By Ian Pollock
Personal finance reporter, BBC News
The hearings could affect millions of people with pre-2007 credit cards
Legal test cases at the end of this month will affect the enforceability of hundreds of millions of pounds worth of credit card debts and other loans.
Five days have been set aside at the High Court in Manchester to hear 12 separate cases that will help to determine a variety of legal issues under the Consumer Credit Act (CCA).
Several are being brought on behalf of clients of a prominent claims management company, Cartel Client Review.
Its boss, Carl Wright, hopes that favourable decisions will lay down some legal ground rules that will force banks and card companies to settle thousands of similar cases on his books.
"We want the judges to rule on these claims, providing precedents which will prevent the banks and credit card companies delaying on paying out on consumer claims any longer," Mr Wright says.
The past year or so has seen a largely unreported explosion of litigation in the county courts between lenders and their customers.
There are now thought to be tens of thousands of similar cases in the legal pipeline.
Typically, borrowers argue that their debts cannot be enforced because the lenders have failed to abide by the CCA.
The law says a lender cannot ask a court to enforce a debt if the lender's original agreement failed to comply with certain requirements.
"Once you have established the agreement is defective, in at least one of a number of specific ways, the court has no discretion to grant an enforcement order in favour of the creditor," says barrister Oliver Mishcon.
However, due to a new Consumer Credit Act in 2006, this lack of discretion for judges only applies to regulated consumer credit agreements entered into before April 7 2007.
Specifically, loan agreements for fixed sums or credit cards must contain three "prescribed terms":
• the amount of credit; or the limit of the credit, or the manner in which the limit will be decided
• the rate of interest
• how the borrower is to repay the debt.
Bob Imrie, who trains trading standards officers and also claims management firms in the operation of the CCA, is doubtful that the courts will let people escape their debts.
"Courts are not very sympathetic to claims that terms and conditions were not provided to customers," he says.
"You've got a real problem trying to undo an agreement on a technicality; you've got to provide evidence the banks behaved wrongly," he adds.
However, the potential use of the law to favour debtors was highlighted by a case in October this year at Stockport County Court.
Alun Thomas helped a client challenge a credit card debt of £6,585
Deputy district judge Howarth issued a decision in favour of a Mr Yates, so that his credit card debt of £6,585 can never be collected.
Mr Yates had run up the debt after taking out the MBNA card in 2003.
In January 2009, the debt was sold, or "assigned", to a debt collection firm called CL Finance and it swiftly took Mr Yates to court to get the money back.
He argued that the copy of the original agreement supplied by MBNA to the court was incomplete and illegible, and so it was unclear that the prescribed terms had in fact been included.
CL Finance did not turn up for the hearing and lost by default, but at the request of Mr Yates' lawyers the judge went on to declare that the debt was unenforceable.
Mr Yates' solicitor, Alun Thomas of law firm JW Hughes in Llandudno, says he has 300 similar cases on his books.
"There are solicitors up and down the country handling many more," he says.
"There are many cases, but almost all of them have yet to be decided."
Difficulties for banks
What has become apparent is that of the millions of credit cards, store cards and personal loans issued since the CCA came into force, some seem to have used incorrectly drafted agreements.
"The proportion of improperly executed credit cards is very high; the further back in time you go, the more sloppy many of the lenders seem to have been," says Mr Mishcon.
What has also emerged is that lenders sometimes have great difficulty:
• presenting debtors and courts with a copy of the original signed agreement
• presenting one that is legible enough to show that it contained the prescribed terms
• showing that the terms were supplied at the time the agreement was struck, or were embodied in the same document.
One bank is even thought to have destroyed all its old loan and credit card agreements as a matter of policy.
"I have spoken to many ex-members of staff who told me their agreements were carted off by couriers at the end of each week with no proper filing," says Bob Imrie.
It would be wrong to assume that this groundswell of litigation means that banks are generally in the wrong and will necessarily lose.
Three English test cases heard in October and November, one in the High Court and two in the Appeal Court, have all been won by lenders.
One, involving a man called Philip McGuffick and the Royal Bank of Scotland, bent the stick very much in favour of lenders.
The case concerned the situation where a lender is temporarily unable to produce a copy of the loan agreement, perhaps because it is having trouble finding it.
Although that prevents the lender chasing the debt by court action for the time being, the ruling means it can still put other pressure on a borrower to pay up, for instance by threatening to inform credit reference agencies that the borrower is in default.
"We are still learning, the law is not settled," another barrister said.
"It is complicated, not resolved, and no one is in a position of certainty at the moment," he added.