Breathing Space, additional debts, cancellation, costs and more: ‘The epic of Axnoller’

A case law update looking at Axnoller Events Ltd vs Brake and another, Brake and others vs Chedington Court Estate Ltd [2021] EWHC 2308 (Ch) in the High Court. This is a binding decision on County Courts in England and Wales.

In July 2021 we published ‘Are contingent liabilities covered by Breathing Space protections.’ which covered an earlier decision in this case. That judgment decided that contingent liabilities could not be debts for breathing space but left open the possibility that they could be added later if they became liquidated.

Together with the second judgment, we now have important authorities on Breathing Space. The creditors (Axnoller and Chedington) are collectively referred to as the Guy parties; the surname of the business owners.

A quick catch up from the first judgment

Mr Brake entered a mental health crisis moratorium on the 6th May 2021, under part 3 of the Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regs 2020. We’ll refer to these as the ‘Breathing Space regs.’

After a series of complex court actions related to possession and eviction, final costs orders against Mr Brakes were in excess of £900,000. The costs orders were included in his breathing space. Mr Brakes was also ordered to pay a further amount of costs ‘to be assessed or agreed’. Let’s call these interim costs orders.

Therefore, at the start of his moratorium he knew he had an obligation to pay something under the interim costs orders, but he didn’t know how much he would have to pay. The judgment handed down on the 4th June was important because:

• The court decided a ‘debt’ for Breathing Space must be a ‘liquidated sum that was due and owing’ (para 22 of the judgment)
• Therefore the interim costs orders were not a debt for Breathing Space as the amount to be paid had not been decided yet. They were contingent liabilities
• As the interim costs orders were contingent liabilities not covered by the Breathing Space protections, the court was able to order the payment of £15,000 towards them

A contingent liability is a known obligation to pay something, but the final amount owed is dependent on another event, in this case a further assessment of costs. There are 2 more common examples that would not be qualifying debts for Breathing Space:

• Council tax — where the client is up to date or has arrears but has not had a reminder notice at the breathing space application date. They then fall behind and get a reminder during the moratorium (see Reg 5(k)).
• Benefit overpayments — where the client has accrued an overpayment before the moratorium, but a decision that there has been a recoverable overpayment is not made until after the moratorium starts.

The second judgment — additional debts…and much more

The Guy parties applied to cancel the Breathing Space under reg 19 of the Breathing Space Regs, claiming it caused them unfair prejudice. They also asked the court to stop Mr Brakes from participating in the possession and eviction litigation, unless he paid the mounting costs.

This second judgment answered various questions:

Can contingent liabilities be added to a moratorium once they are liquidated?

The answer to this is no. A debt that is contingent but later becomes liquidated during a Breathing Space cannot be added under regulation 15 of the Breathing Space Regs. The £15,000 order on account of costs, could not be added even though this had liquidated some of the interim costs orders.

Regulation 15 defines additional debts as:

‘…a debt that wasn’t included in the information under regulations 25(1)(b) or 31(1)(b) or (d)’

Information provided under regs 25 and 31 is only given at the initiation of a Breathing Space, in relation to qualifying debts. As a contingent debt is not a qualifying debt for Breathing Space, information related to it falls outside of regs 25 and 31. As reg 15 (adding additional debts) flows from regs 25 and 31, the same debt cannot become an additional debt even if it becomes liquidated. An additional debt must have been a qualifying debt capable of inclusion at the outset.

It follows that no brand new debt, say a new loan, can be added under reg 15.

Put another way; the only debts that can be included or added later are debts that existed and were liquidated at the point the application was made.

Mr Brakes raised arguments against this finding, claiming the contingent debts should not be enforced. Firstly, his debt adviser had said that contingent debts could be included. The Judge commented that:

‘I can understand the Brakes’ frustration at having been told by a debt professional that the law is one thing, and then to have the court say another. But I cannot help that. Even if the party’s own lawyer advised that that was the law, it could not bind the court.’

Secondly, that the Guy parties had agreed that future debts might be included in Breathing Space (see para 25 of the first judgment), also failed. The Guys were entitled to change their mind as the issue had not been decided earlier.

Permission to appeal was refused in a subsequent judgment (para 11 of judgment three!!). The claim that additional debts could include contingent or future debts was ‘simply unarguable’.

Which court should an application to cancel be made to?

Applications can be made in the High Court. Regulation 19 only says an application ‘may’ be made to the County Court. If an application is brought in the High Court it will usually be transferred to the County Court. In this case there was already litigation in the High Court so it was appropriate to keep it there.

How a cancellation application citing ‘unfair prejudice’ might be viewed by the courts

The Guy Parties applied to cancel the Breathing Space under regulation 19, via reg 17, on the grounds of unfair prejudice because:

• they were engaged in litigation and Mr Brakes costs debts were increasing
• Mr Brakes could continue his litigation without fear of costs
• he had taken no steps to engage and deal with his debt situation since the moratorium began

The court refused to cancel the moratorium but made some important observations.

The policy intent under a Mental Health Crisis moratorium is clear. Mr Brakes was not expected to engage with debt advice whilst in crisis. It was not unfair that Mr Brakes had not tried to restructure his debts. Had evidence shown an improvement in his health, the outcome might have been different. He might then have been expected to seek advice, and not doing so might be unfair.

Balancing creditor and debtor interests is ‘chalk and cheese.’ There should be no hard line drawn such as an amount of debt that causes unfair prejudice. However, debt amount might be a factor in the consideration.

An application can be made to cancel the whole moratorium as it was here, or just in respect of the debt in question. No other creditor had applied to cancel, and cancelling would expose Mr Brakes to enforcement from all his creditors. We can infer that an application to cancel the Breathing Space in relation to just the applicant creditor’s debt might be harder to defend.

The Guys were more at risk than other creditors as they were involved in a lengthy court case. However, the escalating costs debts were not the fault of Breathing Space but of the costs rules. Protection for the past costs orders was exactly what Breathing Space was designed to give. Unfairness must be linked to how the Breathing Space operates and all creditors were treated in the same way.

When dealing with the application to stop Mr Brakes participating in court action, Mr Brakes argued it served no purpose to allow enforcement of the interim costs orders excluded from the Breathing Space. He could cancel his moratorium under reg 34 and apply again to have the costs covered in a new Breathing Space*. The court felt any subsequent Breathing Space would be susceptible to a creditor review under reg 19. Second or ‘tactical’ Breathing Space applications may be more vulnerable to challenge.

*Note that you can apply for more than one Mental Health Crisis Moratorium (MHCM) in a year. You can also apply for a standard Breathing Space within 12 months of a MHCM ending, but not 2 standard Breathing Spaces within a year.

What is enforcement in Breathing Space Regs?

The Guy Parties applied for an order that unless Mr Brakes paid all costs, he should be barred from further participation in the possession and eviction cases. This should include the costs protected by Breathing Space and those excluded. Such an order is referred to as an ‘unless order’ ‘ i.e. ‘unless you pay £x by a certain date, you must drop your case.’

Having decided that the interim costs orders were not protected by the Breathing Space, despite the arguments above, the court considered Mr Brake’s final argument against enforcement, that the Guys had not applied to enforce the debt under Reg 7(2)(b) as required by the Breathing Space Regs.

The court found this irrelevant. The interim costs orders were not covered by Breathing Space, so they could be enforced without permission from the court.

However, the final cost debts that were included in the Breathing Space were protected. An unless order would force Mr Brake to decide either to pay those costs, or face discontinuing his case against the Guys. This pressure to pay was indirect enforcement, was a step under reg 7(2) and would be null and void under regulation 7(12). There would also be proceedings to enforce a court order barred under regulation 10(5). Enforcement is to be given a wide meaning.

The unless order could be made, but only in respect of the interim costs orders excluded from the Breathing Space. The Brakes had to pay the 2 interim costs orders by the 30th August and 30th September respectively. If they were unable to pay, they would have to stop litigation in order to avoid further escalating costs.

Who is liable for costs on an application to cancel Breathing Space?

Since the regulations were published, it’s been unclear who would pay the costs where a creditor applies to court to cancel a moratorium. The debt advice provider was not a party to this case at any point. It appears there is no immediate risk of costs awarded against the debt advice provider. In March 2022 the Insolvency Service provided guidance to debt advice charities to say that an application to cancel is not a review or appeal of the debt adviser’s decision. It is an application for the court to make its own decision on evidence. In Axnoller no application was made to join the debt advice provider as a party and the court took no steps to do so.

The costs will be borne by the losing side. Although the moratorium was not cancelled, Brakes ‘lost overall’ given the unless order was made. The costs of the above proceedings were assessed at a later hearing at £34,364.50, then reduced to £20,470. Mr Brakes would be liable for this amount.

We therefore know that costs can be substantial in these cases if the facts are complex. The court commented that as these regulations are new, cases might be complex.

What does this mean for advisers?

1. Contingent liabilities are not a debt that can be entered into Breathing Space at any point
2. Applications to appeal a debt adviser’s decision should be in the County Court. If there are good reasons they could be in the High Court
3. Costs of losing will be the client’s liability but we need clarity about the debt advice provider position
4. Appeals against a refusal to cancel will be considered case by case. Factors include:

• amount of debts
• the behaviour of the client since the moratorium began (even in mental health crisis moratoria) and
• the impact on the applying creditor compared to others
• it may be a high bar to succeed on unfair prejudice grounds given the scheme treats all creditors equally

We also learn that ‘enforcement’ under regulation 7 is to be read widely. In this case, ‘indirect enforcement’ through an unless order was enforcement for the purposes of Reg 7(7)(a), so the unless order could not cover the final costs orders protected by the moratorium

It’s also interesting to look at the complexity of this case; two parties engaged in the fallout of business ventures. It was not typical of a debt adviser’s caseload. However, the route to Breathing Space is only through a debt adviser. If similarly complex cases reach the High Court (or higher!) and a party learns of the scheme…we could see more like this.

Creditors involved in litigation might be more motivated to apply to cancel moratoria.

The complete box set

Although the rights have not been sold to any streaming service yet, Bailii has the full four-part drama:

• Contingent liabilities are not qualifying debts
• Contingent liabilities are not additional debts, cancellation, enforcement and costs
• Costs of cancellation application assessed, appeal refused
• Costs reduced

NB — if you search Bailii you’ll find an anthology devoted to these parties, beyond Breathing Space!

Graham O’Malley is a Senior Debt Expert in the Expert Advice Team at Citizens Advice.

The information in this article is correct as of the date of publication. This article was updated on the 17th March 2022.

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