Mortgage debt – Enforcement – Mental health crisis moratorium – Appellant borrower appealing against decisions that principal sum due and owing under secured debt was not moratorium debt – Whether principal amount owing in respect of secured debt, where principal amount due prior to commencement of moratorium, was non-eligible debt excluded from definition of “moratorium debt” – Appeals dismissed
The appellant in both these combined appeals was the borrower under two credit agreements, with the respective respondents. In each case, the appellant had taken a loan from the respondent secured by a charge over various properties owned by the appellant. When the appellant failed to make repayments, the respondents called in the loans.
The appellant then sought and was granted a mental health crisis moratorium under the Debt Respite Scheme (Breathing Space Moratorium and Mental Health Moratorium) (England and Wales) Regulations 2020. In each case, the court subsequently held that the called in capital was not a moratorium debt.
The main issue raised in both appeals was a point of construction of the 2020 Regulations. The question was whether the principal amount owing in respect of a secured debt, where that principal amount had fallen due prior to the commencement of a moratorium, was a non-eligible debt within the meaning of regulation 5(4), and was thereby excluded from the definition of a “qualifying debt”, and excluded in turn from the definition of a “moratorium debt”.
The practical significance of the question was that if the principal sum due and owing under a secured debt was a moratorium debt then, among other things, the creditor was precluded (without first seeking permission) from taking enforcement action in respect of the debt during the period of the moratorium, and lost all right to interest accruing during that period.
Held: The appeals were dismissed.
(1) There was no doubt that, apart from the question of whether they amounted to arrears, the relevant debts satisfied each of the requirements for a non-eligible debt: they were sums due pursuant to a debt secured by a mortgage on land, and were thus “a secured debt” within the meaning of regulation 5(4)(a).
The critical question was whether the principal amount of a secured debt was “arrears”, defined in regulation 2 as any sum, other than capitalised mortgage arrears payable to a creditor by a debtor, which had fallen due and not been paid at the date of the application for a moratorium in breach of the agreement between the creditor and the debtor or in breach of the legislation or rules under which the debtor incurred the debt or liability.
(2) The choice of language in regulation 5(4)(a) was notable. Secured debt was (generally) non-eligible debt, unless it amounted to “arrears” which naturally carried a more restricted meaning (ie, such of those periodic instalment payments which had fallen due but remained unpaid) particularly when construed in context. That context included the fact that secured debt was defined to include mortgages on land, hire-purchase agreements and conditional sale-agreements, all of which (particularly in the case of individuals likely to take advantage of the debt respite regime) invariably involved periodic instalment payments in respect of a principal sum.
The phrase “any sum… payable to a creditor by a debtor which has fallen due…” was not intended to have the breadth which it might have if taken out of context. Regulation 2(1) was not setting out to define the meaning of the word “arrears”, as such, but started from the recognition that it was generally understood as referring to missed instalments (whether of capital, interest or fees and charges), but imposed three requirements before arrears were excluded from non-eligible secured debt: (i) the arrears must have been due as at the date of the application for the moratorium; (ii) the arrears must be of instalments that the debtor failed to pay in breach of the agreement or applicable legislation or rules; and (iii) the arrears could not be those which had already been capitalised.
(3) On that reading of the definition of “arrears”, there was less force in the point made by both judges below to the effect that the exclusion of capitalised mortgage arrears would be an anomalous “outlier” if the capital amount which had fallen due was itself a qualifying debt. That was because the definition of arrears did not exclude that part of the capital which had fallen due, where that sum represented capitalised arrears, but excluded the mortgage arrears which had, in the past, fallen due and been capitalised. It said nothing, therefore, about the status of any part of the outstanding principal sum that had fallen due for payment.
It was clear from the definitions of “arrears” and “capitalised mortgage arrears” that that natural meaning was intended at least within those definitions. Incorporating the latter into the former, it read: “… any sum other than any arrears in relation to a mortgage that have been added to the outstanding balance to be paid over the duration of the mortgage payable to a creditor…”
(4) In order for something to be added to the outstanding balance it had to be different from the outstanding balance itself. “Arrears” in that context could only refer to unpaid instalments (whether of interest, in an interest only mortgage, or interest and capital, in a repayment mortgage, or outstanding charges) in respect of the outstanding principal sum.
There was some support for that conclusion in the distinction drawn in regulation 5(4)(a) between “arrears” and that which they were to be in respect of, namely the “secured debt”. The view that the drafter intended such a distinction was reinforced by regulation 7(9), which limited the restriction on the recovery of interest (during the moratorium period), in the case of a secured debt, to “interest that accrues on any arrears on the debt”.
(5) It was not necessary to rely on the legality principle of statutory interpretation in order to conclude that the principal secured sum was not “arrears”. Nevertheless, in circumstances where the appellant’s construction led to a significant interference with the rights of a secured creditor, particularly in comparison with other personal insolvency regimes, the principle referred to in Bennion, Bailey and Norbury on Statutory Interpretation (8th ed) at §27.6 and S Franses Ltd v Cavendish Hotel (London) Ltd [2018] UKSC 62; [2019] EGLR 4 (that where a statute interfered with proprietary rights, the protection conferred by it should be carried no further than the statutory language and purpose required) provided at least some support for resolving the ambiguity in the 2020 Regulations in favour of the respondents.
Julian Gun Cuninghame (instructed by Direct Access) appeared for the appellant in the first appeal; Joseph England (instructed by Brechers LLP) appealed for the respondent in the first appeal; Martin Westgate KC and Daniel Clarke (instructed by TV Edwards LLP) appeared for the appellant in the second appeal; Tom Morris (instructed by JMW Solicitors LLP) appeared for the respondent in the second appeal.
Eileen O’Grady, barrister
Click here to read a transcript of Forbes v Interbay Funding Ltd; Forbes v Seculink Ltd
