Bankruptcy Petition Dismissed Due to Unfair Relationship and Penalty Clause. Key Lessons from Ciddy Ltd v Natalia
In the case of Ciddy Ltd v Natalia [2025] EWHC 1616 (Ch), Judge Agnello KC dismissed a bankruptcy petition issued in respect of an unpaid debt arising from a Loan Agreement, which the court found resulted from an ‘unfair relationship’ and contained an unenforceable penalty clause.
Anjana Natalia (‘the debtor’) challenged the petition on the grounds that the Loan Agreement was unfair due to lack of transparency, and in breach of the Consumer Credit Act 1974 (‘the Act’), as the default interest provision represented an unenforceable penalty clause.
The court dismissed the petition and the dispute was referred back to the County Court for it to determine the correct level of outstanding debt.
Tim Thompson of KANGS outlines the circumstances leading to this decision in these contested insolvency proceedings.
The Relevant Law | Consumer Credit Act 1974
The Act provides
S. 140A Unfair relationships between creditors and debtors
The court may make an order of the nature shown below in connection with a credit agreement if it determines that the relationship between the creditor and the debtor arising out of the agreement is unfair to the debtor because of one or more of the following:
- any of the terms of the agreement or of any related agreement,
- the way in which the creditor has exercised or enforced any of his rights under the agreement or any related agreement,
- any other thing done, or not done, by, or on behalf of, the creditor, either before or after the making of the agreement, or any related agreement.
The court will consider all relevant matters, including those affecting both the creditor and the debtor.
140B Powers of court in relation to unfair relationships
Amongst the orders available to the court, it may:
- require the creditor to repay, in whole or in part, any sum paid by the debtor,
- require the creditor to do, not to do, or to cease doing anything specified in the order,
- reduce or discharge any sum payable by the debtor or by a surety,
- set aside, in whole or in part, any duty imposed on the debtor,
- alter the terms of the agreement or of any related agreement.
An order under this section may be made in connection with a credit agreement only:
- on an application made by the debtor or by a surety,
- at the instance of the debtor or a surety in any proceedings in any court to which the debtor and the creditor are parties, being proceedings to enforce the agreement or any related agreement or
- at the instance of the debtor or a surety in any other proceedings in any court where the amount paid or payable under the agreement or any related agreement is relevant.
An order under this section may be made notwithstanding that its effect is to place a burden on the creditor, or any associate or former associate of the creditor, in respect of an advantage enjoyed by another person.
The Case in Focus
The Circumstances
In 2020, the debtor, together with her former husband, Ketan Natalia obtained a loan of £562,500 from Ciddy Ltd (‘Ciddy’), secured against their property.
The loan was to be repaid within 12 months, with interest charged at the rate of 10% for that year. Should the debt remained unpaid thereafter, default interest of 2% per month (24% annually), would be paid, compounded monthly.
The loan was not repaid, receivers were appointed and, having only received £563,471.93 against the debt, Ciddy issued a bankruptcy petition against the debtor for the sum of £657,516.32.
The proceeds of sale were not used to reduce the capital owed but were set off against the outstanding interest. This left a substantial amount of the principal sum still outstanding against which the default interest continued to accrue. Ciddy was entitled to utilise the funds received in this manner by virtue of the terms of the Loan Agreement.
The Debtor’s Defence
The debtor disputed the petition claiming that:
- the loan was unenforceable as it was unfair under section 140 of the Consumer Credit Act 1974. She relied upon the lack of transparency caused by the absence of direct communication with the lender and the coercive control exerted by her husband during the loan process,
- the default interest provision constituted an unenforceable penalty clause.
Although she signed the Loan Agreement in the presence of a solicitor, the debtor claimed that:
- the advice provided was superficial in that the solicitor had not fully explained the implications of default, the interest provisions, or the lender’s enforcement rights,
- her signature on the Indicative Term Sheet was not genuine, though no expert evidence was presented to support this claim.
Crucially, the court noted that:
- the lender had no direct communication with the debtor until after the loan had defaulted,
- all correspondence and negotiations were conducted with Mr Natalia,
- emails were sent exclusively to Mr Natalia’s address, and
- the lender failed to respond adequately to the debtor’s requests for a breakdown of interest charges.
The Court Judgment
The bankruptcy petition was dismissed.
Judge Agnello KC found that the debtor had raised substantial grounds to dispute the debt in that:
- the default interest clause was arguably a penalty, particularly as the loan was secured. There was no evidence that the rate reflected a legitimate business interest or was proportionate to the risk involved.
- the relationship between the lender and the debtor was potentially unfair given the lack of communication, failure to explain key terms, and the debtor’s limited understanding of the terms of the Loan Agreement.
The Court declined to make any assessment of the correct amount of the debt, which remained outstanding and referred the matter back to the County Court.
How Can We Assist?
When delivering Judgment, the court made it clear that in the formation of any Loan Agreement, legal advice should be obtained, and that such advice must be meaningful and not just a ‘procedural step.’
Lenders cannot be content simply to rely on ‘surface-level compliance’ when seeking to enforce terms that may be unfair or overly harsh.
It is absolutely essential that anyone seeking to borrow money, at every level, should ensure that comprehensive legal advice is obtained and that all aspects of the loan including repayment obligations, interest rates and potential insolvency enforcement procedures, in the event of failure to pay, are fully understood.
Passive involvement or reliance on a partner’s actions can leave you exposed to significant liabilities, even if you were not directly engaged in the loan’s administration.
The team at KANGS can advise in relation to Bankruptcy Petitions and Winding Up Petitions as well as wider insolvency matters.
If we can be of assistance, our team would be delighted to assist you, simply contact us using the details below:
Tel: 0333 370 4333
Email: info@kangssolicitors.co.uk
We provide initial no obligation discussion at our three offices in London, Birmingham, and Manchester. Alternatively, discussions can be held through video conferencing or telephone.
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