A recent High Court judgment has provided some clarity on issues arising from the Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 (“the Regulations 2020”). Partner Alex Jay and Senior Paralegal Aarti Chadda examine the judgment and its interpretation of the Regulations 2020.

The Regulations 2020 originated from the 2017 Conservative Party General Election Manifesto and came into force on 4 May 2021. The purpose of the Regulations 2020 is to provide individuals experiencing debt problems with the ability to obtain legal protection from enforcement by their creditors for a period of time (referred to as a ‘breathing space moratorium’) during which they can seek debt advice.

In particular, the judgment in Axnoller Events Ltd v Brake [2021] EWHC 2308 (Ch), dated 12 August 2021, concerned these issues:

• Whether a breathing space moratorium applied to debts incurred after the moratorium had been initiated, and
• The scope for a creditor to apply to have a breathing space moratorium cancelled on the grounds that it unfairly prejudiced the creditor.

Summary of the dispute

The judgment arose from an application by Axnoller Events Ltd and The Chedington Court Estate Ltd (together referred to as “the Guy Parties”) against Mrs Nihal Brake and Mr Andrew Brake (“the Brakes”).

The Guy Parties and the Brakes had (and continue to be) involved in wide-ranging and hard-fought litigation resulting in substantial adverse costs orders being made against the Brakes. On 6 May 2021, two days after the Regulations 2020 came into force, Mr Brake entered into a specific type of breathing space moratorium for those with debt problems and suffering a mental health crisis (referred to as a mental health crisis moratorium under the Regulations 2020) preventing enforcement action in respect to debt(s) covered by the moratorium.

By their application, the Guy Parties sought the following relief:

• First, an order under regulation 19 cancelling Mr Brake’s mental health crisis moratorium on the ground that it unfairly prejudiced the Guy Parties, and
• Second, an order that unless the Brakes pay certain costs orders in favour of the applicants (incurred after the moratorium was initiated), they be debarred from participating in various litigation they had caused and/or initiated with the Guy Parties.

The outcome of the Guy Parties’ application is summarised below.

Application to cancel the moratorium

A debt advice provider (Advisor) is an individual authorised by the Financial Conduct Authority (FCA) to offer debt counselling and grant a breathing space moratorium or a mental health crisis moratorium, the latter requiring evidence from an approved mental health professional. The Advisor is the point of contact between the debtor, the creditor and the Insolvency Service. Regulation 17 allows a creditor to “request that the debt advice provider who initiated the moratorium reviews the moratorium to determine whether it should continue or be cancelled in respect of some or all of the moratorium debts”.

The basis for such a challenge is provided by regulation 17(1)(a) and (b) if it “unfairly prejudices the interests of the creditors” or “there has been some material irregularity” (for example, if the debtor has sufficient funds to discharge or liquidate their debt as it falls due).

In the first instance, the Guy Parties asked Mr Brake’s Advisor to review and cancel the moratorium under regulation 17 on the grounds that it unfairly prejudiced the Guy Parties’ interests. This was because it allowed the Brakes to continue their litigation against the Guy Parties (putting the Guy Parties to considerable further cost) while using a moratorium to prevent the Guy Parties from recovering approximately £1m of costs already owed to them (as well as later costs orders that the Brakes sought to have included in the moratorium). The Advisor refused this request. This allowed the Guy Parties to apply to the court under regulation 19 for an order cancelling the moratorium on the same ground.

In the judgment, the court considered the meaning of unfair prejudice in the context of the Regulations 2020 (which do not include a definition for the term) and noted as follows:

• It was to be assessed objectively.
• A moratorium would adversely impact/prejudice all creditors, but where it could be shown that the impact on one creditor was significantly greater than for creditors generally that may constitute unfairness.
• It required the court to embark upon a balancing exercise between the respective interests of the creditor and debtor.
• As the Regulations 2020 are new, the judge was unwilling to lay down any firm guidelines on what may constitute unfair prejudice.
• The development of unfair prejudice in this context will have to be determined on a case-by-case basis.
• There could be conduct by the debtor after a moratorium was initiated that meant it unfairly prejudiced a creditor (for example, where a debtor fails to engage with the debt problem without good reason).
• When carrying out the balancing exercise, the judge commented that it is important (on a challenge under regulation 19 of a mental health moratorium) to have appropriate evidence from a suitably qualified professional about the debtor’s mental health, treatment and prognosis. This allows the court to determine whether the debtor’s mental health has improved to the extent that it would be reasonable to expect them to begin engaging with the debt problem. A debtor who is likely to respond to treatment within a short time and return to normal is in quite a different situation from one in which the health problems are more intractable and will take a considerable time to resolve, or indeed may never be resolved.

The judge concluded that the Guy Parties had not been unfairly prejudiced. Although the Guy Parties suffered prejudice by being unable to enforce certain debts, the prejudice was not unfair. The moratorium only applied to pre-moratorium debts, and the prejudice caused applied to all creditors, so it was not obviously unfair to the Guy Parties. In relation to the ongoing incurrence of costs, that was a result of the litigation system itself (specifically the costs rules), and not a result of the moratorium, which did the court found did not apply to future debts (see further below).

Enforcement of post-moratorium debts

The Guy Parties sought an unless order in respect to adverse costs orders dated 17 May 2021 and 4 June 2021 (both post-dating the moratorium). The Brakes’ response included the assertion that these debts were included in the moratorium and could not therefore be enforced. Whether or not that was the case turned on the definition of moratorium debts in the Regulations 2020.

Regulation 6 defines moratorium debt as any “qualifying debt” to which the following conditions apply:

• It was incurred by a debtor in relation to whom a moratorium is in place,
• It was owed by the debtor at the point at which the application for the moratorium was made, and
• It was a debt about which information has been provided to the Secretary of State by a debt advice provider under these Regulations.

As noted above, a precursor to being a moratorium debt is that it is a ‘qualifying debt’ as defined under regulation 5 and specifically 5(3), which provides that a ‘qualifying debt’ includes liabilities incurred pursuant to:

• An order or warrant for possession of the debtor’s place of residence or business
• A court judgment,
• A controlled goods agreement, and/or
• Any debt or liability owed to the Crown.

A further consideration relevant to moratorium debts is found at regulation 15, which sets out the rules concerning an application for the addition of moratorium debts to a moratorium where such a debt had not been notified to the Secretary of State at the time of the original moratorium application.

The court concluded that under regulation 6, moratorium debts cannot include future debts incurred after the moratorium comes into effect. In particular, the court noted the second condition applicable to moratorium debts that required the debt to be ‘owed’ at the time of the application for the moratorium indicating the regime was backwards-looking. Moreover, under regulation 15, future debts cannot be additional debts as they are restricted to debts that were incurred before the moratorium but had not been known. Consequently, based on the judge’s findings, the later costs orders of 17 May 2021 and 4 June 2021 could not be moratorium debts and were therefore enforceable.

To determine whether an unless order should be granted, the court will consider all the circumstances of the case, but the burden is primarily on the debtor to show their rights will be interfered with and the claim stifled (should that be the consequence of failing to comply with such an order). In the present case, the court held that the Brakes had not demonstrated that having to pay the two costs orders amounting to approximately £80,000 would stifle their claims and, on the balance of probabilities, they could afford to pay them.

Conclusion

Head of Insolvency, Alex Jay, says:

“This is the first reported case concerning the new ad-hoc moratorium available to debtors, and it provides a useful clarification the process only applies to existing debts. As a result, it really affords only a short opportunity to address debt issues as ongoing (ie future) obligations will still need to be met.

“One interesting feature as acknowledged by the judge in this case, however, is that fact that a moratorium would also protect a co-debtor. This could lead to a scenario where a co-debtor who has no grounds to seek relief, obtains relief by default if the other co-debtor obtains a moratorium. This could lead to some interesting results.

“It would also be interesting to see what approach a court would adopt to a subsequent application for another moratorium in light of this, and I expect we will see this point before the courts in due course.”