Insolvency: New Breathing Space regulations for individuals
The new Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 (Regulations) came into force on 4 May 2021. The Regulations provide for individuals who are either facing problem debt or receiving mental health crisis treatment to be afforded the protection of a moratorium from legal action being taken by their creditors.
In this article we focus on the Breathing Space Moratorium and explain its scope and its potential implications for rural landowners and businesses.
Breathing Space Moratorium
The Regulations were introduced with the aim of encouraging those who have problem debts to seek professional advice and implement an appropriate strategy for dealing with their financial situation. Such a strategy may involve an informal arrangement being reached with one or more creditors, or the entry into a formal insolvency procedure such as a Debt Relief Order (DRO), Individual Voluntary Arrangement (IVA) or bankruptcy.
As such, the Regulations allow for individuals, who have accessed the services of a professional debt adviser, to benefit from a 60-day period of relief (referred to as a Breathing Space Moratorium, or simply a moratorium). In this regard, it is similar to the protection that is accessible to companies considering appointing administrators or to certain companies preparing a CVA proposal.
The Breathing Space Moratorium prevents certain charges, fees and interest accruing against debts, as well as preventing creditors from taking enforcement action. However, any liabilities which are due for payment during the moratorium must still be paid.
Practicalities for debtors
In order to take advantage of a Breathing Space Moratorium, an individual must have sought advice from either an FCA authorised debt counsellor or a debt adviser accessed via their local authority. The scheme is being administered by the Insolvency Service, although its role is largely limited to operating a private electronic register of participants.
As long as an individual can demonstrate that they are unable to repay their debts, they can apply for a moratorium and all applications must be considered by debt advisers. However, a debt adviser may refuse an application where is appears that the debtor has better options, such as an immediate insolvency process or being provided with assistance with budgeting where funds are available to them.
In addition to this, there are standard criteria the debtor must fulfil which include:
- being an individual
- owing a Qualifying Debt
- being resident in England or Wales
- not being the subject of a Debt Relief Order, Individual Voluntary Arrangement or being an undischarged bankrupt; and
- not having taken advantage of a previous breathing space within the previous 12 months.
Qualifying debts include credit cards, personal loans, overdrafts, utilities arrears and mortgage or rent arrears (to the extent these are not secured). It is also possible to include jointly owed debts.
Practicalities for creditors
A Breathing Space Moratorium will begin on the day after its details are entered onto the Insolvency Service Register and often the first time a creditor becomes aware of a moratorium is when they receive the requisite notification. As noted above, the register administered by the Insolvency Service is private and, although the Service will send notifications to creditors, they are unable to assist with individual enquiries. Once contact has been made with a debt adviser, that person becomes the point of contact for the debtor, their creditors and the Insolvency Service.
Once notification has been received, creditors must:
- stop charging certain interest, fees and charges on the debt for the period of the moratorium;
- stop any enforcement or recovery action being taken (including by agents);
- notify the relevant Court where any proceedings are being taken against the debtor;
- not contact the debtor to request payment of the debt without permission of the Court.
However, the Regulations do not prevent liabilities that fall for payment during the moratorium from being paid. The moratorium is not a payment holiday.
The position of creditors with regard to the calculation of interest, fees and charges during the moratorium; the notification of additional debts that have not been included on the initial notification; and the scope of the moratorium on enforcement, are not straightforward and creditors would be well advised to seek legal advice on receiving notification that one of their debtors has taken advantage of the Regulations.
Challenging a moratorium
In terms of challenging a moratorium, in each case the debt adviser must carry out a review of the moratorium between days 25 and 35, which is intended to ensure the debtor is complying with their obligations. If this hurdle is satisfied, the moratorium will continue until day 60. However, if the debt adviser considers it appropriate (for example if ongoing liabilities have not been paid on time or the debtor is failing to engage with the process) they have the ability to cancel the moratorium immediately following their review.
Importantly, there is a system whereby a creditor can request the review of a Breathing Space Moratorium if they consider their position has been unfairly prejudiced, or there is a material irregularity with the debtor's eligibility. Such a request must be made within 20 days of the moratorium start date (or within 20 days of an additional debt being added). However, reviews must be requested in writing and be supported by evidence, and there is no obligation on the debt adviser to consider such a request prior to the midway review. In the event a debt adviser refuses to bring the moratorium to an end, a creditor's only recourse is via Court proceedings.
As the Regulations are still reasonably new, there is little information available as to the circumstances in which a debt adviser is likely to cancel a moratorium, or where the Court will intervene to overturn the decision of an adviser. In circumstances where such cancellation may shorten the period of the moratorium by less than 25 days (even less where a Court challenge is required), creditors will need to consider carefully whether the costs of such a challenge are worthwhile.
End of moratorium
Once a Breathing Space Moratorium ends, whether via expiration of the 60 days or cancellation by the debt adviser or Court order, a creditor can begin applying interest, charges and fees once again. However, no such sums can be backdated to the period of the moratorium unless ordered by the Court. Importantly, unless a debtor has used the moratorium to put in place a DRO or IVA, or has successfully petitioned for their bankruptcy, enforcement action and any legal proceedings can also be started or continued.
Farming and rural businesses will doubtless come across Breathing Space Moratoriums in the coming months in connection with payments due under tenancy agreements, or other commercial agreements with individuals It should be noted that some (but not all) business debts will qualify for a moratorium.
The Regulations will undoubtedly be of value to those who legitimately require assistance with an untenable financial position, providing them with time and advice to enable them to restructure their financial affairs. We are, however, already seeing the potential for the moratorium to be abused by those seeking to use any means available to stymie or delay enforcement action by their creditors.
Any business faced with one of these moratoriums as a creditor, should consider obtaining prompt legal advice as there are issues which creditors should check and options for challenge.