From May 2021, provisions for statutory breathing space are likely to apply to claims against personal debtors; but remember that the new regime will apply to business debt owed by individuals who are not VAT registered and not in partnership with anyone else.
The business to business debt recovery environment is relatively benign for creditors, and there are few restrictions when it comes to enforcing payment of debts through the courts. Generally, creditors operate a voluntary approach to indulgence for overdue debts, taking each case on its facts as to whether it is prepared to agree time for payment, or place a hold on enforcement for a fixed period.
In many cases, however, this will change next May when the Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium (England and Wales) Regulations 2020 are due to come into force. These will, where they apply, enable a 60-day moratorium during which enforcement action cannot be taken, and where interest and charges will be frozen.
So which business debts will be covered by the Regulations? Business debts are eligible if the individual debtor is not registered for VAT. However, they are not eligible if the individual is in partnership with anyone else. There is no limit on the amount of any individual debt, or total debt, that can be protected in a moratorium.
Provided the eligible person receives professional debt advice, they can access a 60-day period in which interest, fees and charges are frozen and enforcement action is paused (“Breathing Space”).
For those receiving mental health crisis treatment, there will be an alternate route by which the protections of a moratorium can be accessed, and which ensures that protections are in place for the duration of their crisis treatment.
The scheme also plans a Statutory Debt Repayment Plan (“SDRP”), a statutory agreement that will enable a person in problem debt to repay their debts within a manageable timetable and with the benefit of legal protection from creditor action for the duration of their plan. More on this as the scheme develops.
Debt Advice Providers
Breathing Space is only accessible via professional debt advice providers. This means an authorised person who has Part 4A permission to carry on any regulated activity of the kind specified in article 39E (debt-counselling) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2014. Alternatively, by exempt persons in relation to that activity (such as a local authority). A debt adviser can offer a moratorium via an online, telephone or face-to-face service. A debt adviser cannot charge a fee for this service or for any service in connection with a moratorium.
What is the moratorium?
The moratorium will last for a fixed period of 60 days. However, individuals will only have access to Breathing Space once in each 12-month period. During the moratorium, a creditor will be prevented from adding interest and costs to the account and will also be prevented from taking action to enforce payment.
A moratorium is not a complete payment holiday, and the individual should keep paying ongoing liabilities during a moratorium (as defined in regulation 2). This will include mortgage payments, rent, insurance, taxes and utility bills. If an individual fails to maintain these specific ongoing liabilities, and they have the means to do so, the debt adviser must cancel the moratorium at a midway review (within first 35 days) unless the debtor’s personal circumstances would make the cancellation unfair or unreasonable.
If you have a charging order or an attachment of earnings order obtained before the moratorium, these will not be affected by the moratorium. All other proceedings, including bankruptcy, will pause during the moratorium.
Where an individual makes an admission before or during a moratorium in connection with an action or other proceeding relating to a moratorium debt, a creditor who is a party to the action or proceeding may enter judgment in that action or proceeding during the moratorium if they would otherwise be entitled to do so.
Mental Health Crisis
An individual will be protected for the duration of their crisis treatment and then for a further 30 days. If eligible, an individual may then have access to the Breathing Space moratorium accessed via professional debt advice. There is no limit on the number of times that an individual receiving mental health crisis treatment may enter a moratorium via this mechanism.
The Insolvency Service will operate an electronic system to administer the scheme, including a register of persons in moratoria. Work is underway as to how creditors will be notified.
Challenging a moratorium
A creditor has 20 days to challenge a moratorium. One of the grounds for a challenge is where the individual has enough funds to discharge their debts as they fall due. You will need evidence to support your challenge on this ground. The debt advice provider will decide whether to cancel the moratorium. If the decision is against cancellation, a creditor may apply to the county court to cancel. Where a court has cancelled a moratorium in relation to a moratorium debt, the court can require the individual to pay any interest, fees or charges that accrued during the moratorium period in respect of the debt.
This will be entirely new territory for many creditors and will bring forward a need to change policies and procedures. The freezing of interest and charges will require practical changes on systems, and we can expect to see individuals challenging any mistakes. The ability to challenge a moratorium will require legal support, and the success of the challenge could rest upon your pre-moratorium conduct.