Does the Protocol Give Rise to a Legally Enforceable Contract?

Mond & Anor v MBNA [2010] EWHC 1710 (Ch) (Sir William Blackburne)

In early February 2009 C (the debtor) approached ClearDebt for financial advice in relation to his loan and credit card liabilities. ClearDebt advised C (who was unwilling to enter into bankruptcy) to propose an IVA to his creditors. Mr Mond (who also happens to control ClearDebt) agreed to become C's nominee for the purposes of the Proposal and to be the supervisor of the IVA upon its approval. The Proposal disclosed that C, who was 23 years old at the time, lived at home with his parents, had no significant assets other than a motorcycle which he required for travel to his place of employment as a plumber, and had unsecured liabilities totalling £18,969 made up of two loan creditors and three credit card creditors (of which MBNA was one). The smallest of the five was for £2,099 and the largest was MBNA for £5,536. The Proposal also disclosed that C had a monthly income of £1,083, monthly outgoings of £860 and, in consequence, when applying what are known as the CCCS (or Consumer Credit Counselling Service) Budget Guidelines, an excess of income over expenditure of £223 per month. The nominee (Mr Mond)’s fee, excluding VAT, would be £1500 and the supervisor's fee, again excluding VAT, would be 15% of all realisations (after the payment of the nominee's fee) and would be drawn as sums were received. In addition, 3.15% of the proposed monthly contribution would be paid to ClearDebt by way of premium for insurance to indemnify C against being unable to work owing to accident, illness or unemployment during the period of the IVA. It was anticipated that the total estimated dividend payable to creditors would amount to 46p in the £.

The Proposal was made in accordance with the procedure laid down by the IA and IRules and was sent to C’s creditors under cover of a letter dated 3 March 2009 giving notice of an intended meeting of creditors on 18 March 2009. By a proxy dated 11 March 2009, MBNA (acting by its agent KPMG) instructed Mr Mond as chairman of the proposed creditors’ meeting to vote against the Proposal. The following grounds for rejection were stated on a document which accompanied the proxy form: “high fees”, “disposable income available for a DMP” and “minimal number of creditors”. As MBNA held more than 25% of C’s indebtedness, MBNA's decision to reject the Proposal meant that it would not be approved. MBNA's precise reasons for opposing the Proposal and whether those reasons changed as the days passed have been a matter of some dispute. One of those reasons was MBNA’s view that, having regard to C’s disposable income and the small number of creditors, a DMP was feasible and manageable. To this end a member of MBNA’s Insolvency Team contacted C in mid-April 2009 with an offer to set up a DMP for him. The result was that on 16 April he agreed to do so on terms that he would make a monthly payment of £70 towards his indebtedness until it was paid off (with interest and fees chargeable in respect of the indebtedness being frozen in the meantime), the payments would be made by direct debit and the arrangement would be reviewed annually. The figure of £70 per month was calculated as that proportion of his monthly disposable income of £223, taking into account the amounts owed to his other creditors, which would leave a balance sufficient to make proportionate monthly payments to those other creditors. In accordance with this arrangement C paid the initial monthly instalment later that month and has since continued to meet the monthly instalments due under the arrangement. The evidence discloses that C was able to enter into DMPs with each of the other four creditors, reviewable six-monthly. Thus, the only persons who are unhappy with what happened were Mr Mond, the nominee under the Proposal (and, if the Proposal had been accepted, the intended supervisor under the IVA), and ClearDebt which had advised C on his options and suggested to him that an IVA was the best solution once he had rejected the bankruptcy option.

The relief claimed was for declarations that, by voting against the Proposal, MBNA acted in breach of various provisions of the Protocol. For the claimants, Mr Stephen Davies QC submitted that the terms of the Protocol are binding on members of the BBA (including therefore MBNA) because, through the BBA (by its Executive Director's letter of 17 December 2007) they agreed to comply with it. It creates, he said, mutual obligations of a bilateral nature. However, Sir William Blackburne noted that the Protocol is not intended to operate in the way that Mr Davies suggested. The Protocol sets out how the IVA provider, on whose advice and with whose assistance the debtor presents a PCIVA proposal, should go about the process of formulating and advising him on it and, assuming the proposal is Protocol-compliant, how the creditors who have elected to abide by the Protocol, should treat the debtor. It is clearly a statement of best practice. It does not set out the terms of any contract by which the IVA provider and the creditors, electing to operate the Protocol, are to be bound in law. Nonetheless, he observed that even though the Protocol does not give rise to a legally enforceable contract but is no more than a voluntary code of practice, the court should not decline, on that account alone, to exercise its discretion to grant declaratory relief in respect of it. But he felt considerable difficulty about granting any kind of declaratory relief on this claim where the only persons who were before him to debate the correct operation of the Protocol were two IVA providers, in reality Mr Mond alone since he effectively controls ClearDebt, and one, albeit important, member of the BBA.

Picture credit: http://www.cleardebt.co.uk/