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Breathing Space Moratorium – 3 months on

  • United Kingdom
  • Financial services disputes and investigations
  • Litigation and dispute management

28-07-2021

The Regulations[1] relating to the Debt Respite (Breathing Space) Scheme came into force in England and Wales on 4 May 2021.  The scheme gives eligible people who receive professional debt advice access to a 60-day period in which interest, fees and charges are frozen and enforcement action is paused.  For people receiving mental health crisis treatment, the moratorium may be accessed for the duration of their crisis treatment. 

When we examined the draft Regulations last year (see here), we queried whether debt advice providers would be able to cope with a significant increase in demand for their services and if they would have the ability to adhere to the tight timescales for conducting reviews.  In this briefing, we examine the position, nearly 3 months on.

Current position

Whilst it’s still early days, there are a few developments of note:

Take up

Take up for the Breathing Space Scheme from debtors has been high, no doubt impacted by the financial fallout from the Covid 19 pandemic.  Queries from creditors arising from the scheme have exceeded expectations and there is currently a backlog with debt advisors. The knock on effect for creditors is that there are delays in being able to obtain the clarity required to properly follow the rules of the scheme and in circumstances where creditors are liable for losses incurred if they don’t, this could be problematic. The Insolvency Service is being encouraged to work with creditors and debt advice providers as a matter of urgency, to develop a fit for purpose electronic system to support the effective delivery of the Breathing Space Scheme.

Debt Relief Orders

Debt Relief Orders (DRO) were introduced in 2009 and are aimed at individuals with low levels of debt who are unable to offer their creditors assets or disposable income, and for whom bankruptcy would be a disproportionate response. A DRO sees debt repayments and interest frozen, while creditors are unable to pursue debtors for a 12 month period, after which the debts are written off. In a move intended to complement the Breathing Space scheme, The Insolvency Service has recently extended the financial limits for DROs (see here and here).  The extended financial limits means that individuals are now eligible for a DRO if they satisfy the following criteria:

  • they owe debts of less than £30,000 in total (an increase from £20,000);
  • they have less than £75 a month spare income (an increase from £50);
  • they have less than £2,000 worth of assets (an increase from £1,000);
  • they do not own a vehicle worth £2,000 or more (an increase from £1,000);
  • they have lived or worked in England and Wales within the last 3 years;
  • they have not applied for a DRO within the last 6 years.

The changes came into effect on 29 June 2021 to coincide with the end of the first 60 days of the Breathing Space scheme.

Statutory Debt Repayment Plans

The purpose of a Statutory Debt Repayment Plan (SDRP) is to enable someone in problem debt to enter a statutory agreement to repay their debts within a manageable timetable. Individuals entering an SDRP would receive legal protections from creditor action for the duration of their plan. An individual would have to meet three criteria to be eligible:

  • they must access debt advice - anyone wishing to enter a plan would have to seek debt advice from an organisation that is either FCA regulated or has appropriate exemptions from FCA regulation to offer debt advice, such as a local authority.
  • they must be assessed as able to repay their debts in full over a reasonable timeframe - an individual would only be eligible for a plan if they had a realistic chance of repaying all of their debts over a period of no more than ten years.
  • their creditors must have agreed to the terms of the plan, or the Insolvency Service must rule that the plan proposed by their debt adviser was fair and reasonable, so that creditors are obliged to comply with it - If an individual’s proposed plan were judged to be fair and reasonable, the plan would commence immediately, without further opportunity for creditor objection, and all creditors would then be bound by the plan. However, if a plan were judged not to be fair and reasonable, the proposal would be rejected, and the plan referred back to their debt advice agency. The debt advice agency would still be able to propose a revised plan, should they believe this was the best solution for the debtor.

The first step towards implementing the SDRP has now been taken with S35 of The Financial Services Act 2021 introducing a new subsection (4A) to S7 of the Financial Guidance and Claims Act 2018 (the Act which brought the Debt Respite Scheme). The SDRP is due to come into force before 1 May 2024.

Judicial consideration

The impact of the Regulations on unliquidated debts was recently considered in Axnoller Events Ltd v Brake and another.

The facts

On 2 May 2021 the Court ordered the Defendants to pay the Claimant’s costs of an application on the indemnity basis, to be the subject of detailed assessment if not agreed (‘the Order’). On 4 June 2021 the Court had to decide whether to order the Defendants to make a payment on account of those costs pursuant to CPR rule 44.2(8) which provides that: "Where the court orders a party to pay costs subject to detailed assessment, it will order that party to pay a reasonable sum on account of costs, unless there is good reason not to do so".

The Defendants resisted the application on a number of grounds, the first being that on 6 May 2021 (4 days after the Order was made) the second Defendant was subject to a Mental Health crisis moratorium under the Breathing Space Scheme. The Defendants argued that the effect of this was that the Claimant was unable to enforce any debt payable to them by the second Defendant (as the protections apply to all joint debtors). They further submitted that the making of an order for payment on account would risk a further impact/deterioration in the second Defendant’s mental health and that was a good reason, within CPR rule 44.2(8), not to make an order.

The Claimant argued that the debt that would be created by an interim payment order could not be a "moratorium debt" within regulation 6 of the Regulations or protected by regulation 7 even if it were such a debt.  (A moratorium debt is defined by the Regulations as any qualifying debt that was owed by the debtor at the point at which the application for the moratorium was made. As the order requiring a payment on account had not yet been made, it couldn’t have been owed at the point at which the moratorium application was made and therefore couldn’t be classed as a moratorium debt).

The Claimant also argued that they were not seeking to take any of the various steps prohibited during the moratorium by regulation 7 and that the making of the order would not result in any enforcement action being taken against the second Defendant. Therefore, there was nothing to prevent the interim payment order being made, and no good reason not to make the order pursuant to CPR rule 44.2(8) .

Held

The Order created a contingent liability of uncertain amount. It could not be enforced before being liquidated in a certain sum whereas a debt is a liquidated sum that is due and owing. Being unliquidated, the Order did not create a debt for the purposes of the Regulations. The making of an order to pay a sum on account of the costs would create a debt, which would be a qualifying debt for the purpose of the Regulations, but not a moratorium debt (since it had not come into existence when the application for a moratorium was made). Even if the debt could become a moratorium debt under regulation 15, that process had not yet happened (regulation 15 requires the debt advice provider to consider whether an additional debt is a qualifying debt). Therefore making the interim costs order could not be a prohibited step under the Regulations, even taking regulation 15 into account. The Judge therefore went on to order the Defendants to make a payment on account of costs of 70%.

Case comment

It is common in many cases, for the Court to order Judgment on the issue of liability,  with damages to be assessed at a later date. There is therefore potential for creditors to seek to rely on this decision in any circumstances where the amount owing has not yet been determined. As such, individuals subject to a moratorium under the Breathing Space Scheme, may still find themselves the subject of court action to liquidate the amount owing, even if enforcement of that sum cannot subsequently take place.

The future?

  • The Breathing Space Scheme and Statutory Debt Repayment Plan are not going away. The implementation of both was a 2017 manifesto commitment with the Government saying that it wanted to act to prevent problem debt from occurring and help people to get out of problem debt effectively should they experience it.
  • it is highly likely that applications for a Breathing Space and Debt Relief Orders will increase over the coming months as we start to see the impact of the changes to the Government’s furlough scheme. From 1 July 2021 the level of grant under the scheme has reduced and from 30 September 2021 the furlough scheme is planned to end altogether.
  • it is also anticipated that by extending the financial limits for Debt Relief Orders, over 13,000 more people may use DROs in the next 12 months compared to 2019, an increase of nearly 50 per cent.
  • creditors will be expected to have adapted their systems, policies and processes to ensure they comply with the Breathing Space Regulations, Debt Relief Orders and, in the future, the Statutory Debt Repayment Plan.
  • HM Treasury, creditors and debt advice providers will all need to work together to overcome the initial teething problems experienced with the Breathing Space Scheme or else there is a risk that the individuals who need a moratorium the most, will not receive the benefits.

This briefing is for guidance only.  It is not advisory in nature and should not be regarded as a substitute legal advice.

 


[1] The Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020