Breathing Space Moratoriums – limitations on creditors and duties of debt advisors clarified following High Court ruling

The Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations were introduced to provide individuals struggling with debt and those experiencing mental health crises with temporary protection from most legal action and contact from creditors. They also allow for the freezing of most interest and charges on their debts, by way of two means of protection.

The first is a Breathing Space Moratorium (“BSM”). This is a standard form of debt relief granted by a debt advice provider authorised by the Financial Conduct Advisory or a local authority where they provide debt advice to residents struggling with debts but not experiencing a mental health crisis.

The BSM lasts for a period of 60 days, and once a debtor is granted one it can’t apply for another BSM for 12 months after it expires. The second is a Mental Health Crisis Moratorium (“MHCM”), available to individuals on application to a debt advisor struggling with debts and receiving mental health crises treatment from an approval mental health professional. The MHCM lasts as long as the debtor’s treatment plus 30 days.

While the scheme offers much needed protection and respite to qualifying debtors, the limitations imposed on creditors can be a source of severe frustration as to recovery of their debts, as in the case of Kaye v Lees [2023] EWHC 758 (KB). This is particularly with regards to an MHCM which in theory, may last indefinitely or be granted successively.

In this case, a creditor obtained an order against a debtor for damages and costs on 18 January 2019 (the “judgment debt”). The debtor failed to pay the judgment debt on the due date, and the creditor then applied for, and was granted, an order for the sale of the debtor’s flat to enforce the debt.

Debt advisors granted the debtor a BSM followed by several MHCMs, which stifled the creditor’s attempts at enforcing the judgment debt through sale of the debtor’s flat between July 2021 to January 2023. On 27 January 2023, His Honourable Judge Dight CBE, sitting as a Judge of the High Court, granted the creditor an Order cancelling the debtor’s most recent MHCM pursuant to Regulation 19(3)(a) and (b).

The Judge also granted an injunction restraining the debtor from making a further application for a MHCM for a period of two months without prior approval from a judge of the High Court, in order to allow the creditor an opportunity to take possession of and sell the flat.

The creditor could not finalise a sale within the two-month period covered by the injunction and so applied to the King’s Bench Division of the High Court to have the injunction extended. This application was heard by Mr David Lock KC, sitting as a Deputy Judge.

The court ultimately refused to extend the injunction and confirmed the following principles in doing so:

• The Regulations do not empower the court to prevent a debtor from applying to a debt advisor for a moratorium under the Regulations, even in circumstances where a previous moratorium had been set aside by the court
• Creditors do not have a legitimate right – as argued by the creditor in this instance – to enforce a judgment without the risk of the debtor applying for a moratorium under the Regulations, which effectively provide debtors with unfettered rights to make fresh applications within the confines of the Regulations.

As to the duties and powers of debt advisors, the court confirmed the following principles:

• Under the Regulations, decisions as to whether the criteria for a BSM or MHCM have been met are to be made by debt advisors, not the courts
• While the scheme serves to protect debtors from enforcement action, it should not enable them to avoid payment of their debts entirely. The “central” and “proper” purpose of a debt respite scheme such as a BSM or MHCM is to allow the debtor a period of time to “develop a realistic plan for the repayment of some or all of the debt”. In this case, no evidence was provided that the debtor was developing a realistic payment plan as part of a process to sort out their financial affairs, rather, the moratoria were granted to provide the debtor with protection from enforcement, which the court held to be an improper purpose
• On-going mental health treatment is not sufficiently severe enough in itself to qualify as a mental health “crisis”, and therefore does not meet the test under the Regulations
• A creditor is entitled to approach a debt advisor to seek the cancellation of a BSM or MHCM under Regulation 17(a) on the basis that its continued existence “unfairly prejudices the interests of the creditor”. A Debt Advisor cannot refuse to consider such a request, given that Regulation 17(a) imposes a legal duty on them to do so.

Ultimately, this case clarifies important principles, including the fact that the court cannot prevent debtors from applying for a moratorium under the Regulations, and creditors do not have a legitimate right to enforce a judgment without the risk of debtors applying for such moratoriums.

The court also emphasised the duties and powers of debt advisors in assessing eligibility for moratoriums, their obligations to consider applications by creditors for the cancellation of such moratoria, and the need for debtors to develop realistic repayment plans.

Overall, a balance must be struck to protect debtors while ensuring creditors’ rights are respected within the framework of the Regulations.