A View On The 'Debt Respite Scheme'

Legal expert and occasional PDPLA contributor. David Smith discussed on LinkedIn the Debt Respite Scheme and how the moratorium on debt recovery applies when mental health is involved.  Knowing that many members do not have access, but that this could potentially be of interest to all, it is reproduced here...

David's Blog Post

The Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 have been a bit of a concern for those dealing with debt arising on property and various forms of lending since they were made. They allow for individuals to seek a temporary moratorium on their debts and to also prevent interest and other fees accruing during that period. This can be for 60 days in ordinary cases but can be unlimited in the case of people suffering from a serious mental health issue. The block is pretty wide ranging as it prevents any letters or notices being sent in relation to debts, any rent demands being made, any possession action being taken, and enforcement of any order for money or possession. So it really does represent a total standstill during periods where a moratorium is put into place.

A big part of the problem with the Regulations has been around the mental health aspect and, indeed, that is where all the litigation has been to date. That is unsurprising. It is generally not worth litigating over a 60-day delay in enforcing a debt or judgment because the courts will take longer to deal with the issue than the delay lasts. However, the mental health moratorium has been more of a concern. They are unlimited in length and some have lasted for a considerable period. There is also a bit of a dispute as to how effective debt advisors are in dealing with these moratoria and some evidence that they simply accept almost any letter from a medical professional asserting that there is a mental health issue connected to debt. The other problem is that debt is inevitably stressful. Anyone who is facing the loss of their home or bankruptcy is bound to feel huge pressure and that takes a toll on their mental health. This has been seen in a couple of cases where individuals have dropped in and out of mental health breathing spaces as the risk of home loss advanced and receded. Naturally, being in a moratorium removed the risk of loss of home and so their mental health improved and then once the breathing space ended because of that improvement and the risk of loss re-arose their mental health deteriorated. But it cannot be the case that lenders and creditors are continually unable to enforce a debt. The reality is that someone in a mental health crisis still owes money and leaving the situation in abeyance is no better for them than for the people they owe money to, however harsh that may seem.

This has set the stage for some increasingly complex litigation over the scope of a mental health breathing space and the nature of the regulations themselves. This has hardly been assisted by the drafting of the regulations which are certainly not a good example of the draftsman's art. By which I mean they are confusing and contradictory!

Recently, have been two useful judgments in a single linked matter in the High Court that significantly advance the law in relation to breathing spaces and provide some welcome clarity. I was lucky enough to be involved in these cases along with my colleague, Neli Borisova , and with representation in Court by Tom Morris.

The first issue that the Court has looked at was contesting the inclusion of a debt. If a breathing space is entered into a debt advisor must review all the debts that the person involved has and consider whether they fall within the remit of the breathing space. These are called Qualifying Debts. Some debts are exempted and these include:

• secured debt which does not amount to arrears in respect of secured debt (this one will come up again later!);
• council tax and rates;
• damages for negligence and nuisance; and
• lots of others which are not important for this discussion.

If a creditor disagrees with the assessment of the debt-advice provider about whether the debt is a Qualifying Debt or objects to the moratorium for some other reason then they have a short window of 20 days to object to the debt advice provider. If the debt advice provider refuses to accept the debt is exempt or change the moratorium (guess what they usually do) the creditor has 50 days from the start of the moratorium to take the matter to the court and ask them to change or end the moratorium.

So the first issue that arose in the matter we were dealing with was what happens if the deadlines are not complied with. The lower court had essentially decided that if the time limit to complain to the debt provider or court is missed then that is it. The decision of the debt advisor becomes final and binding for all purposes to use the words of the lower court. The debt is therefore then assumed to qualify, regardless of whether it does or not. This is a bit of a concern because ousting the organic jurisdiction of the court is quite hard (and arguably undesirable) and is something that should only be done in very clear terms in primary legislation. It should not be done in regulations that have not been fully considered by Parliament and certainly should not be done as an implied clause by judicial fiat. There is also the fact that the entire regulations are based on Qualifying Debts and if a Debt does not actually qualify then it requires a bit of a mental leap to just ignore this and decide that it does.

Fortunately the High Court agreed. It was persuaded by the fact that the regulations did not themselves say that a failure to apply in time would block out any future applications, that was something that the lower court had inserted for itself. The High Court was also heavily persuaded by the fact that a debt which is not a Qualifying Debt never falls within the regulations at all and so an error by a debt advisor should not be able to change that, even if this is not raised at the correct stage.

So the first key point is that if the debt is not a qualifying debt then failing to apply to a debt advisor or the court within the regulatory time limits is not fatal. It probably will be fatal if the application was to have the moratorium set aside for some other reason.

The second issue the High Court was asked to determine was in a separate judgment and was whether this specific debt was a Qualifying Debt or not and the extent to which it was. The debt arose from a secured debt but the mortgage was a fixed term loan with all repayments due at the end. In other words, the mortgage was for a fixed period of 12 months and all of the principal, interest, and fees were due to be repaid in one lump sum at the end of the term. At first blush this would suggest that the debt is exempt as "secured debt" is not covered. To repeat the earlier definition the secured debt exemption is for:

"secured debt which does not amount to arrears in respect of secured debt"

Secured debt includes "a secured credit agreement" and the definition of a "secured credit agreement" includes

"an agreement under which a creditor provides credit to a debtor and the agreement provides for the obligation of the debtor to repay to be secured ... by a mortgage on land"

There are a lot of interlocking definitions in these Regulations! However, the series of exclusions and definitions would appear to equate to this problem being solved! Of course it is not that simple. The exclusion of secured debt from a breathing space has to be read with the second part of that phrase which excludes "arrears in respect of secured debt". That makes things somewhat less clear. Surely that means that as soon as there is a failure to pay the debt at the end of the fixed term the debt is then in arrears and so it ceases to be exempt. The definition of arrears is:

"any sum other than capitalised mortgage arrears payable to a creditor by a debtor which has fallen due and which the debtor has not paid"

But that would suggest that if mortgage arrears are capitalised they again become secured debt and do not qualify for a breathing space.

Therefore one interpretation of the regulations is that the principal sum owed on the mortgage (the sum originally lent) is exempt from a moratorium and is always repayable. It is the capital. Although it did not arise in this case presumably any arrears that had already been capitalised before the moratorium could also fall within the scope of that exclusion. But the interest and other fees due on the capital (the arrears) fall within the scope of a moratorium and cannot be recovered during its term. The alternative explanation is that everything is in arrears as soon as it is unpaid and so all of it falls within a moratorium. The slightly odd outcome of that second option is that the date of the moratorium then becomes critical. If the mortgage is called in before the moratorium is declared then there is an exemption but if it is called in after then there is no exemption as debt is only protected if it has fallen due when the moratorium is declared.

My personal view is that this slightly roundabout drafting was really targeted at classical repayment mortgages to enable people who were in a moratorium to have their repayments suspended without penalty but to preserve the overall liability under the underlying mortgage so that the repayments would seamlessly start up again after a moratorium ended. I just don't think the drafter really considered other ways in which debt could be secured on property.

In any event, the High Court has agreed with the first analysis. In the event that a fixed term mortgage has ended then a moratorium does not bite on the initial capital that has been advanced and that is recoverable as a secured debt regardless of a moratorium.

The judge felt that the separation of the two elements was entirely pointless if there was no intention that they be treated differently. The court was unable to see any other reasonable course of action that did not create more problems than it solved. There was a telling remark at the end of the judgment that coming to a decision "might have been easier to rationalise some of these distinctions and anomalies if it were apparent why secured debt was excluded from the moratorium in the first place". However, there was no clear answer to that question in any of the supporting material so the court had to do the best it could.

This is by no means the end of the process. The same issue is already under appeal in the Court of Appeal in the matter of Interbay v Forbes which involves the same debtor with a different lender. The High Court has granted permission to appeal already for part of its decision and permission is likely to be sought from the Court of Appeal for the rest. It seems likely that both matters will be heard together in May. So the Court of Appeal is finally going to get a chance to look at the Breathing Space Regulations for itself. It will be interesting to see what they make of them.

What all of this means in practice is that at the current time the principal capital owed on a debt that is secured on property where the term of the loan has ended is recoverable regardless of a moratorium but that the arrears and fees will not be recoverable unless they have already been capitalised into the principal. If there has been a failure to ask a debt advisor to exclude that debt from the scope of a moratorium then that is irrelevant because it never feel within the scope of regulations anyway. But this position is subject to review when the Court of Appeal gets hold of the issue in a couple of months time. 

David Smith

(If you have a LinkedIn account and wish to follow David, subscribe to 'Property & Legal Thoughts')