Nine Regions Limited (trading as Log Book Loans) v Welcome Financial Services Limited

We acted for Welcome Financial Services Limited recently in a very significant case that went to Court in Birmingham recently. You may have heard of "Log book Loans", the trading name of Nine Regions Limited. LBL provides short-term loans by way of an unusual financial instrument known as a "chattel mortgage" combined with a loan agreement, which uses a borrower's car as "security" for the money borrowed. A normal secured loan, such as a mortgage, uses an asset owned by the borrower as security for the amount borrowed, so if the borrower defaults on the loan the lender can get its money by selling the asset. However, the lender has to go to Court and get an order allowing it to do so. The Court therefore acts to protect the borrower from abuse by the lender. In addition the provisions of the Consumer Credit Act 1974 also act to regulate lenders and protect borrowers.  

Under the Bills of Sale Acts, the bill of sale must be registered with the High Court in London but apart from that there is very little in the way of formal requirements.The intention is that, once the amount borrowed is repaid, the borrower regains ownership of their car, although how this actually happens is rather unclear. The real advantage of a chattel mortgage from the lender's point of view becomes clear if the borrower defaults on the loan repayments. If this happens, all the lender has to do is to serve a notice of default on the borrower. If the borrower does not make up the payments within a very short time (usually 7 days) the lender has the right to seize its car without needing to go to Court-because, of course, the lender already owns it! As a result the lender can then sell the vehicle at auction to recover the outstanding loan and any other charges it has levied, such as the cost of making telephone calls, writing letters, and the cost of seizing the car. Again as there is no requirement for a Court order there is no regulation of how much these charges might be unless the borrower brings proceedings after the seizure.

Welcome provide various types of loans to borrowers, often for buying cars with. One common type of loan is a hire purchase agreement; here the borrower wishes to buy a car, and the lender agrees that it will pay the seller for it. As long as the borrower keeps up the payments, the borrower is entitled to use the car and treat it (more or less) as their own provided they look after it properly by insuring it, complying with MOT requirements and so on, and don't sell it without the lender's agreement. At the end of the agreement ownership of the car transfers to the borrower. What happens if the borrower defaults? Because the loan agreement is regulated by the Consumer Credit Act, the lender can't seize the car without going to Court for an order, if the borrower has paid back more than 1/3 of the loan. Even if less than this has been paid back, the lender can only seize and sell the car if it's parked in a public place such as on the road. If it's on private land (eg in a garage or on a drive) a Court order is needed.

The usual rule is that it is not possible to sell something you don’t own-an old legal maxim often stated in latin as nemo dat quod non habet. This means that you wouldn’t own something you bought from a thief, even if you paid for it, and the rightful owner could later come along and get their property back from you. This principle was enshrined in statute by the Sale of Goods Act 1979. It also applies to goods which are subject to HP agreements because, again, the real owner of the goods is the lender. However, there is some protection for buyers in certain limited circumstances.

Under the Hire Purchase Act 1964, if a private individual buys a car which is subject to a hire purchase agreement (but, critically, doesn’t know about it) then the real owner of the car-the lender-can't later claim them back. But traders that buys cars “wholly or partly for the purpose of offering or exposing them for sale” and providers of car finance aren’t classed as private individuals under the Act, so if they buy a car that is subject to HP, the lender can reclaim the vehicle from them. This is why there is a register of cars subject to HP (the HPI register).  

In a few cases, some customers of Welcome have bought their cars on HP and then, before the details have been entered on the HPI Register, gone on to get another loan from LBL claiming they owned the cars even though they were not theirs to sell. In one case a customer even took one of Welcome’s cars for a test drive and got a loan from LBL on it! The customers have then defaulted on the loan repayments to both companies, LBL have seized the cars and auctioned them. Is LBL entitled to keep the sale proceeds, bearing in mind it was Welcome owned the cars? LBL claimed that, because it wasn’t a motor trader, it could claim protection under the law as a private purchaser because Welcome hadn't entered the details on the HPI Register yet-and so keep the money. Welcome argued that, because part of LBL’s business was to sell on the cars it seized, it couldn’t claim to be a private purchaser and in reality it was either a trader or finance purchaser, and in either case was not entitled to statutory protection.

This was the question that came before His Honour Simon Brown sitting in the Birmingham Mercantile Court on 22 April 2010. The hearing was an appeal from the Wandsworth County Court, which had decided that LBL was a private purchaser.

The judgment which can be seen here was conclusive; LBL was not a private purchaser and the cars in question belonged to Welcome. The Judge held that the intention of parliament was to protect the public, not motor dealers or finance companies, which could look after themselves. Although it remains to be seen if LBL will appeal to the Court of Appeal, the case is a major victory for Welcome.