Katherine Clark, a solicitor at Weightmans, looks at some of the options available upon finding an asset is in the possession of a third party
Frequently finance companies are faced with a difficult decision when their customer has disposed of their asset and it is found to be in possession of a third party. Some situations will be very straightforward to decide how to proceed, for example, when the vehicle has been transferred to the customer’s spouse, but what exactly is the legal position and is there any obligation to the ‘innocent purchaser’?
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The legal claim against a third party purchaser of the vehicle is conversion of goods. Conversion is any deliberate act which deprives another of their right(s) over the goods. To be successful in a claim for conversion the finance company needs to show that the third party took or received the vehicle without its permission. This must be accompanied by an intention to exercise a permanent or temporary right over the vehicle, the most obvious example is by becoming the registered keeper of the vehicle. Once a conversion claim is established the finance company will be entitled to recover the vehicle and/or damages to compensate for its losses.
A defence to a conversion claim may be established under Part III of the Hire Purchase Act 1964 if the purchaser can show that he or she is:
- A private purchaser, that is, someone who is not a trade or finance purchaser;
- Without notice of the hire purchase agreement and acting in good faith. This would be difficult for a spouse or business partner to satisfy;
- The vehicle was "disposed" to them, i.e. by way of sale, contract of sale or another hire purchaser agreement; and
- The disposal of the vehicle was by the customer under the hire purchase agreement.
If the first purchaser of the vehicle is able to establish this defence then good title would pass and the finance company would have to release its financial interest in the vehicle. Any subsequent purchasers of the vehicle would also acquire good title to the vehicle. The finance company’s only recourse would be against their customer for a money claim.
It is common for a vehicle to have passed through the hands of a number of third parties. If the first purchaser is unable to meet the criteria of Part III of the Hire Purchase Act 1964 then no further purchaser will be able to establish that they have acquired good title to the vehicle – subsequent purchasers cannot acquire better title to the vehicle than that which the seller they have purchased it from has.
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By GlobalDataThe vehicle could therefore end up in the hands of an entirely innocent third party, who had no idea that the vehicle was originally subject to a finance agreement, but who is required to return the vehicle to the finance company. Recently I had a case where the vehicle was sold by the customer to a third party who openly admitted that he was fully aware of the finance agreement but under the belief that the customer would settle the outstanding finance. That third party later sold the vehicle on to another party who was not aware that the vehicle had ever been subject to a finance agreement. Each party had registered itself as the keeper of the vehicle with the DVLA which, helpfully, allowed it to be easily tracked. The finance company was in the position where it was entitled to recover the vehicle from the current registered keeper – albeit that that person was entirely innocent and believed that good title to the vehicle had been acquired.
The legal position is therefore very clear, but is there any obligation to the third party in possession of the vehicle? While there may be a degree of sympathy for the third party which could translate to a concern for brand protection, in reality the finance company is entitled to return of its asset.
The finance company cannot double recover, i.e. collect more than it is entitled to under the agreement, but undoubtedly by obtaining judgment against as many parties as possible will increase the prospects of recovery. Further, the best recovery in these type of debt recovery cases is return of the asset, therefore finance companies must vigorously pursue return of the vehicle when it is their legal right to do so.
The third party is not left without recourse. It is entitled to pursue whoever it purchased the vehicle from and could even join that party into the same proceedings as those against it (if they have been initiated).
Clearly the more parties there are to a claim the more expensive and lengthy a case tends to be. With that in mind the money claim against the customer and the return of goods claim against the third party convertor should be run together. With the recent increase in county court fees and solicitors usually dealing with this type of work on fixed fees the two elements to the claim should be issued in the same set of proceedings, saving time and costs. This approach also reduces the risk of the court finding that the there has been an abuse of process, which could have a significant impact on the recoverability of costs, by issuing two separate claims that are intrinsically linked.
