The Supreme Court handed down judgment in the case of Southern Pacific Securities 05-2 Plc v Walker [2010] UKSC 32 on the 7th July 2010. The case concerned the meaning of terms “credit”, “amount of credit” and “charge for credit” and the enforceability of a fixed-sum credit agreement under the Consumer Credit Act 1974 (the Act).

The appellants had signed a credit agreement in 2005. The loan amounted to £17,500. £875 was also loaned to the appellants to cover the broker administration fee, with interest repayable at the same rate as the loan itself. The “amount of credit” was stated on the loan document to be £17,500, with “total amount financed” set at £18,375. The appellants were in arrears and a suspended order for possession of their home was granted. The appellants argued that the document incorrectly stated the sum of “amount of credit” by failing to include the £875 administration fee and by applying the principle of “truth in lending” the agreement was rendered unenforceable.

S 9 of the Act defines “credit” as including a cash loan or any other financial accommodation. S 9(4) outlines that an item in the total charge will not be treated as credit even though time is granted for repayment. S 127 of the Act provides that failure to comply with any of the prescribed terms is sufficient to render an agreement unenforceable. The Consumer Credit (Agreements) Regulations 1983 (SI 1983/1553) define prescribed terms to be in this case a term stating the amount of credit, a term stating the rate of interest and a term stating how the debtor will discharge his obligations.

Before the County Court, the appellants successfully argued that the respondent had failed to correctly state the “Amount of Credit” and the charge on the property was discharged. The Court of Appeal allowed the respondent’s appeal, finding the agreement to be enforceable.

The issue before the Supreme Court centred on the construction of s 9(4). Referring to Wilson v First County Trust Ltd [2001] QB 407 amongst other authorities, the court found the process involved assessing the “total charge” so that items forming part of the “charge for credit” can be removed before the “amount of credit” is calculated.

Calculating the true cost to the appellants, the court highlighted the case of Watchtower Investments Ltd v Payne [2001] EWCA Civ 1159, which notes the difficulty in distinguishing items forming the charge for credit and a component of the credit itself. Finding that the £875 administration fee formed part of a cost to the appellants of borrowing the £17,500, the court determined it could not form part of the credit itself within the bounds of s. 9(4) and was part of the “charge for credit”. The prescribed terms had been complied with.

Considering whether the interest charged on the loan of £875 altered that conclusion, the court found that there was no prohibition in s 9(4) against the charging of interest. Having determined that the administration fee formed part of the total charge, the court concluded it logically followed that interest on that fee would also be included in the total charge and therefore not form part of the “amount of credit”.

Dismissing the appeal, the court noted that for agreements concluded after 5 April 2007, different rules contained in the Consumer Credit Act 2006 c.14 and Consumer Credit (Agreements) Regulations 2010 (SI 2010/1014) were applicable.