By Ian Pollock
Personal finance reporter, BBC News
The obligation to repay many consumer loans may be undermined
A decision by a county court judge could mean thousands of borrowers being able to renege on their debts.
Judge Jacqueline Smart at South Shields county court has decided that the MBNA credit card company cannot demand the repayment of a customer's debt.
It tried to force Mrs Lynne Thorius to repay the £8,000 she owed on her card.
But the Judge decided there had been an unfair relationship between Mrs Thorius and MBNA because of the way she had been sold payment protection insurance.
Mrs Thorius's case was pursued on her behalf by a claims management firm Cartel Client Review, based in Manchester, and the law firm Consumer Credit Litigation Solicitors.
Carl Wright of Cartel Client Review said the court decision was a landmark judgement.
"This will have massive ramifications for consumers up and down the country," he said.
But MBNA downplayed the importance of the court decision.
"The judgement went against MBNA for a number of reasons," a spokeswoman said.
"In principle, because the deputy district judge felt that MBNA had not on this occasion provided the appropriate documents to the customer and as such was not able to rely on the clauses MBNA would ordinarily seek to rely on in these cases," she explained.
"The case is a county court case and each case is decided on its own merits and on the factual circumstances of each case. This does not set any legal precedent," said MBNA.
The credit card in question was branded with the logo of Sunderland football club and was sold to Mrs Thorius in the club's shop in 2002.
The PPI policy was strongly recommended by MBNA to her at the same time, to pay off her account if she fell ill or was made redundant.
But, critically, she had not been told that MBNA would be receiving regular commission payments from the insurance provider ITT London & Edinburgh, a subsidiary of the Aviva insurance group.
Judge Smart agreed with the argument of Mrs Thorius's barrister, Paul Brant, that this "secret" commission meant the credit card deal was unfair and therefore in breach of the Consumer Credit Act.
This point could potentially undermine many other agreements where PPI has been sold by the lender alongside a loan.
These include car finance deals, other personal loans and even mortgages.
"This practice is believed to be widespread and formed part of the Competition Commission's decision to prohibit the co-sale of PPI with credit in its report published on 29/1/09," her solicitors noted.
"This point is likely to affect many thousands of individuals within England and Wales," they added.
The main ground on which Judge Smart said Mrs Thorius's credit card debt was unrecoverable was because MBNA could not provide a copy of the original signed loan agreement, which is also a requirement by the Consumer Credit Act.
The Judge ordered the company either to repay Mrs Thorius's PPI premiums and interest, or the value of the commissions it had received which so far has been undisclosed.
The PPI premiums, which rose each month as the credit card debts increased, amounted to £2,500 over the time the card had been in use.
The claims management industry which has emerged in the past few years has been highly controversial.
Many firms advertise in newspapers and on television, encouraging people to come forward to write off their debts.
This year the authorities, such as the Office of Fair Trading (OFT), Ministry of Justice (which regulates claims management firms) and the Solicitors Regulation Authority, have warned firms not to make exaggerated claims about their ability to get debts written off because of apparent technical errors in the lenders' paperwork.
Since April 2007 more than 100 such firms, or those advertising for people to pursue personal injury claims, have been shut down by the OFT.
But the South Shields ruling appears to open up a new and genuine line of attack for claims firms.
"We have been using this argument for some time but lenders have been settling outside the courts to avoid publicity," said Mr Wright.
MBNA applied for leave to appeal, which was rejected, but it may now apply directly to a higher court for permission to appeal.
Or it may be able to appeal if it can find the original loan documentation.
Only when higher courts have decided the issue will the legal ramifications, and the effects on lender and borrowers, be clear.