Breathing space — case law on cancellations

An article on recent case law related to evidencing mental health crisis treatment, and cancellation of moratoria due to unfair prejudice or material irregularity

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10 min readMay 22, 2023

Breathing space case law is quickly developing. In this article we’ll look at these recent cases, most of 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) — The creditor’s application to cancel a mental health crisis moratorium (MHCM) was refused, and contingent liabilities were considered

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

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

West One Loan v Salih — A county court case where an injunction was granted to stop multiple debtors applying for moratoria

Medical evidence for MHCMs

It’s especially important for you to understand what medical evidence the courts are asking for following these cases, which have decided both:

What medical evidence is needed to show eligibility for a MHCM, and
What medical evidence is relevant when considering if there’s been unfair prejudice to a creditor

The Insolvency Service guidance documents for Approved Mental Health Professionals (AMHPs) and debt advisers have been updated to reflect the court’s interpretation of the regulations.

In another article we discuss what these decisions are likely to mean for your clients and how you can support them.

Grounds for cancellation

The process for cancelling a breathing space is set out in how can a creditor cancel a breathing space? . As a very brief summary — if a debt adviser doesn’t cancel a moratorium following a review, the creditor can apply to the court to do so. The grounds for cancellation are set out in reg 17 of the Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 (the regs).

17(1)
(a) the moratorium unfairly prejudices the interests of the creditor, or
(b) there has been some material irregularity in relation to any of the matters specified in paragraph (2)
17(2)
(a) the debtor did not meet the relevant eligibility criteria when the application for the moratorium was made,
(b) a moratorium debt is not a qualifying debt, or
(c ) the debtor has sufficient funds to discharge or liquidate their debt as it falls due

When might the moratorium unfairly prejudice the interests of the creditor?

Unfair prejudice not found

Judge Matthews set out several starting points for considering unfair prejudice in a MHCM in Axnoller Events Ltd vs Brake and another, Brake and others vs Chedington Court Estate Ltd [2021] EWHC 2308 (Ch), discussed in our article of January 2022. This is part of several long-running court cases between the Brakes and companies known collectively as ‘the Guy parties.’ To recap the main points here:

Unfair prejudice is not defined in the regs and is to be assessed objectively
Every moratorium prejudices creditors, but where the impact on one creditor is significantly greater than on others this could be unfair
The court is required to carry out a balancing exercise between the interests of the creditor and debtor, taking into account factors like debt amount, the impact on the applying creditor compared to others and the behaviour of the client since the moratorium began — including in this case whether Mr Brake should be expected to have engaged with his debts

The judge ruled the moratorium did not unfairly prejudice the Guy parties compared to other creditors, and there was no requirement for Mr Brake to engage with his debts in a MHCM whilst the evidence did not show an improvement in his mental health.

Unfair prejudice found

IV Fund Ltd SAC v Frank James Mountain [2021] EWHC 2870 (Ch)

Mr Mountain owed IV Fund approximately £17 million in damages for breach of trust and dishonest assistance. IV Fund petitioned for Mr Mountain’s bankruptcy, but before the petition hearing Mr Mountain entered into first a standard and then a mental health crisis moratorium. IV Fund applied to the court to cancel the moratorium on the basis of unfair prejudice arguing:

if the petition hearing didn’t go ahead they were at risk of losing assets
Mr Mountain was using the regulations as a shield, and the timing of the moratoria showed they were being ‘cynically deployed’ to frustrate creditors
The bankruptcy petition was at an advanced stage and had already been delayed
The medical evidence didn’t support Mr Mountain’s position

Judge Schaffer agreed to cancel the MHCM, relying on several factors:

The petition had already been recognised as urgent by the court due to the serious risk of Mr Mountain dissipating his assets.
Mr Mountain’s mental health didn’t impair his taking part in complex legal proceedings, making lengthy and coherent witness statements, advancing defences and appealing decisions
It didn’t impair him trying to re-finance corporate developments
The medical evidence was ‘wholly inadequate’ in providing information on the duration, severity, and prognosis and timescale of Mr Mountain’s condition

The medical evidence in this case was

an email stating Mr Mountain was receiving crisis treatment, which had no more information than the AMHP evidence form
An undated note from a community mental health nurse stating he had seen a psychiatrist on 2 occasions and had a treatment plan. The nurse recommended that Mr Mountain should stay in the moratorium until his health was ‘significantly improved.’

Importantly, unfair prejudice could still be found where all creditors were affected equally, as in a bankruptcy petition.

Ivan Kaye v Amanda Lees [2023] EWHC 152 (KB)

This third case between Kaye and Lees followed the end of Ms Lees’ previous MHCM on 6 November 2022 and her immediate entry into a new MHCM on 8 November. Mr Kaye requested a review of this new moratorium and then applied to cancel when this was refused.

The moratorium was cancelled due to material irregularity but the judge considered there was also unfair prejudice.

the debt was substantial and longstanding
delaying enforcement further risked Mr Kaye’s security (in the form of a charge over Ms Lees’ property) not covering the debt, and there was evidence that he’d exhausted his financial means in pursuing enforcement
this was Ms Lees’ fourth moratorium, showing a pattern of applying for breathing space when Mr Kaye got closer to enforcement
there was evidence she was continuing to work- she had written, published and publicised two new books — which implied that ‘her condition was not serious or had significantly improved’

West One Loan v Salih

Unfair prejudice was also discussed in West One Loan v Salih, this time for a standard breathing space. The Salihs were four joint debtors defending a high value and long-running possession claim. In November 2021 one entered a standard moratorium. When this ended, another applied for his own. By the time the creditor’s application to cancel came before the court the moratorium had ended, so the judge was unable to cancel it, but commented that the successive moratoria were clearly entered into to delay enforcement and avoid paying debts rather than to ‘explore a debt solution.’ He stated the court’s discretion was clearly wide enough to cancel for unfair prejudice in this situation.

This was a County Court case, so it doesn’t set legal precedent, but it’s likely to be persuasive and fits with the trends in other cases.

When might there have been a material irregularity for a MHCM?

Both Lees and Mountain looked at whether Ms Lees and Mr Mountain were eligible for a MHCM under reg 17(2)(a). In Lees the moratorium was cancelled on the basis that the medical evidence did not show that she was receiving crisis treatment. In Mountain the judge was highly critical of whether ‘the moratorium was ever properly put in place’ given the weakness of the medical evidence. As unfair prejudice had already been found he didn’t rule on this specifically.

The point in question was reg 28, which defines mental health crisis treatment for the purposes of the regs. Regs 28(2)(a-d) relate to detention under the Mental Health Act. Reg 28(2)(e) covers the situation an adviser is more likely to see, where the client

‘is receiving any other crisis, emergency or acute care or treatment in hospital or in the community from a specialist mental health service in relation to a mental disorder of a serious nature.’

Judge Dight in Lees 3 ruled that two conditions need to be satisfied for this to be the case:

The debtor has a mental disorder of a serious nature, and
They’re receiving crisis, emergency or acute treatment in hospital or in the community

A mental disorder is clarified in reg 2(1) as ‘any disorder or disability of the mind’ but ‘of a serious nature’ isn’t defined. The interpretation of the court was that the condition must be severe enough that in other circumstances it would justify detention under the Mental Health Act. The criteria in reg 28(2) all relate to conditions of equivalent severity, and reg 28(2)(e) does not set a lower bar than the others. The letter from Ms Lees’ psychiatrist did not appear to describe her condition as serious, and the symptoms of ‘low mood, anxiety and suicidal thoughts’ relating to stress around her eviction did not persuade the judge she had a condition ‘of a serious nature.’

Crisis treatment will mean something ‘well beyond general or routine treatment.’ Ms Lees was receiving 3 monthly outpatient appointments, which the judge ruled were not ‘crisis, emergency or acute interventions.’ An email from her AMHP simply asserted she was receiving crisis treatment so added nothing of substance.

Paragraph 4.8 of the updated Insolvency Service guidance for debt advisers sets out the need for debt advisers to seek further clarification from the AMHP or nominated point of contact if there’s any doubt about the client’s eligibility for the MHCM. Paragraph 7.19 also highlights the need for this if creditors give you cause to doubt eligibility. They have also issued a statement on the guidance changes addressing the Lees case directly, clarifying the definitions of mental health crisis treatment for reg 28(2)(e) and confirming the court’s interpretation of reg 28(2)(e).

When might there have been a material irregularity for any moratorium?

Material irregularity because a joint debtor has benefited from a previous moratorium

Eligibility for the standard breathing space was considered in Salih. The creditor applied to cancel under reg 17(1)(a) on the basis that the second defendant wasn’t eligible as he had already benefited from the 60 days of protection for a joint debt under the scheme. Reg 24 sets out eligibility for the standard breathing space, including that the debtor hasn’t been ‘subject to’ a previous breathing space moratorium in the 12 months before the application (reg 24(3)(g)).

The judge ruled that ‘subject to’ only referred to someone having their own breathing space moratorium, whether or not they were joint debtors and had previously been protected through someone else’s moratorium under reg 7(7)(n). Therefore it will not be material irregularity if a joint debtor applies for a moratorium within 12 months of being protected by someone else’s moratorium — although as above this could be seen as unfairly prejudicing the creditor.

Material irregularity because a debt is not a qualifying debt (reg 17(2)(b))

The definition of a qualifying debt is in reg 5.

We haven’t had any updated case law where cancellation on this basis has been considered. As our previous article discussed, Axnoller confirmed that contingent liabilities are not qualifying debts. These could include benefit overpayments that haven’t been decided yet, and court costs which haven’t been assessed.

Material irregularity because the client is able to pay their debts (reg 17(2)c)

This was considered in Mountain. The creditor argued that by his own admission in related bankruptcy proceedings Mr Mountain had sufficient funds to pay the debt. The judge found no evidence to show that he did — his bankruptcy defence was based on needing time to raise funds. The relevant question in this case was whether funds were immediately available, and there was no evidence to show ‘an ability to pay now.’

Future cases might explore this area further.

Injunctions — can future moratoria be prevented?

We’ve also seen applications for injunctions to prevent debtors entering into further moratoria, but the case law on this is conflicting.

In Lees 3, the judge found a ‘real risk’ that Ms Lees would enter another MHCM (the current MCHM was her fourth) given the history of repeated applications, and granted a 60 day injunction, due to expire on 31 March 2023.

Mr Kaye went on to evict Ms Lees from the property with no further challenge, but was concerned that she would attempt to frustrate a planned sale, so applied for an extension of the injunction in Lees 4.

In refusing, the judge said that debtors have a complete and unfettered right under the regs to apply for a moratorium, and there’s no provision in the regs for the courts to constrain those rights. This indicates Parliament didn’t intend there to be any limits on fresh applications.

In the light of this case, it may be unlikely that judges will grant injunctions in the future, even where they feel there has been abuse of the breathing space scheme. The judge here stated that the responsibility for avoiding potential abuse fell on debt advice providers rather than their clients, as the decision on whether or not to enter someone into breathing space is made by the adviser.

He also commented that the decision of whether or not to grant a breathing space application is a quasi-judicial one, so a Judicial Review application could be possible against the debt advice provider. This has obvious worrying implications, and we discuss this and other considerations for debt advisers in the article below: Breathing space — avoiding cancellation.