Breathing Space additional debt procedure extended to debts incurred before moratorium but unknown at the time of the moratorium application.
Summary
In a previous case (see Axnoller Events Ltd v Brake and another (Costs)), the High Court decided that a costs order was a contingent liability. As a result, the costs order was not considered a qualifying debt and in turn, did not satisfy the conditions of regulation 6 of the Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 (DRS Regs 2020).
In the present case, the court made it clear that the ‘additional debt’ procedure under regulation 15 of DRS Regs 2020 extended to debts incurred before the moratorium but unknown at the time of the moratorium application.
Background
Brake (B) entered a mental health crisis moratorium on 6 May 2021.
Axnoller Events Ltd (A) were B’s creditors. They asked the debt advice provider who had initiated the moratorium to review and cancel it under regulation 17(1)(a) of DRS Regs 2020 on the ground that it unfairly prejudiced their interests. The debt adviser declined.
A applied to the court to cancel the moratorium under regulation 19 of DRS Regs 2020.
The court's decision
Application dismissed. On the facts of the case, the court held that A had not shown that they were unfairly prejudiced.
Among other, the High Court confirmed that an additional debt was not intended to cover future debts that arise after a breathing space or mental health crisis moratorium had begun.
Future debts included contingent liabilities where the debt existed at the time of the moratorium application, but the amount had not been quantified.
Even if a contingent liability became liquidated after a moratorium had started, it could not be added to the moratorium because it would not have been a qualifying debt at the time of the moratorium application.
The court also made observations on A’s claim of being unfairly prejudiced by the mental health crisis moratorium, including that:
‘unfairly prejudices’ is not defined in the DRS Regs 2020, and as this was the first application for a cancellation of a moratorium, there was no judicial guidance on this point
every moratorium would prejudice creditors, and as such, a moratorium cannot be said to automatically unfairly prejudice creditors. Ultimately, the creditors must show that the prejudice suffered is unfair