The recent judgment in Axnoller v Brake starkly illustrates some of the strengths and limitations of the new Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 (the Debt Respite Scheme Regulations). It is also a timely reminder to parties with unsatisfied interim costs orders in their favour of the potential power of debarring orders.
The judgment comes in the context of an ongoing pitched battle between Mr and Mrs Brake on the one hand, and Dr. Geoffrey Guy, Axnoller Events Limited (AEL) and Chedington Court Estate Limited (Chedington) on the other. The heart of the dispute between the parties is the ownership and occupation of Axnoller Farm; specifically, Axnoller House (a large residential property rented out for weddings and so on) and West Axnoller Cottage (a smaller residential property on the same site).
The dispute has spawned multiple related sets of proceedings. In the broadest terms, the Brakes (who were adjudged bankrupt in May 2015) currently occupy Axnoller House and have launched proceedings seeking possession of the cottage; meanwhile, AEL has issued its own claim seeking possession of the house.
There have been numerous other related claims, including a claim by the Brakes for breach of confidence or misuse of private information, which they substantially lost following a trial in November 2020. For good measure, the Brakes have also launched employment proceedings arising out of a period when the Brakes were employed by AEL, and have made two applications (unsuccessfully, so far) for recusal of the assigned judge.
The costs orders
In the course of the various related claims, the Brakes have had numerous costs orders made against them in favour of AEL and Chedington, totalling almost £1 million:
- Three costs orders from 13 and 21 April 2021, amounting to some £900,000 in total.
- One from 17 May 2021, for £63,851.50.
- One from 4 June 2021, for £15,391.95.
Those orders have not been satisfied by the Brakes.
The difficulty for AEL and Chedington in enforcing these orders is that Mr. Brake has the benefit of a "mental health crisis" moratorium under the Debt Respite Scheme Regulations. Under that regime, a debtor (or other specified individuals on their behalf) may apply to a debt advisor for such a moratorium, which must be granted where it appears to the debt advisor to be "appropriate" for such a moratorium to be granted, and "an approved mental health professional has provided evidence that the debtor is receiving mental health crisis treatment".
Mr Brake had indeed made such an application, which had been successful. Mr Brake entered the moratorium on 6 May 2021, just two days after the Debt Respite Scheme Regulations came into force. Astute readers will note that this was after the April costs orders, but before those on 17 May and 4 June. This is an important point, to which we shall return.
The consequence of the moratorium, as set out in regulation 7 of the Debt Respite Scheme Regulations, was that AEL and Chedington (or any other creditors) were prohibited from taking any "enforcement action" in relation to a moratorium debt.
The application to cancel the moratorium
Desirous of taking precisely such action, AEL and Chedington applied to the relevant debt advisor under regulation 17 for the moratorium to be cancelled. When that application was (predictably) refused, it was renewed before the court under regulation 19.
HHJ Paul Matthews refused the application; he held that, per regulation 17 (1), he would need to be satisfied that the moratorium unfairly prejudiced the interests of AEL or Chedington, or both, for the application to be granted. He did not see that any prejudice caused to AEL and Chedington was unfair.
There was undoubted prejudice to them in allowing the Brakes to continue to put AEL and Chedington to the expense of litigation in circumstances where AEL and Chedington could expect little by way of recovery, even if successful, while refusing to pay the outstanding costs orders. But that was not unfair; it was simply the Debt Respite Scheme Regulations operating as intended, coupled with "the familiar problem of a richer person litigating against a poorer".
There is a helpful discussion in HHJ Paul Matthews' careful judgment that gives guidance as to the application of the "unfair prejudice" test (although the court was careful to eschew laying down any rules of general application). In this post, my interest is more in three points of principle which dictated the result of the AEL and Chedington's alternative application for a debarring order.
The debarring order application
HHJ Paul Matthews recited the relevant law relating to such orders, citing with approval the summary given by Saini J in Siddiqi v Aidiniantz:
"(i) The ultimate aim of the Court is to identify the just order from a case management perspective, bearing in mind the overriding objective.
(ii) In approaching that task, the 'working' or 'default rule' is that a litigant should not be able to continue with his or her claim without satisfying an existing and non-appealed final costs order, and the court should impose a condition requiring compliance.
(iii) However, if a claimant can show his or her Article 6 rights will be interfered with by such a condition (because they cannot pay, and a genuine claim will therefore be stifled) that is a material, but not conclusive, consideration pointing against such a condition.
(iv) Finally, the Court must take into account all other circumstances of the case, including the procedural behaviour of the defaulting party in deciding on the just order to make."
(These principles were laid down in relation to an application for a stay pending payment of the costs order. AEL and Chedington were seeking a more draconian unless order, but the court held that the same principles apply.)
How do these principles interact with the provisions of the Debt Respite Scheme Regulations? HHJ Paul Matthews made three critical determinations.
Firstly, a debarring order is, in principle, "enforcement action" for the purposes of regulation 7. As the court noted, failure to comply with such an order could carry an "unwelcome consequence" for the Brakes. "In a practical sense, therefore, it would be a step to enforce the order, because the default leads to the loss of something else which may be desirable to the Brakes. It therefore puts pressure on the debtor to comply with the order. That is the only point of doing it." Accordingly, a debarring order could not be made in respect of a moratorium debt.
Secondly, the costs orders existing at the time the moratorium was applied for were "moratorium debts" but those which arose after the moratorium application had been made were not. This follows from the wording of regulation 6(b), which requires that a moratorium debt is a debt "that was owed by the debtor at the point at which the application for the moratorium was made".
Thirdly, the costs orders arising after the commencement of the moratorium would not constitute "additional debts" under regulation 15. HHJ Paul Matthews held that regulation 15 applies to debts existing but not known about at the time the moratorium commenced, which are subsequently discovered. It does not apply to debts which subsequently arise. This finding is notable, in particular, because in an earlier judgment, the point had arisen but not been decided.
From these propositions, the result in the application naturally flowed:
- No debarring order was made in respect of the April cost orders, in respect of which the Brakes enjoyed the protection of the Debt Respite Scheme Regulations.
- However, the May and June orders fell outside the protection of the Debt Respite Scheme Regulations. The Brakes failed to meet the high bar set by Siddiqi and the default rule applied. As a result, the court granted the debarring order sought in relation to the two later orders.
Where does this leave practitioners navigating the new Debt Respite Scheme Regulations? Several points arise:
- The scheme is a powerful defence against "enforcement action" which the court in Axnoller v Brake drew in wide terms. It is not limited to formal enforcement proceedings under CPR 70 et. al., but extends to steps taken in proceedings to "put pressure on the debtor" to pay their debts. That is a broad landscape, the limits of which will surely be tested in subsequent cases.
- The timing of any application for a moratorium is critical, since the Debt Respite Scheme Regulations offers no protection for debts arising after the application has been made.
- Joint debtors all benefit from a moratorium obtained by one of them. In this case, Mrs Brake was equally protected by the moratorium obtained by Mr Brake, despite not being a party to it.
Overall, the Debt Respite Scheme Regulations could be a powerful tool to those able to utilise its protections. Of course, many debtors will not be eligible for a mental health crisis moratorium, and doubtless should be extremely grateful for that fact. But the regime also allows for a "standard breathing space" of up to 60 days, which anyone who has difficulties with debt can apply for. In the right circumstances, even a time limited moratorium could be a significant tactical advantage in ongoing litigation.
At the same time, the result also underlines the potential power of a debarring order. AEL and Chedington, although unsuccessful in a number or respects, emerged with an "unless" order that will stop the Brakes' claims in their tracks unless the unprotected costs orders are paid. This would leave AEL and Chedington victorious in the possession claims, without needing to expend the estimated £585,000 in proceeding to trial. On any view, that is a very significant result.
Doubtless there may be further skirmishes in this ongoing litigation. For now, this decision is an important early landmark as the courts grapple with the Debt Respite Scheme Regulations, which practitioners will wish to make careful note of.
This article was written by Simon Kerry. First published Practical Law's Dispute Resolution Blog in October 2021.
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