Are Contingent Liabilities Covered By the Breathing Space Protections?
A case law update looking at Axnoller Events Ltd v Brake & Anor (Costs) [2021] EWHC 1500 (Ch) This was a High Court case and therefore all County Courts must follow it. It applies in England and Wales.
A further judgment in this case now means that this article no longer reflects the up to date legal position. It is still an accurate report of the judgment in question. We’ll be adding a new article in due course to explain the further developments.
What the case was about
This decision was part of a larger court battle between the parties, and followed on from a series of different hearings about various issues. At a previous court hearing on 2 May 2021, Mr Brakes’ arguments had been unsuccessful and the court decided that he should pay the other party’s costs. The court ordered that if the parties were unable to agree the exact amount of costs between themselves then a detailed assessment would be carried out by the court at a future hearing. This case was a hearing to decide whether Mr Brakes should make an interim payment, before the exact amount of costs was decided, known as a ‘payment on account’.
Civil Procedure Rule 44.2(8) states that where the court orders a party to pay costs subject to detailed assessment, it will order that party to pay a reasonable interim sum on account towards the costs, unless there is good reason not to do so. This hearing had been set to determine whether, and how much, the Brakes should pay for the time being, with the final amount of costs to be assessed at a later date.
Mr Brakes entered into a mental health crisis moratorium on 7th May 2021, before the hearing took place. It was argued that this prevented the court from making an interim costs order against him, or against any joint debtors, until the moratorium had ended.
What the court decided
The court decided that this debt was not covered by the Breathing Space scheme because at the time the moratorium began it was only a ‘contingent liability’. A contingent liability is an obligation to pay something, which is dependent on some future event. In this instance, although the court had already decided at the previous hearing that Mr Brakes should pay the other side’s costs, there was no decision as to when they should be paid, or how much they would be. The liability would not become due and payable unless, and until, the court made another order.
The judge acknowledged that there is no specific definition of a ‘debt’ set out in the Breathing Space regulations, but stated that in ordinary language a debt is ‘a liquidated sum that is due and owing’. The obligation to pay court costs had been established at the earlier hearing, however, this did not become a ‘debt’ — and therefore did not come within the protections of the moratorium — until it had been ‘liquidated’, with a specific amount becoming due for payment on a specific date.
Mrs Brakes also raised the fact that it was possible under regulation 15 for a debt that had not been listed in the original application to be included later as an ‘additional debt’. However, this proved to be something of a ‘catch 22’ situation. As the obligation to pay costs would not become a ‘debt’ until the court made the order, this meant that the protections could not apply to the debt until after the order had been made. It could not, therefore, prevent the making of the order.
The court considered the question of whether a new debt, incurred during a moratorium, could be included as an ‘additional debt’ or whether the scheme only offered protection for debts which existed at the time of the application. In the end, the court did not make a decision on this point, as it was not directly relevant to the case.
It is also unclear whether a debt, such as this one, which was a contingent liability at the application date, but which later becomes a liquidated sum during the moratorium, can be brought in the scheme’s protections as an additional debt. At several points in the judgment, the judge stated that, even if the interim costs order was made, it could not be enforced. It seems that the court accepted that this debt, which was a contingent liability at the time of the application, was capable of benefiting from the breathing space protections if it became liquidated during the moratorium. However, the court did not say explicitly that this was the reason the debt could not be enforced. The successful party had not made any request for enforcement and so the hearing was simply about obtaining the order and the question of enforcement was not directly addressed.
What this means for advisers
This case confirms that, for the purpose of breathing space and mental health crisis moratoria, the term ‘debt’ means any debt that is a liquidated sum that is due and owing. A contingent liability is not covered by the breathing space protections and a creditor is free to take action to liquidate it.
The judge did imply that even if the cost order was made, it could not be enforced during the moratorium, suggesting that a contingent liability which existed at the time of the application could be included as an additional debt, although we cannot be certain of this. It is also important to remember that an additional debt does not come under the protection of the moratorium until the debt has been entered into the scheme and the creditor notified.
Where a client enters into a completely new obligation during the moratorium, for example by taking out a further loan, it is not clear whether this would be capable of being included as an additional debt. It is worth noting that if a client was to take out more than £500 credit this would be in breach of their obligations under reg 16 and risk the moratorium being cancelled.
Rachel Wilson works as a debt expert in the Expert Advice team at Citizens Advice.
The information in this article is correct as of 24/9/2021.
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