Court of Appeal rules in favour of Creditor; The Debt Respite Scheme only applies to arrears of instalments

Court of Appeal rules in favour of Creditor; The Debt Respite Scheme only applies to arrears of instalments

The Court of Appeal recently handed down judgment in Interbay Funding Limited -v- David Terence Forbes [2025] EWCA Civ 690. Lord Justice Zacaroli described the case as a “short but important point of construction of the Debt Respite Scheme (Breathing Space Moratorium and Mental Health Moratorium) (England and Wales) Regulations 2020 (‘the Regulations’)”. The judgment sets out the basis of the protections of a debt moratorium under the Regulations when a creditor calls in a capital loan. 

The Regulations make provision for two types of moratorium which provide debtors with legal protection from their creditors without the permission of the court. Firstly, a ‘Breathing Space’ moratorium which lasts for up to 60 days, and secondly a ‘Mental Health Crisis’ moratorium, which lasts while any medical treatment continues, plus 30 days. Once effective, the moratoriums have the effect that a creditor must stop all action relating to their debt and apply the stated protections. If a creditor has commenced legal proceedings, either in-house or instructed solicitors, these must be put on hold, including any enforcement action. Importantly, the creditor cannot add interest to the debt during a moratorium and cannot subsequently add this when the moratorium is lifted. 

Background 

The Interbay case concerned the appellant, Mr Forbes, who had taken an interest only loan from Interbay for sum of £1,363,189, secured by a first legal charge over his property. He fell into arrears and as a result Interbay made a formal demand for repayment of the whole capital sum, the arrears following the missed instalments at the time the loan was called in were in excess of £60,000. Mr Forbes subsequently applied for a mental health crisis moratorium under the Regulations which was granted and effective from 2 July 2022.

Despite the moratorium being in place, Interbay called in its security and issued possession proceedings on 9 May 2023. Interbay sought an order for possession on the grounds that, amongst other things, Mr Forbes had failed to pay the full amount of the loan which had been due for payment. An Order for possession was made on 3 June 2024, the Deputy District Judge hearing the case, held that the capital sum due to Interbay was not a moratorium debt, Mr Forbes appealed this decision. 

Judgment 

The Court of Appeal dealt with the appeal. Regulation 5(1) defines a “Qualifying debt” as “any debt or liability other than a non-eligible debt”. A “Non-eligible debt” is defined by Regulation 5(4) and sets out a number of categories of debt, the relevant one being that in sub-paragraph (a) “secured debt which does not amount to arrears in respect of secured debt”. A “secured debt” is defined by Regulation 2 as (a) “a secured credit agreement; (b) a hire purchase agreement or (c) a conditional sale agreement”. 

Considering these definitions, Lord Justice Zacaroli explained that “there is no doubt that – apart from the question of whether they amount to arrears – the relevant debts in these appeals satisfy each of the requirements for a non-eligible debt: they are sums due pursuant to a debt secured by a mortgage on land and are thus “a secured debt”.”

The definition of “arrears” is defined in Regulation 2(1) as: “any sum other than capitalised mortgage arrears payable to a creditor by a debtor which has fallen due and which the debt has not paid at the date of the application for the moratorium in breach of the agreement between the creditor and debtor”

The critical question was whether the capital of the secured debt itself fell within the definition of “arrears” if called in prior to the moratorium. If it did, it enjoyed the protection of the moratorium under the Regulations.  Lord Justice Zacaroli deliberated that for something to be added to the outstanding balance it must be different from the outstanding balance itself. “Arrears” in this context could only refer to unpaid instalments (whether of interest, in an interest only mortgage, or interest and capital, in a repayment mortgage, or outstanding charges) in respect of the outstanding principal sum and on this basis the appeal was dismissed.

Importance of decision 

Debtors rely heavily on the Regulations as a form of protection from creditors and it can seem that the “Debt Respite Scheme” is often manipulated by debtors to their advantage. The aim of the Regulations is to protect debtors from accrual of further interest or charges, enforcement or to help debtors to devise a realistic plan for the repayment of their debts. Since implementation, creditors will be alert to the fact that the Regulations are intentionally debtor friendly in order to offer protection and until now there has been little comfort to creditors that there could be a successful opposition to the Regulations. The current decision not only resolves the confusion surrounding the interpretation of the Regulations with regards to enforcement of a capital sum during the moratorium period, but it also allows creditors the ability to challenge the Regulations in scenarios where there is a question mark over the category of debt. 

Conclusion 

This is a welcome decision for creditors who may have been frustrated in their longstanding efforts to enforce payment of a debt and their debtors’ repeated abuse of the Debt Respite Scheme. The decision also allows for creditors to charge interest during a moratorium period in scenarios where a capital sum is being demanded following the breach of a mortgage agreement.