Prescription Begins Running on Default

Prescription Begins Running on Default

In light of the decision of the Court of Appeal in the  English case of Doyle v PRA Group UK Limited (2019 EWCA Civ 12), I am grateful for Paul Tilley of Wannops LLP for sharing a decision of the Scottish Sheriff Appeals court that was decided in October 2018, and has not previously been published on the Scottish Courts Website.

The decision, PRA Group Ltd v MacPherson, considered the same point considered in Doyle, advanced by the PRA Group in the Court of Appeal, and that is when does prescription begins running in a consumer credit agreement?

The decision by Sheriff Principal Turnbull found it began running, not on breach of the agreement, but when a default notice was served.

MacPherson, it is understood, was relied upon by the PRA Group in the Doyle case.

Prescription (Scotland) Bill

Prescription (Scotland) Bill

The Prescription (Scotland) Bill 2018 should be welcomed, but the Scottish Parliament needs to ensure all obligations to pay debts arising from personal contracts and statute should be covered by short term negative prescription, with few exceptions.

Scotland’s law of prescription governs when an obligation to pay a debt is extinguished and no longer owed. This includes debts owed for credit cards and personal loans, but also debts such as council tax arrears, benefit overpayments and outstanding tax debts owed to the crown.

At present the framework for this area of law is provided for by the Prescription and Limitations (Scotland) Act 1973 (1973 Act), which the Scottish government aims to amend and clarify with the Prescription (Scotland) Bill 2018 (2018 Bill), currently at stage one in the Scottish parliamentary process.

Prescription Framework

The current framework under the 1973 Act provides that if a debt is specified in paragraph one of Schedule One of the Act, it is covered by short term negative prescription, which means the obligation to pay the debt expires after five years, unless the person owed the debt takes certain steps to protect their claim (or the debtor makes a relevant acknowledgement of it). Paragraph Two of the Schedule, then specifies which obligations are not covered by the five-year rule, whilst Schedule Three lists obligations which are never extinguished.

Where an obligation is neither covered by short-term negative prescription, or exempt from being extinguished, it is covered by long-term prescription, which means the obligation can be recovered for up to 20 years, with, as the law currently stands, that period being restarted if a creditors makes a relevant claim for the debt within that twenty year period or the debtor makes a relevant acknowledgement of it.

It was the operation of this long-term prescription rule that meant that even in 2014 some Scots still owed poll tax debts, which dated back as far as 1989, and led to the passing of the Community Charge Debt (Scotland) Act 2015 to write off the remaining debts owed.

However, as was entirely predictable, attempts by the 2018 Bill to simplify the law in this area have already been derailed, with certain statutory creditors arguing their debts are different and in need of special treatment. So, in section three of the 2018 Act, a new provision that aims to include all statutory obligations to pay a debt into the five-year rules, unless provided for elsewhere, has now led to several provisions which provide otherwise elsewhere.

This includes debts owed for council tax, non-domestic rates, benefit overpayments (under UK legislation) and tax debts owed to the crown.

Few Exceptions

The Scottish Parliament should resist these attempts to protect the “special interests” of certain statutory creditors, with a view to preserving the overall principle that all debts, with few exceptions, that arise from personal contracts or statute should be covered by the five year rule and creditors, who wish to protect their claim, should be required to take certain steps to do so.

This could easily be achieved in relation to debts for council tax, non-domestic rates, and crown tax debts by extending sub-paragraph (a) of paragraph two of Schedule One of the 1973 Act to include debts legally constituted by decrees or documents of debt. This provision currently states the five-year rule does not cover obligations if they relate to an obligation to comply with a decree of court, an arbitration award or an order of a tribunal or authority exercising jurisdiction under any enactment. By extending it to include decrees and documents of debts, this would mean debts that are constituted by summary warrants, which all local authorities and HMRC have the power to issue for the above debts, and regularly do so, would be covered by long-term negative prescription. It would also mean in future, where new statutory obligations are created, and there is a wish to allow the statutory creditors to protect their claim easily, it would not be necessary to further amend the 1973 Act, but instead to allow for a means of recovery that allows the summary warrant procedure to be utilised.

In relation to benefit overpayments, however, that are owed to HMRC and the Department of Works and Pensions, the Scottish government should bring forward rules to provide that UK benefit overpayments, owed under the Social Security Administration Act 1992 and the Tax Credits Act 2002, are expressly included into the five-year rule. This would ensure all UK benefit debts are treated the same as Scottish benefit overpayments, which because of section 38 of the Social Security (Scotland) Bill 2017, will be covered by short-term negative prescription. It makes no sense that debts which are essentially the same in nature, should be covered by different prescription rules, simply because the source of the debt is UK legislation, rather than Scottish legislation.

Equally, however, if the purpose of section 38 the Social Security (Scotland) Bill 2017 is to provide a short recovery period for benefit overpayments, it may be necessary to further restrict sub-paragraph (a), of paragraph two of Schedule one of the 1973 Act. The reason being is that it makes clear that debts that are constituted by a tribunal or authority exercising jurisdiction under any enactment are not covered by the five-year rule: this could include both benefit UK and Scottish benefit overpayments. Also, it may wish to consider whether the running of short-term negative prescription for these types of debt can be interrupted by claimants making relevant acknowledgements of the debt, such as in making payments towards them. The reason being most benefit overpayments are recovered by direct deductions from existing awards of benefits, meaning every payment constitutes a relevant acknowledgement of the debt and the five-year prescription period begins running again. Most people will, therefore, clearly still be paying back benefit overpayments, long after the expiry of five years.

Bill to be Welcomed

However, the new Prescription (Scotland) Billis to be welcomed. For many years, because of the omissions in the 1973 Act, it was not even clear if HMRC tax debts could be extinguished.

Also, section 6 in the 2018 Bill makes it clear it will no longer be possible for long-term prescription to be interrupted by a creditor making a relevant claim or the debtor making a relevant acknowledgment, meaning a repeat of the problems that arose with poll tax should no longer arise, with debts still be being owed long after the expiry of twenty years.

Also, section 14 of the 2018 Bill also introduces into the 1973 Act a new burden of proof on creditors who are pursuing a debt through the courts, to show, where a question arises, whether that debt is prescribed or not. With the increasing use of litigation by debt purchasers to protect claims for distressed debts, this will hopefully help stamp out the practice of them obtaining decrees for extinguished obligations.

Long term Prescription – Is it too Long?

However, the question does need to be asked, with the similar law in other parts of the UK being governed by the Limitations Act 1980and the prescriptive periods being six and 12 years, is the long-term negative prescription period in Scotland too long? There appears little reason it should be possible for debtors in Scotland to be pursued for the same types of debts, owed to the same organisations, for almost double the duration of debtors elsewhere in the UK. Arguably, a shorter period of long-term negative prescription of 10 or 15 years should now be adopted.

Old Debts Create Debt Sewers

Old Debts Create Debt Sewers

As the practice of buying and selling old debts has grown, money advisers across Scotland are now witnessing a rise in the number of people being pursued for old debts.
Over the last few years, I have seen many clients in this situation and have heard of similar cases from other advisers. Many of the clients cannot either remember the debts being taken out or long believed they were written off.
When challenged to provide more information, it is not unusual for the new owners of the debt to struggle to provide documentary proof that the debts are even owed.
They often struggle to produce copies of the consumer credit agreements, they don’t have the account statements showing how the sums were accrued and they cannot point to the contractual basis for charges and penalties that have been applied.
There is also no chance they will ever produce the assignation agreements with which they bought the debt, even if it is the only evidence they own it (presumably not wanting anyone to see how little it was sold for in the first place).
To compound matters, when challenged on whether the debt is statue barred (meaning it cannot be recovered) under the Prescription and Limitations (Scotland) Act 1973 (1973 Act), it’s not unusual for them to reference English Law and the Limitations Act 1980 (1980 Act), which gives them longer to pursue the consumer for the debt.
This is no doubt the situation Mike Dailly of Govan Law Centre found himself in recently, and why he was in Glasgow Sheriff Court yesterday (22.01.2018) in front of sheriff Reid.
In his case Mike made an argument that can best be summed up in his own blog (The paper chase: Can an English governing law clause oust Scots law rights in a consumer contract?), but to summarise, it goes along these lines:

An English debt recovery company (DRC) buys an old debt and intimates to their solicitors to raise proceedings in Glasgow Sheriff Court. The debt has not been relevantly acknowledged for the purposes of the 1973 Act in over 5 years, but the DRC claims the debt is still recoverable as it involves a credit card agreement, within which the governing law is stated to be English Law and, therefore, the 1980 Act applies (meaning the debt is not statute barred until after 6 years).
Mike’s argument is the contract is a consumer contract for the purposes of the Rome I Regulation, Regulation (EC) No. 593/2008, and as such should be governed by the law where the consumer habitually resides (Scotland). However, the Rome I Regulation allow the consumer to choose the governing law that shall apply to their contract, meaning English Law can apply.
However, despite that choice, the law that governs cannot deny the consumer the protection they would normally enjoy under Scots Law, where that is greater than it would be under the chosen legal system. Therefore, the 1973 Act still applies, as it provides greater rights, and the debt becomes statute barred after 5 years if there is no relevant acknowledged or claim.

Consumer Credit Act 2015

Not having the benefit of being a solicitor, I have in the past made a different argument, but similar in approach and one that was recently argued successfully against another law firm resulting in them abandoning their claim against a client prior to it going to court. They too had relied on the 1980 Act.

My approach was under S62(1) of the Consumer Rights Act 2015 there is a requirement for the terms of a consumer contract to be fair. Where it is not, it is not binding on the consumer and the govering law clause is void, unless the consumer chooses to be bound by it.

As to what constitutes fair, section 62 states:

(4) A term is unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer.
(5) Whether a term is fair is to be determined—
(a) taking into account the nature of the subject matter of the contract, and
(b) by reference to all the circumstances existing when the term was agreed and to all of the other terms of the contract or of any other contract on which it depends.

My argument is a clause in a consumer contract which states the governing law is English law, when the consumer is habitually resident in Scotland, is unfair where the terms of the contract are not individually negotiated. There being no real choice.

Also, with regards to the resources available to the lender, who is acting in the course of a business, the significant imbalance results from the fact the contract is governed not by the consumer’s legal system, but the one which is preferable to the business, which results in a detriment for the consumer as they lose the protections of their own legal system.

This argument is not without some support. The Consumer Rights Act 2015 superseded the Unfair Terms in Consumer Contract Regulations 1999 (1999 Regs) which was essentially worded along the same lines.

In relation to those regulations the Office of Fair Trading (prior to being superseded by the Financial Conduct Authority) had stated in their guidance on the 1999 Regs:

17.4 It is not fair for the aggrieved consumer to be forced to travel long distances and use unfamiliar procedures. International Conventions lay down rules on this issue [The Rome Convention – Mike’s argument], which are part of UK law.

Terms which conflict with them are likely to be unenforceable for that reason, too.

A similar clause is included in the Competition and Marketing Authority’s Guidance on the Unfair Terms in the Consumer Rights Act 2015 at paragraph 5.29.7:

Consumers should not normally be prevented from starting legal proceedings in their local courts – for example, by a term requiring resort to the courts of England and Wales despite the fact that the contract is being used in another part of the UK having its own laws and courts. It is not fair for the consumer to be forced to travel long distances and use unfamiliar procedures to defend or bring proceedings.

Treating Customer’s Fairly

Considering this, it must now be questioned whether those lenders and debt purchasers who are relying on English Law in Scottish consumer contracts are having due regard to the interests of their customers and treating them fairly, as required under Principle 6 of the Financial Conduct Authority’s Higher Business Principles.

It is also not the first-time concerns have been raised about the lack of evidence creditors and debt buyers can produce when raising actions. In 2009 the Sheriff Courts Rules Council produced an Act of Sederunt that required lenders to produce a copy of the regulated agreements when raising an action, but after last minute lobbying by the credit industry and debt recovery solicitors, the regulations were withdrawn. Their concerns were that many creditors would not be able to produce actual copies of the agreements and would only be able to produce “re-constituted” copies.

It is clearly now time for the Scottish Civil Justice Council to re-examine this area. It is clear Scotland’s lower debt courts are being treated like sewers with claims being raised for debts that are either statute-barred or cannot be proven. The calculation being most consumers lack the knowledge or resources to defend such actions.

For more information on statute barred debts, see here or visit our Forum on statute barred debt.