Breathing Space — avoiding cancellation

Following recent cases on breathing space cancellation, Megan Lloyd looks at what an adviser can do to avoid this.

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Adviser online

15 min readMay 22, 2023

We are starting to identify trends from breathing space case law and advisers will need to be alert to potential challenges, especially with mental health crisis moratoria (MHCM).

If you’re a debt advice provider (DAP) registering a breathing space, you will need to look out for factors that might make them open to challenge. It will be important to pay attention to whether the client is eligible and why you decided a moratorium was appropriate. It will also be vital to record these reasons carefully and have detailed evidence — especially for MHCMs.

We’ll look at these recent cases, which are binding on County Courts in England and Wales:

Axnoller Events Ltd vs Brake and another, Brake and others vs Chedington Court Estate Ltd [2021] EWHC 2308 (Ch) (Axnoller) — The creditor’s application to cancel a mental health crisis moratorium (MHCM) was refused, and contingent liabilities were considered

Kaye v Lees [2022] EWHC 3326 (KB) (Lees 2) — Mr Kaye’s application to cancel Ms Lee’s MHCM was unsuccessful as he was out of time

Kaye v Lees [2023] EWHC 152 (KB) (Lees 3) — Ms Lees’ MHCM was cancelled for material irregularity and an injunction granted against applying for further moratoria

Kaye v Lees [2023] EWHC 758 (KB) (Lees 4) — Mr Kaye applies to extend the injunction which was refused

IV Fund Ltd SAC v Mountain [2021] EWHC 2870 (Ch) — Mr Mountain’s MCHM was cancelled on the basis of unfair prejudice

Risk factors for court action

We know most creditors aren’t applying to cancel moratoria, but challenges can’t be ruled out. There may be a greater risk of a creditor applying where:

the debt is to a personal creditor, for example court costs, a personal dispute or dispute involving business dealings, especially if there is a history of litigation between the parties
there are substantial sums of money owed as judgment debts — over £300,000 up to £17 million in one case
debtors are entering into repeated moratoria, either standard or MHCM, or a mixture of both
joint debtors have had consecutive standard or MHCMs that prevent enforcement against them all
enforcement has already reached a late stage, for example a bankruptcy hearing or an existing third party debt order

Medical evidence

One of the main areas of creditor challenge has been whether a client in a MHCM was actually in a mental health crisis, with the creditor in Lees 3 successful in cancelling the moratorium on this basis. The quality of medical evidence is key to:

whether the client met the conditions for a MHCM moratorium at the time it was entered into
whether a MHCM moratorium has unfairly prejudiced creditors

As discussed in our case law article, in all of the cases that have reached the courts it has been decided that the medical evidence provided was not up to scratch. The Insolvency Service guidance for debt advisers has been updated in June 2023 to reflect this and emphasise the need for the evidence to show the client ‘is receiving mental health crisis treatment that meets the required level of severity.’

The guidance for Approved Mental Health Professionals (AMHPs) and the form for AMHPs to confirm crisis treatment have also been updated to provide guidance to AMHPs on the interpretation of the specific requirements in regulation 28(2)(e) discussed below. Even with these changes, the standard form is just an assertion that the client is receiving crisis treatment, not evidence of that treatment. These judgments override the guidance, and advisers should be prepared to gather more evidence on the client’s condition and treatment.

The courts have acknowledged that it’s not a debt adviser’s role to assess the client’s health for themselves, and they won’t be in a position to ‘second-guess’ medical evidence. There’s undoubtedly a tricky balancing act here, especially given the difficulties of supporting clients in mental health crisis and getting timely evidence from medical professionals.

While advisers can’t make judgments on health conditions, you will need to ensure that the evidence itself is clear, considered, reliable and covers:

Duration of mental health treatment
Severity of the medical condition
Prognosis and timescale

Your client will need evidence of the treatment they are receiving, not just confirmation that they’re getting treatment.

The evidence will need to relate to the client’s condition at the date they entered the moratorium. The courts have also referred to the need for evidence to have been available to the debt adviser at the time, questioning in Lees 2 whether a moratorium could have been entered into correctly if this wasn’t the case.

Is the client eligible for a MCHM?

At the point of entering a client into a MHCM you should be satisfied that the evidence shows they are in mental health crisis treatment. You should ask for more evidence if what they’ve given you isn’t sufficient. This must show the client was receiving crisis treatment at the date of the MHCM application.

Reg 28(2)(a-d) — where the client is detained

If the client is detained under the Mental Health Act you should only need confirmation of this from the AMHP, including the relevant dates. The standard form doesn’t ask specifically whether the client’s been detained, so you’ll need to make sure this is confirmed somewhere.

Reg 28(2)(e) — where the client is not detained but receives treatment for a mental health disorder of a serious nature

The evidence will need to show that:

The client has a mental disorder which is serious enough that it could justify detention under the Mental Health Act in other circumstances and
They’re receiving crisis, emergency or acute treatment in hospital or in the community, which is well beyond general or routine treatment

The updated guidance for both AMHPs and debt advisers suggests gathering further information if there are doubts that a client is in a mental health crisis, but it would be safer to do this in every case. You can explain the courts have said a template form won’t be enough to prove eligibility if challenged.

Whether a client can wait for evidence to be gathered before entering into a MHCM will depend on their circumstances and the stage of any enforcement action.

Is the moratorium ‘appropriate?’

The judge in Lees 4 emphasised the need for a DAP to consider whether breathing space is appropriate when granting a moratorium. This is distinct from the eligibility tests.

For a standard breathing space the test is in reg 24(5)

For the purpose of paragraph (4)(b), when considering whether a breathing space moratorium is appropriate the debt advice provider

(a) must consider whether —

(i) the debtor has sufficient funds or income to discharge or liquidate their debt as it falls due,
(ii) it would benefit the debtor to enter into a debt solution,
(iii) the debtor may be eligible to enter into a debt solution during a moratorium or as soon as reasonably practicable after the moratorium ends, and
(iv) the moratorium period is necessary in order for the debt advice provider to assess which debt solution would be appropriate for the debtor, to advise the debtor on which debt solution would be appropriate or for a debt solution to be put in place, and

(b) may have regard to any other factor that the debt advice provider considers relevant, including but not limited to whether —

(i) it is necessary for the debtor to enter into a debt solution in order to discharge or liquidate their debt,
(ii) it is necessary for the debtor to enter into a debt solution without delay and the debtor is in a position to do so, or
(iii) the debtor is already subject to an appropriate debt solution.’

For a MHCM the test is in reg 30(5)

For the purpose of paragraph (4)(b), when considering whether a mental health crisis moratorium is appropriate, the debt advice provider —

(a) must consider whether the debtor has sufficient funds or income to discharge or liquidate their debt as it falls due, and
(b) may have regard to any other factor that the debt advice provider considers relevant

The judge said this should include considering whether the client is going to use the moratorium to develop realistic repayment plans or enter a solution like bankruptcy.

This is clearly set out for a standard breathing space in reg 24(5)(a)(iv).

It’s not listed in reg 30 as a consideration for a MHCM but the case was about a MHCM. This has worrying implications and is a change in how the MHCM has previously been viewed. This case was about whether to extend an injunction against Ms Lees entering further moratoria, not a cancellation application, but the reasoning was relevant. Whether the moratorium was appropriate and who is responsible for deciding this were factors in the decision to refuse extending the injunction.

We’d suggest that until we get any further clarification you should keep very clear records at both application and review stage of:

your client’s intent to engage with debt advice and develop a plan when they’re able to
the fact that they aren’t able to engage at the moment. This should be supported by the medical evidence held by the adviser.

This may help if there’s a challenge, but there’s no guarantee of this.

This appears to conflict with the decision in Axnoller, where the judge ruled that the client in a MHCM was not expected to engage with debt advice unless evidence showed an improvement in their mental health to the point where it would be reasonable to expect engagement, and future case law may distinguish these points further.

Advising on the risks of a challenge

For any breathing space application, you should advise your client of the potential risks. You should let them know that if there is a review request you have discretion not to cancel the moratorium, but this may lead to court action. If the court cancels a moratorium your client will be the respondent in the case so this may lead to costs.

It’s important to give detailed advice and keep records at this initial stage. If you or the court subsequently cancels the breathing space, you can show the client was advised of this risk.

Although the debt adviser should be notified if a cancellation application is made, we are aware of cases where this hasn’t happened, so you should also advise your client to contact you as soon as possible if they receive this.

If the creditor requests a review

The creditor can request a review up to 20 days from the point the moratorium started for that debt. They should provide evidence for their argument and tell you the grounds from reg 17 they’re relying on:

the moratorium unfairly prejudices the interests of the creditor
the debtor did not meet the relevant eligibility criteria when the application for the moratorium was made,
a moratorium debt is not a qualifying debt, or
the debtor has sufficient funds to discharge or liquidate their debt as it falls due

They must request a review in writing. Shelter’s Specialist Debt Advice Service (SDAS) supported an adviser with an unreported case where a review request was not in writing, so didn’t meet the criteria in reg 17(6):

Any request made under this regulation must:

(a) ‘be made in writing to the debtor’s debt advice provider, and
(b) contain the following:
(i) a statement of the ground or grounds on which the review is requested, and
(ii) evidence which supports the statement.’

In this case a subsequent cancellation application failed as the court held that the review request wasn’t valid, so the requirement for a review hadn’t been met. Given that the requirement for evidence is in the same regulation, we feel it also won’t be a valid review request if the creditor doesn’t provide evidence to support their position. This is from an unreported County Court case, however, so won’t be binding on other courts.

You should not carry out a review if the request is out of time

You have until day 35 of the moratorium to make a decision, including gathering more evidence if this is needed.

Unless a client in a MHCM requests cancellation, you always have discretion not to cancel a moratorium if it would be unfair or unreasonable due to the client’s personal circumstances (reg 18(3), reg 34(2)). This applies even if you feel the grounds for cancellation are met.

You have a duty under the regulations to consider those grounds.

Judge Matthews in Axnoller recognised that any moratorium necessarily prejudices the interests of creditors, but deciding whether this is unfair involves weighing up the interests of the creditor and the client. We have conflicting case law on some points, but prejudice might be considered unfair if:

The debt is substantial and longstanding
Enforcement is urgent, due to the risk of the creditor losing assets or security for the debt
Medical evidence not showing the client is in mental health crisis
The client is taking part in complex activities like ongoing litigation, company refinancing, or writing books whilst not engaging with their debts
A pattern of applying for moratoria, especially if these are close together, which the courts could see as an attempt to avoid enforcement indefinitely
In a standard breathing space, the client isn’t getting advice and exploring a debt solution. As noted above, the judge in Lees 4 also applied this to a MHCM, but the judge in Axnoller did not.

Factors weighing against unfair prejudice could be:

There’s been no improvement in a client’s mental health while in a MHCM — this was key in Axnoller.
The creditor isn’t prejudiced any more than other creditors are — this was found in Axnoller, but in another case (Mountain) the judge said there could still be unfair prejudice if all the creditors are affected equally
Cancelling the moratorium would leave the client open to enforcement action from all creditors — an application just to cancel for one creditor’s debt might be harder to defend, but there’s no case law on this yet

You should record your reasoning in detail to support the client with any further challenge and show that you’ve complied with the regulations. You don’t have to give details to the creditor if you refuse to cancel the moratorium, but it might be useful to share them to state the client’s case. You could also share any medical evidence if you have permission from the client and the evidence is strong. This might discourage the creditor from applying to court, but there’s no guarantee of this.

Our article on material irregularity and unfair prejudice goes into more detail about the court decisions on unfair prejudice and the cases we’ve seen where these factors applied.

To sum up:

Are there risk factors that suggest the creditor is more likely to take the case to court?
What grounds are the creditor arguing?
What evidence has the creditor provided to support their challenge?
Does the client have good evidence to support their position if the case went to court?

Although the guidance says that the creditor should use the same grounds when they request a review and when they apply to court, there’s nothing in reg 19 that says they must do this. So it’s possible, for example, that they could ask for a review based on material irregularity but apply for cancellation based on unfair prejudice instead or as well.

It would be in the creditor’s interests to provide all the evidence they have at review stage to support their request, but if the case does go to court they may well gather further evidence in the meantime.

Before you make a decision you should consult the client and anyone supporting the client, for example family members or support workers, to discuss:

Why you are thinking about cancelling if that is the case
The risks to the client if you don’t cancel
If it’s a MHCM, whether they have or will need more medical evidence.

The risk factors for court action are also relevant to whether cancelling the moratorium is fair and reasonable

No guidance replaces adviser discretion. Any decision must be clearly justified, recorded and communicated, including the associated risks. If you do cancel the moratorium the client should be informed that their creditors can resume enforcement action.

Whilst the decision to cancel the moratorium is made by the adviser, the client’s wishes should always be taken into account — they may want you to cancel the moratorium to avoid the risk.

If the creditor applies to court

There are some key things to remember if there’s a court application.

It will be important for your client to engage with the court process, and provide evidence to support their case — this evidence will form the basis of how the judge makes a decision. Neither Mountain or Lees provided the evidence requested, or attended the hearings, which factored into the judges’ decisions. As it’s for the client’s benefit to provide this evidence, it’s unlikely that we’d see a disclosure order against a debt advice provider, but it’s not impossible

The quality of medical evidence is key. If the client is in a MHCM because they’re receiving crisis treatment in the community, and the only evidence they have is the form, case law suggests the court is highly likely to cancel the moratorium. We don’t have any case law involving the June 2023 updated form, but this is still unlikely to provide the level of evidence the courts have been asking for. If the creditor is arguing unfair prejudice, consideration will involve a balancing act between creditor and debtor interests, and medical evidence is needed for the court to carry this out

Up to date medical evidence will be useful to address whether there has been any improvement in a client’s mental health, and the 30 day reviews in a MHCM could be an opportunity to gather this evidence. The guidance for AMHPs states unless you have information which gives you a reason to doubt the client is in mental health crisis treatment they only need to provide confirmation that they are receiving treatment at this point, so again you’ll need to explain the need given the courts’ approach.

In a standard moratorium, the client will need evidence to show they’re working towards a debt solution, which could be details of plans they’ve made, advice sessions they’ve attended or booked, or records of advice given.

The courts could view repeated moratoria as an abuse of the breathing space scheme, so this would need to be justified.

Although you won’t be a party to the case, you should also get notified if a creditor makes a cancellation application. At this point you should contact your client and support them to gather evidence, bearing in mind the points discussed here.

If there’s a court application for cancellation the client would benefit from legal advice and representation if this is possible. If there’s a risk to their property they may qualify for Legal Aid, and they should check if they have any legal cover through insurance, Union membership or other schemes.

The court may also accept informal representations from the DAP, which should be in the form of a witness statement. Luke Oliver’s Spotlight article from March 2022 suggests this would come under the Civil Procedure Rules 23.1(b) with the DAP acting as a non-party respondent. The article has detailed notes and suggestions if you’re considering this.¹

Although a cancellation application isn’t a review of your decision not to cancel the moratorium, it could be useful for the court to consider your reasons for not doing so, as these will address the grounds the creditor is arguing.

If your client receives notice of an application to cancel, second tier support for advisers from Shelter’s Specialist Debt Advice Service would be useful, especially if you are considering filing a witness statement.

Role of debt advisers

The Lees 4 case brings up wider implications for the sector. The judge said DAPs have a ‘quasi-judicial function’ when making decisions about breathing space applications, and those decisions could be challenged by judicial review (JR). This would be court action against the DAP directly rather than the client, so there would be cost risks for an advice agency. Detailed considerations of JR are outside of the scope of this article, but a possible defence (as the judge here noted) would be the existence of ‘an adequate alternative remedy’ to the creditor in the form of a cancellation or enforcement application. It also appears that the debt advice provider in this case was acting at all times in accordance with the Insolvency Service guidance, which states in the guidance on MHCMs:

‘The expertise of the AMHP allows the debt advice provider receiving the evidence form to trust that the person is receiving mental health crisis treatment without further research or assessment.’

The updated Insolvency Service guidance does clarify the regulations around MHCMs, and it’s possible that we’ll see changes in approach based on this.