Useful Guidance From the High Court in Relation to Debt Moratoria

25th August 2021 Commercial Litigation

The High Court has made one of the first judgements relating to debt moratoria made under the new Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 which I have written about elsewhere.

The decision of the Court is made within a much larger piece of litigation which I am not going to comment on other than to say it is a genuine epic of property law with multiple different claims and counter-claims ongoing and numerous applications and appeals. This decision deals with a narrower issue of a mental health moratorium and gives important guidance on how to apply to have these overturned and what the considerations should be.

In short, one of the three defendant’s in the litigation, an Andrew Brake, has sought a mental health crisis moratorium. He is also the claimant in other litigation which is part of the overall dispute but I have called him the defendant here for clarity. The applicants, Axnoller Events and Chedington Court Estate, have made applications within the existing proceedings to have this moratorium set aside as creating an “unfair prejudice” to them.

Procedural Points

The High Court made several useful procedural points.

First, the regulations specify that applications to set aside a moratorium should be made in the County Court. However, the High Court has held that the regulations do not say that the County Court has an exclusive jurisdiction and so while such applications should normally be made in the County Court they can be made in the High Court if it is sensible to do so, such as in this case where there is an ongoing set of High Court proceedings.

Second, the High Court has stated that the proper way to make an application to cancel a debt moratorium is by way of a claim form, not a standard N244 application notice, even if the application is made in the context of existing proceedings. The reason for this is that an application to cancel a debt moratorium is a free-standing request and not connected to any set of proceedings as it will affect all debts within the moratorium including those which are not part of any existing claim. This also given the court its full range of case management powers in terms of giving directions to resolve the dispute such as for witness evidence and disclosure of documents. In this case the application had been made in the wrong manner but the High Court let the applicants off as it was the first one.

Third the application was supported by signed witness statements. There was no cross examination on these but that was very much an exception based in this case. The presumption should be that all applications to set aside a debt moratorium will require witness evidence and if there is any dispute over the facts there will be cross-examination before the court.

Finally, the High Court made reference to the substantial evidence associated with the making of the regulations and indicated that this was relevant material to which a court could have regard in interpreting them.

There was discussion about whether the regulations create a single moratorium to which there is two possible routes of entry, ordinary debt respite and mental health respite, or two entirely different moratoria which apply to the two different scenarios. However, the Court did not consider that this was very relevant although it might be in a different case.

Unfair Prejudice

Ultimately the main issue was whether the mental health moratorium created an unfair prejudice to the applicants. The court decided that this was to some degree a balancing test between the detriment to the creditor by being unable to enforce a debt and the detriment to the debtor by having the moratorium removed. However, it held that it involved a wider consideration as the positions of the two parties were radically different and could not be easily compared. In addition, there was the issue of other creditors. A moratorium applied to all debts and so a complete cancellation would allow for all those debts to be enforced and not just those of the creditor making an application. It is open to the court to make a debt tailored cancellation order but that had not been sought in this case. It may well be worth future applicants seeking a more tailored order to avoid this kind of criticism unless there is no other creditor that could take advantage of the cancellation. The other key point to note is that changing events after the moratorium has been made can be relevant. For example an improvement in mental health since the making of the moratorium could allow for debts to be dealt with.

The evidence provided in support of the mental health problems of Mr Brake was limited. It was a letter from a doctor which was not addressed to the court and did not comply with any of the rules around expert evidence. It said nothing more than that Mr Brake’s health was fragile and that it would be detrimental to his health to end the moratorium. But it gave no details as to the “duration and severity of Mr Brake’s illness, no prognosis and no timescale for any improvement of his mental health. Nor does it explain how the removal of the moratorium would hinder Mr Brake’s recovery when at the same time he continues to be involved, both as a party to and as a witness in large-scale civil litigation, including three lengthy trials within the next ten months. Indeed, it is unclear whether Dr Jefferies knows about the forthcoming trials, or understands what a moratorium is in this context and what its consequences may be.” The clear hint for those seeking to defend an application in the future is to have rather more detailed medical evidence. The court also noted that the debt advisor making the mental health moratorium is required to act on evidence from a mental health professional. That evidence was not provided to the court and the court noted that it may be the subject of future challenge. The key points here are that the moratorium must be based on solid evidence and that it is probably sensible to provide it if defending an application for the moratorium to be ended.

In terms of the core arguments made by the applicants they said two things. First, that it was unfair to allow Mr Brake and his co-defendants to hide behind the debt moratorium and so not pay the considerable costs orders already outstanding for other parts of the legislation while at the same time continuing to pursue the litigation and put the applicants to the expense of dealing with it. The court did not agree. Partly this argument was a complaint about the costs rules in the court which the court could not entertain. However, the court also made the point that the moratorium was only applicable to past debts, not new ones which accrued after the moratorium was made. Mr Brake had argued that the moratorium covered past debts and future debts accrued during the moratorium but the court did not agree and was clear that a moratorium dealt with the past only. Therefore any new costs orders arising from the ongoing litigation would be ones that Mr Brake and his co-defendants would have to pay notwithstanding the existence of a moratorium. The court clearly considered that this was a fair balance which respected the moratorium but prevented it being hidden behind by a party pursing litigation.

The second argument was that the point of a moratorium was to obtain debt advice. As there was no evidence of this then the moratorium was applied for in bad faith. While this may be an argument in a normal moratorium it seems a bit weak in the face of a severe mental health crisis and the court did not accept it. The court also noted that the application to set the moratorium aside had been applied for virtually immediately and so this rush meant that there was little opportunity to establish if there was an improvement in Mr Brake’s mental health.

Conclusions

This is the very first case on breathing spaces and it may be subject to appeal. So, while I have sought to draw threads from it the court was clear that it was not seeking to lay down binding principles and some of it will need to be treated with caution. There are useful points though to note in terms of the evidence needed and the procedure to be followed. It will be interesting to see how things progress in this case and in other ones which will no doubt follow.

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David Smith is a Partner located in Londonin our Commercial Litigation department

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