When you’re owed money your priority will be recovering it as quickly and effectively as possible. As a creditor you may choose to issue court proceedings and pursue enforcement options without delay. However, such efforts could be affected by the Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations (“the Regulations”).
The Regulations came into force in 2020 and allow debtors to apply for protection against enforcement proceedings in the form of a moratorium. Such moratoria are commonly called “Breathing Space Moratoriums” (“BSM”).
BSMs allow debtors time to prepare payment plans for some or all their debt without fear of enforcement proceedings scuppering those plans.
There are two types of BSM:
The Standard BSM is available to anyone who cannot pay their debts, protecting the debtor from any imminent or ongoing legal action relating to qualifying debts for up to 60 days. Ongoing enforcement action by affected creditors must be adjourned until a Standard BSM has expired or been cancelled.
During a Standard BSM affected creditors are prevented from making contact with the debtor in relation to enforcing the debt owed (meaning no demand letters can be sent), and interest and additional charges on the debt are frozen.
To qualify for the Standard BSM the debtor must be an individual who resides in England and Wales, with a qualifying debt owed to a creditor; not be party to a Debt Relief Order (‘DRO’); and most importantly must not already have or have had a Standard BSM in the last 12 months at the time of their application.
A Standard BSM can only be accessed through a debt advisor who must be satisfied the debtor is unable to pay their debts and that a BSM is the most appropriate form of protection. If the adviser believes the debtor has sufficient funds or assets to pay the debt owed the application will be refused.
The MHCM is slightly different and has some important additional characteristics:
When a debtor has entered a BSM, any affected creditors that have been identified to their debt advisor will be notified of the BSM via the electronic service maintained by the Insolvency Service.
Creditors are then expected to conduct a ‘reasonable review’ of their records to identify the relevant debt and ensure that no steps are taken to enforce it during the period of the BSM. This is the creditor’s responsibility and if ignored all enforcement action will be nullified, potentially making you liable for the costs involved.
It is also the creditor’s responsibility to ensure any additional debts within their records that relate to the debtor are brought to the debt adviser’s attention if they have not previously been listed under the BSM. The debt advisor can then advise whether such debts are also affected by the BSM.
During the BSM, creditors must cease:
If the debt has been sold to a third party, it is the creditor’s responsibility to make the third party aware that the debt is covered by a BSM, or you may be liable for any losses incurred by the debtor and the third party. The same applies for ongoing enforcement proceedings, in respect of which you must notify the Court the debt is protected under a BSM.
You might be asking yourself; how can I trust that the debtor is working towards clearing or managing their debt during the BSM period if communication has been stopped? Or are scheduled payments still required to be made during the BSM?
The BSM is not a system that excuses the debtor from paying. The debtor is still required to make any payments that are due during the period of the BSM.
If the debtor does not make any such payments a creditor may request a review of a Standard BSM is carried out by the debt adviser. Should the debt adviser consider that a Standard BSM is no longer appropriate, it may be cancelled, in which case enforcement action can resume.
Should the debt adviser disagree and opt to allow a Standard BSM to remain, a creditor may apply to the court within 50 days of the BSM start date to request that it be lifted.
A debt adviser must cancel a MHCM if they believe that evidence of the debtor’s mental health crisis treatment is inaccurate or misleading (and cancellation of the MHCM would not be unfair or unreasonable); or the debtor asks for the MHCM to be cancelled.
To date, there have been few cases involving BSMs which have been considered by the Courts. However, in one significant decision (Kaye v Lees [2023] EWHC 758 (KB)) the Court considered whether the beneficiary of a MHCM, Ms Lees, should be prevented from obtaining multiple moratoria which would prevent the sale of her property in satisfaction of a judgment debt.
In Kaye v Lees, an injunction had been granted preventing Ms Lees from making a further application to a debt advisor for two months. However, the Court refused to extend the injunction, finding that it was for a debt advisor to consider whether a further moratorium should be granted on the basis that the Regulations provide for debt advisers to be the primary decision makers, not the Court. The judgment suggests that judicial review of the debt adviser’s decision could be used as an alternative to the review process set out in the Regulations where there is particular urgency on the part of the creditor to take enforcement steps.
It is important that creditors consider the responsibilities imposed on them under the Regulations to avoid any additional costs associated with enforcement of debt that will effectively be null and void if a respite scheme has been granted.
BSMs are not a tool to prevent debtors from paying what they owe, they are a breathing space which must be supported and approved by a professional debt advisor with a view to setting up a more manageable payment plan. Creditors can take action if they consider that the BSM process is being misused, but specific timescales will apply.
As highlighted by Kaye v Lees, debtors can apply for multiple subsequent MHCMs making enforcement by creditors incredibly difficult. It is important that creditors keep an open line of communication with the debt adviser and request reviews, or consider judicial review, should there be any concern that the moratoriums are not being used in accordance with the Regulations and/or urgency in taking enforcement steps.
For advice on debt recovery or any of the issues raised in the article please contact Emily Reeve, Partner in our Banking, Restructuring & Insolvency team.
This article is for general information only and does not, and is not intended to, amount to legal advice and should not be relied upon as such. If you have any questions relating to your particular circumstances, you should seek independent legal advice.
[1] Kaye v Lees [2023] EWHC 758 (KB) (31 March 2023) (bailii.org)
