The policy objective behind the Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 is to give individuals a period of protection from their creditors to obtain debt advice and to devise a repayment plan.
It is necessary to provide an overview of the scheme before turning to the impact of the Regulations on creditors and potential for abuse.
Debtors and the purpose of the scheme
The Financial Guidance and Claims Act 2018 created a debt respite scheme under sections 6 and 7, consisting of both a “breathing space” (the government’s term here for a debt respite scheme) and a statutory debt repayment plan. Implementation of the SDRP has been delayed pending further consultation, but the breathing space regulations have been in force since 4 May 2021.
Eligible debtors can benefit from a breathing space moratorium of 60 days (or longer, if under the mental health scheme) to seek professional debt advice. Under Regulation 7, this is no payment holiday and so the debtor must continue meeting ongoing liabilities during this time, but charges, fees and certain interest will all be frozen. Enforcement action must also be paused.
The types of moratoria, eligibility and their effect
Under the Regulations, an individual resident in England and Wales who owes a “qualifying debt” that they are unlikely to be able to repay will be eligible for a standard breathing space moratorium of 60 days. Certain individuals will be ineligible, notably those who have already benefited from a BSM in the last 12 months. Those subject to other debt relief schemes are also ineligible, including those who are subject to an individual voluntary arrangement, or are an undischarged bankrupt. The “qualifying debt”, meanwhile, is defined under Regulation 5 and, while there will be limited exceptions, most judgment debts will be debts qualifying for breathing space.
Whether or not a BSM is then granted to an eligible person with a qualifying debt is a decision for the debt advice provider with reference to Regulation 24. The providers are defined under Regulation 3 and may either be persons authorised to carry out debt counselling as a regulated activity or those who are exempt persons in relation to that activity (such as a local authority). Regulated firms will need to comply with the Financial Conduct Authority Handbook, updated in February 2021 to take account of the Regulations.
The Regulations also provide a type of moratorium specifically for people receiving mental health crisis treatment, known as a mental health crisis breathing space.
The MHCBS can be initiated by a debt advice provider where an approved mental health professional has certified that a person is receiving treatment. Regulation 28(1) provides that this includes detention for treatment or assessment pursuant to the Mental Health Act 1983, or removal by a police constable to a place of safety. Paragraph 28(2)(e) then extends this to cases other than detention, involving “any other crisis, emergency or acute care or treatment in hospital or in the community from a specialist mental health service in relation to a mental disorder of a serious nature”.
The MHCBS lasts as long as the said mental health crisis treatment plus 30 days and is less commonly granted than the BSM: the government’s own statistics show that in 2022 there were 70,546 registered breathing spaces, of which 69,334 were standard and 1,212 were mental health breathing space registrations.
Formalities
Once a BSM is granted by the debt advice provider, the provider must send details of the debtor and their debt to the Insolvency Service. The Insolvency Service’s role is to maintain a register and notify creditors that a moratorium is in place and when it ends.
The creditor is notified of the debt (by post or e-mail) and becomes bound by duties under the Regulations themselves. First, the creditor must inform the debt advice provider of debts owed to them not set out in the notification from the Insolvency Service. Then, the main effect is that a creditor is prevented from taking certain steps in relation to a moratorium debt during the moratorium period: charging interest, charging fees or penalties, and taking any enforcement action on the debt without court permission (Regulation 7). Enforcement action includes enforcing a judgment, security or obtaining a warrant.
If court proceedings are already in play, the creditor must notify the court of the BSM so that proceedings are not improperly progressed (Regulation 10).
Impact on creditors and abuse of process
In common with most debt relief schemes, there is potential for unfairness to creditors and abuse, and the impact on creditors can be draconian.
The first difficulty for creditors is that Regulation 7(12) provides that any step taken contrary to the regulation shall be null and void. This can have serious consequences. In Lees v Kaye [2022] EWHC 1151 (QB); [2022] EGLR 25, the court held that eviction to enforce a judgment and subsequent sale to a third party was null and void. An application to appeal that decision was refused by the Court of Appeal.
Secondly, a strict timetable is imposed for any challenge. A review must be sought within 20 days from when the moratorium started and then be completed within 35 days: if not cancelled the creditor can apply to the county court within 50 days. Swift J held that there is no power for a creditor to apply to cancel an MHCBS out of time (Kaye v Lees [2022] EWHC 3326 (KB)). Although the county court is specified, the High Court has dealt with such applications in a number of cases.
Thirdly, there are limited grounds for challenge specified in Regulation 17(1): that the decision unfairly prejudices the interests of the creditor or that there has been a material irregularity in relation to the eligibility criteria, the debt did not qualify, or the debtor has funds to discharge or liquidate their debt as it falls due.
Comprehensive guidance has been given by Paul Matthews (sitting as a deputy High Court judge) in Axnoller Events Ltd v Brake and another [2022] EWHC 1363 (Ch); [2022] PLSCS 89, in which the learned judge accepted that this could include a situation in which the moratorium unfairly distinguishes between creditors so the impact was significantly more unfair on one than another, but continued: “I also accept that the phrase ‘unfairly prejudices’ should not be confined to that. These are ordinary English words, undefined in the legislation, and not obviously terms of art. They can properly be understood to go wider.”
This guidance has been followed in other cases
In Kaye v Lees [2023] EWHC 152 (KB); [2023] PLSCS 23, Judge Dight cancelled a moratorium on the grounds of material irregularity and unfair prejudice.
Regarding material irregularity, the debtor had failed to provide evidence that she was suffering from a mental disorder of a serious nature, and receiving crisis, emergency or acute care or treatment for that disorder. The only material before the court (a doctor’s letter and social worker’s e-mail) did not demonstrate that the defendant was suffering from a disorder of the severity required, receiving only three-monthly follow-up appointments without medical or clinical interventions rather than treatment that could be categorised as crisis, emergency or acute care. The criteria were not met when the current moratorium was granted, which was a material irregularity giving the court discretion to cancel the moratorium.
The judge considered that, while a debt advice provider could not be expected to assess the debtor’s health, it was essential that they had clear, considered and reliable evidence that one of the Regulation 28(2) conditions was met. Where necessary, they had to be prepared to closely assess the information and seek clarification or further information before accepting that the conditions for an MHCBS were met.
Judge Dight also considered that the moratorium unfairly prejudiced the claimant’s interests because: the debt was substantial and long-standing; the defendant had made no attempt to discharge it; the security of the debt was in doubt; and the claimant had exhausted his financial means in seeking to enforce the debt. The defendant had not directly engaged with the merits of the application. There was no evidence to suggest that the defendant required any further protection from her debts, whereas there was evidence that she had been able to continue to work and was economically productive.
The judge also granted an injunction restraining the defendant from seeking a further BSM or MHCBS.
Room to grow
The Regulations have the laudable aim of protecting debtors who engage with creditors and make affordable repayment plans. The courts can provide a remedy where they are abused, however, and will no doubt increasingly be called on to do so as familiarity with the breathing space scheme grows in the coming years.
Kerry Bretherton KC and Diane Doliveux are barristers at Tanfield Chambers
