. We believe strongly
that the recovery of interest on secured debt should be subject to the core limitation period of three
years.

We do not think it is reasonable for a creditor to sit on a mortgage shortfall debt for ten years. We
believe that the law should encourage creditors to deal with shortfall debts in a more reasonable time
by applying a shorter limitation period. Otherwise, as indicated in the cases above, debtors who have
been repossessed and suffered a shortfall can have their lives blighted by shortfall claims that are
only made very many years after their homes were repossessed or sold.

We would point out to the Ministry of Justice that the policy environment in relation to limitation
periods for secured debts has changed since the Law Commission undertook their inquiry and issued
their report. As we highlighted above, our policy work has resulted in a regulatory limitation period of
six years. If the Ministry of Justice are not willing to change the limitation period to five years for the
principal and three years for the interest, we would suggest that they should at least implement a six
years limitation period for secured debts in the interests of simplicity.

Paragraphs 20 and 26 - acknowledgment and part payment

Under the current law, where an acknowledgment is given, it binds only the person giving it but not
any joint debtors or guarantors (s31(6)). Therefore, an acknowledgment made by a joint debtor only
restarts a limitation period for that debtor but not for any other joint debtors or guarantors. However,
under s31(7), where a payment is made, it binds all others liable for the debt. This is apparently
based on the principle that where a payment is made, it benefits all others liable for the debt. As we
highlighted in the cases about mortgage shortfall debt recovery above, this may not necessarily be
the case. As the aim of the review of limitation periods is to simplify the legislation, there is no
justification to keep the difference between the way in which acknowledgements and payments are
treated.

The amendment to the requirement for acknowledgement to be in writing and signed by the debtor
may cause problems for debtors and their advisers. For example, an unsigned financial statement
setting out the debtor’s income and expenditure would now definitely be acknowledgement, as, it
would appear would a financial statement completed over the phone or other written notes taken by a
creditor over the phone. We are concerned that the current requirement for there to be a definite
admission of liability seems to have been substantially weakened. This may leave any new regime
very much open to abuse by unscrupulous debt collectors. The result may be to encourage the
debtor to not make any attempt to contact the creditor as this would be deemed acknowledgement.
This seems to defeat the object of the exercise which is stated as encouraging communication
between debtor and creditor. We believe that the best option to try and gather information would be
to ensure communication is always by correspondence, to dispute liability and rely on without
prejudice protection.

Paragraph 26 also proposes that in ‘writing’ should also include ‘any recording by any means of a
representation of words, symbols or numbers, whether recorded by the person making the
acknowledgment or its recipient’. Citizens Advice strongly opposes this proposal for a number of
reasons. A tape of a phone call could appear to provide evidence of an acknowledgment if it is only
partial and/or used out of context, e.g. it follows a phone call (of which a recording is not available)
where liability was clearly in dispute. It will also be open to unscrupulous creditors to manipulate
phone calls to induce an acknowledgment where a debt is, in fact, disputed.

It appears that this proposal is intended to relate to tape recordings of telephone calls, but it seems
that it may also cover written transcripts of phone call. If this is the case, we believe it is unacceptable
for a creditor to be able to rely on its own written record of a phone call, as, in our experience, such
records are often inaccurate and are open to abuse.

The introduction of the proposal could lead to more disputes about whether acknowledgments have
been given and evidential problems which debtors are less equipped to deal with and is contrary to
the stated aim at paragraph 8 of making the law simpler and more cost-effective.

Paragraphs 22-and 23 – core limitation periods

This paragraph proposes that the cause of action in debt cases should run from the date of the
creditor’s knowledge of the breach of contract giving the right to take legal action. Whilst there is
unlikely to be much, if any, difference between the cause of action arising on the breach of contract
and the creditor’s knowledge of the breach, this might introduce an unnecessary complication that
could lead to disputes over when the creditor knew, or should have known, of the breach.

This proposal also requires that any damage, e.g. caused by a debtors default, needs to be
‘significant’ (paragraph 23(3)). This word is not defined. The Law Commission’s paper suggests a
reasonableness test for “significant”. The Ministry of Justice should consider how this should be
applied to debt claims in a way that encourages good practices.

If the proposal that time runs from the creditor’s knowledge is introduced, the long-stop of ten years is
welcomed, as are other long-stop provisions.

Paragraph 25 – control of limitation periods

This paragraph refers to creditors having ‘effective control’ of when a limitation period begins. We
believe that this assertion runs contrary to case law. The idea that a creditor should be permitted to
do this was strongly disapproved in Hornesy Local Board v Monarch Building Investment Building
Society [1889] 24 QBD 1 C.A. which was cited extensively in Royal Borough of Kensington and
Chelsea v Khan [2002] EWCA Civ 279. Also, in West Bromwich Building Society v Wilkinson [2005]
UKHL 44 this position was supported by the House of Lords which said at paragraph 10 of the
judgment that it would be ‘strange if a lender could stop time running by its own act …’.

We believe that creditors should be prevented from doing this by delaying making a demand in order
to stop a limitation period even starting to run.

Paragraph 32 – the impact on the credit industry of the reduction of limitation periods

Citizens Advice strongly disagrees with the views expressed in this paragraph. We see no reason
why creditor cannot attempt an out of court settlement with a debtor within a three-year period. We
believe that the shorter limitation period would encourage creditors to operate more efficiently and to
act more promptly. It is always open to creditors to threaten legal proceedings if a debt is not
acknowledged or a (nominal) payment made.

If creditors operate efficiently, they should not be overly prejudiced by the reduction in the limitation
period. We would reiterate our views expressed earlier in this response; namely that a three year
limitation period is fairer to debtors and more appropriate at a time where electronic methods of
collection and tracing are available. In addition, it will stop creditors sitting on old debts approaching
their limitation period in order to allow interest and charges to accrue. In the short term, a reduction in
limitation periods may lead to more litigation but in the longer term it is likely to lead to creditors
operating more efficiently and for debts to be dealt with earlier.

Paragraph 39 – unpaid water debts

The consultation paper asserts that problems are ‘particularly acute’ in respect to unpaid water debt.
It also says that non-payment of water debts ‘may’ arise under a breach of a statutory duty to pay (i.e.
under section 9 that covers sums recoverable under statutes) rather than on a breach of contract.
We would point out that section 9 does apply to water debts, as water is supplied under a statutory
duty to supply and that consumers have to pay under the Water Industries Act and not under a
contract.

Other issues not covered by the consultation paper – transitional provisions

The consultation paper does not contain any suggestions on transitional provisions which will apply to
limitation periods that are already running when any changes come into force. We believe that it is
essential for any transitional provisions to ensure that creditors do not rush to court just before the
new provisions come into force.

[hdly2010]

I agree too~

I am a newbie here. I agree with the thread starter.