The County Court granted an injunction to the claimant to prevent joint borrowers of a secured loan from applying for a breathing space moratorium.
Summary
This case concerns two issues. The first is an application by a creditor to cancel a breathing space moratorium under the Debt Respite Scheme. The second is an application by three out of four joint defendants (the Salihs) to set aside a possession order.
This case summary considers the breathing space issue. The County Court dismissed the application to set aside the possession order.
The regulations referred to in this case are the Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 SI 2020/1311.
Background
In 2015 the Salihs took a joint secured loan against their property with Aura Finance, later assigned to West One Loan. No payments were made towards the loan. In February 2019 West One Loan obtained a possession order and a money judgment in the sum of over four million pounds.
Vacant possession was not delivered by the Salihs. A combination of stay hearings and failed evictions due to COVID-19 restrictions meant the Salihs were still residing in the property when the first joint debtor entered a breathing space moratorium in November 2021. When the moratorium ended, another of the joint debtors applied for a breathing space moratorium.
West One Loan challenged the second breathing space moratorium on the grounds that:
the arrears on the secured debt were not qualifying and were not subject to the moratorium protections
the second joint debtor was not eligible for a breathing space moratorium as they were already subject to the benefits of the first
joint debtors applying for consecutive moratoriums provides 120 days of protection, causing unfair prejudice to the creditor
The Court's decision
HHJ Monty considered the issues of qualifying debts, eligibility criteria, and unfair prejudice, in relation to the breathing space moratorium.
Qualifying debts
Arrears on a secured loan are a qualifying debt in a breathing space moratorium. A qualifying debt is defined in regulation 5 as "any debt or liability other than a non-eligible debt".
Secured debts that are not in arrears are non-eligible debts under regulation 5. Because the loan was in arrears, the debt was a qualifying debt for the moratorium.
On this count, the application to end the moratorium failed.
Eligibility criteria
Regulation 24 states that to be eligible for a breathing space moratorium, a debtor must not be subject to another breathing space moratorium, or have been subject to another moratorium in the last 12 months.
The Judge considered the claimant's assertion that a debtor receiving the benefit of a breathing space moratorium started by a joint debtor would count as the first debtor "being subject" to the moratorium.
The Judge deemed that a joint debtor was not "subject to" a breathing space moratorium started by another. To be subject to a breathing space they would have to apply for their own moratorium.
On this count, the application to end the moratorium failed.
Unfair prejudice
The Judge considered the meaning of "unfair prejudice", which is not defined in the regulations.
On balance, the Judge found that the entry into the second breathing space moratorium was not done as a means of finding a debt solution, but as a mechanism to frustrate the creditor and prevent enforcement.
The second joint debtor's breathing space had come to an end by the date of the hearing. The Judge expected the two other joint parties (the second and third members of the Salih family) would make separate breathing space applications to prolong the moratorium protections. In the event that all four of the Salihs chained their breathing space moratoriums, they could effectively achieve 240 days of protection.
On this point, the Judge commented:
"It seems to me that the jurisdiction to cancel a moratorium for unfair prejudice to the creditor, and the discretion I have to exercise, is wide enough to enable it to be cancelled where joint creditors apply for successive moratoria in order to avoid paying their debts rather than to explore a debt solution."
The Judge found there had been "abuse" of the regulations by the Salihs, and ordered an injunction preventing any further members of the Salih family from applying for either a standard breathing space or a mental health crisis moratorium until January 2023.
Comments
In this instance, the Judge felt that the applications were being made solely as a means of frustrating a creditor, rather than to find a debt solution. This was an abuse of the breathing space scheme.
This decision should not dissuade debt advice providers from using breathing space moratoriums for clients with joint debts, and there could be cases where joint debtors wish to apply for back-to-back moratoriums and use the time effectively.
A "debt solution" is defined in regulation 2 as "an arrangement, scheme or procedure, whether statutory or not, the aim of which is to pay, discharge or liquidate some or all of a debtor's debts". This broad definition could encompass any number of formal or informal solutions, including income maximisation or access to benefits or trust funds.
To refute allegations of an abuse of process when advising joint debtors, debt advice providers can retain evidence of the progress made to reach a debt advice solution during the moratorium. If a creditor does apply to end to the moratorium on the basis of unfair prejudice, the evidence will be necessary in preventing a similar outcome to the case detailed above.
Risks for debtors and debt advice providers
The court could order the debtor to pay costs if a creditor challenge reaches court and is unsuccessfully defended.
There is also a chance that a debt advice provider could face a costs order, as discussed by Luke Oliver in his article Costs risks and other issues with the breathing space creditor review process.
Find this article and other legal updates from Shelter's Specialist Debt Advice Service in Resources for debt advisers.