Irish Supreme Court rules on alleged unlawful credit servicing

The decision (24 pages) arose from an appeal brought by a borrower, John Kelly, who argued that a loan agreement was unenforceable due to the alleged breach of credit servicing related consumer protection laws.

Lisa Carty of Pinsent Masons in Dublin said: “The Supreme Court’s decision is one worth noting for the financial services industry, as it considers whether the application of credit servicing regulations can be retrospective, and also highlights the interplay between the Central Bank’s role as the regulator of credit servicing providers and the court’s role.”

The origins of the case date back to 2007, when Bank of Ireland (BOI) provided a loan of around €12 million to a partnership of five individuals, including Kelly, to support the commercial development of land. The loan was called in by BOI in 2011 and proceedings were subsequently issued against the five debtors. The loan was sold to Cave Projects Ltd (Cave Projects) in 2013. Cave Projects reached agreement with all of the debtors aside from Kelly, and ultimately obtained judgment in the amount of €11.4 million against Kelly in the High Court.

Kelly appealed the High Court's decision to the Court of Appeal, representing himself. Shortly before the appeal was heard, the Central Bank of Ireland (Central Bank) issued a public warning notice, stating that it believed that Cave Projects was engaged in credit servicing services without Central Bank authorisation.  The Central Bank also noted that it is a criminal offence for an unauthorised firm to provide financial services that require authorisation. The fact the Central Banks’s notice was issued was referenced but not considered by the Court of Appeal, which ultimately rejected Kelly’s appeal.

Kelly was granted leave to appeal to the Supreme Court, on the sole question of whether the credit servicing/Central Bank notice issue had implications for the appeal itself. In reaching its decision, the Supreme Court considered several questions, including whether Kelly was entitled to raise the issue and whether Cave Projects was engaged in unauthorised credit servicing.

The court examined the relevant legislative provisions of the Central Bank Act 1997, which had been amended by the Consumer Protection (Regulation of Credit Servicing Firms) Act 2015. This amendment brought credit servicing firms within the regulatory remit of the Central Bank. A central issue which the court considered was whether these legislative amendments applied retrospectively to the ongoing litigation between Kelly and Cave Projects, in circumstances where the litigation had been issued prior to the amendments coming into force.

Kelly argued that the enforcement of the debt by Cave Projects was illegal without Central Bank authorisation, citing public policy considerations and the need to protect consumers. Cave Projects countered that it was not engaged in credit servicing and that even if it were, Kelly was not a ‘consumer’ for the purposes of the debt due and could not, therefore rely on the consumer protections. It further argued that the legislative changes did not apply retrospectively.

The Supreme Court ultimately dismissed Kelly's appeal, affirming the Court of Appeal's decision. The court found that Kelly failed to raise the credit servicing argument effectively in the High Court and that there were no exceptional circumstances to admit the new argument on appeal to the Supreme Court. The court also concluded that there was no persuasive and comprehensive evidence of illegality on the part of Cave Projects. The court referred to the common law presumption against retrospective effect in its decision, finding that it strongly leant against the legislative amendments applying retrospectively to the existing proceedings.

Carty said: “It is worth highlighting the appellant’s reliance on the warning issued by the Central Bank as a basis for his appeal – although this warning did not change the legal position and simply recorded the opinion of the Central Bank, it is clear that parties may seek to rely on such warnings before the Irish courts.”