The High Court allowed a bankruptcy petition to proceed during a breathing space moratorium.
Regulation references in this summary are to the Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020.
Summary
The High Court considered whether it has discretion to allow a bankruptcy petition to proceed where the debtor is subject to a breathing space moratorium under the Debt Respite Scheme.
The court allowed the bankruptcy petition to proceed and made a bankruptcy order.
Background
The case concerned three related bankruptcy petitions. The petitions arose out of a personal guarantee for business lending between the parties to finance property development. The debt, including interest, was around £1 million.
The three respondents were joint debtors and had all entered into a breathing space moratorium at least once at different times. As a result, the bankruptcy petitions had been stayed several times. The day before the hearing of this case, one of the respondents, Mr Paliouras, entered another moratorium.
The petitioner, Yianni, asked the court to allow the bankruptcy petition against Paliouras even though he was subject to a breathing space moratorium.
Yianni argued the moratoria were being used tactically to delay the petitions progressing.
Whether regulations 7(3) and 7(5) apply
Yianni argued that regulations 7(3) and 7(5) did not apply.
Regulation 7(3) prevents a creditor from requiring a debtor to pay interest, fees, penalties or charges during a breathing space. Under regulation 7(5), permission for enforcement action can only be granted where:
it would not be detrimental to the debtor, or
it would not significantly undermine the protections of the moratorium
It must be reasonable to allow a creditor to take enforcement action.
Definition of enforcement action
Yianni stated that for the purposes of regulation 7, the steps defined as enforcement action are contained in regulation 7(7).
Regulation 7(7)(f) states that starting any legal action or legal proceedings in relation to or because of a non-payment of a moratorium debt is enforcement action. Regulation 7(8) confirms that legal proceedings include bankruptcy petitions.
Yianni argued this only applies to the issue of bankruptcy petitions. The regulations did not apply in this case because the proceedings had started. The court's discretion to allow the petition to proceed fell under regulations 10(5) and 7(2)(b).
Whether bankruptcy petitions an abuse of process
The respondents argued Yianni was using the bankruptcy petitions solely for collateral purpose and it was an abuse of process.
A petition might be used for a collateral purpose where the petitioner does not want to obtain the bankruptcy of the individual but uses the proceedings to put pressure on them to take some other action.
In this case, the respondents stated Yianni was not interested in being paid, refused reasonable offers, and attempted to "blacken their names" to make it impossible for them to pay.
The court's decision
The High Court agreed that the breathing space moratoria were being used tactically and regulations 7(3) and 7(5) did not apply.
Bankruptcy order made during breathing space
The court allowed the petition to proceed and made a bankruptcy order. The court commented that if it was wrong and did have to consider regulation 7(5), they would still allow the petition to proceed.
The court stated that allowing the petition to proceed would not be detrimental to Mr Paliouras because he had ample opportunity to seek advice. The petition would not significantly undermine the protections of the moratorium because the protections are there for debtors to take advice and find a solution. Mr Paliouras had not done this. This latest moratorium would only delay the proceedings further.
The court did not adjourn the other petitions as all three petitions stood and fell together.
Bankruptcy petitions not an abuse of process
The court concluded that Yianni had not unreasonably refused offers because the source of the funds offered was speculative and based on promises.
The court held that while Yianni had been "intemperate and frankly downright unpleasant" this did not prove that he was attempting to prevent the petition being resolved or show he was trying to cause harm to the respondents. The petitions did not meet the bar for abuse of process.
Comments
For clients facing bankruptcy proceedings, a breathing space moratorium might not provide the protection they are seeking. Creditors could rely on this case to get permission for bankruptcy petitions to proceed.
Where a client has benefited from more than one breathing space moratorium but has not used them to find an appropriate debt solution, advisers should be prepared for creditors to quote this case when seeking permission to enforce a moratorium debt.
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