Summary
This morning, the Court of Appeal (Zacaroli, Males and Jonathan Baker LJJ) handed down judgment, in a second appeal, on an “important” point on the scope of the catchily named Debt Respite Scheme (Breathing Space Moratorium and Mental Health Moratorium) (England and Wales) Regulations 2020 (the “Regulations”). It concerned whether, properly construed, the capital part of a mortgage debt, once called in, enjoyed the protections of a debt moratorium under the Regulations (as the debtor contended) or not (as the lender contended). The Court of Appeal held that the capital of the secured debt if called in before (as well as after) a moratorium was not moratorium debt.
Background
This was the first time the Regulations have come before the Court of Appeal. As Lewison LJ remarked when granting permission to appeal, “The interpretation of the [Regulations] is causing some difficulties…The use of moratoria is widespread; the status of a called in capital loan is important.”
The increasing prevalence of the Regulations may reflect the fact that they afford debtors a moratorium on their debts which prevent (without permission of the Court) creditors taking any steps to enforce that debt. Nor is a creditor able to charge interest or any penalties or charges on the debt for the entire moratorium period. A creditor is also unable to recoup any of that interest or the charges when the moratorium is lifted.
The Regulations provide a “breathing space” moratorium of 6 months for debtors but also a mental health crisis moratorium which may continue indefinitely. In this case the debtor has been subject to a mental health crisis moratorium for over three years. A mental health crisis can also be granted after the debt is due and pursued by a creditor and does not have to be based on any pre-existing medical condition.
Facts and Issues
The appellant, Mr Forbes, had taken an interest only loan from Interbay for c.£1.3 million, secured by a charge over one of his properties in in Purley, Surrey. He failed to repay the instalments as they fell due and when the mortgage arrears were around £60,000 Interbay called in the loan. Mr Forbes subsequently applied in April 2022 for a mental health crisis moratorium under the Regulations which was granted and effective from 2 July 2022. Interbay issued possession proceedings in May 2023 based on inter alia the called in capital part of the debt.
The Regulations were not a Covid-19 measure but introduced by Theresa May's government under the Financial Guidance and Claims Act 2018. They provide a moratorium for debtors in respect of eligible qualifying debts, which essentially covers any debts save for those excluded in the Regulations.
The first exclusion in Regulation 5(4)(a) is for: “secured debt which does not amount to arrears in respect of secured debt.”
The definition of “arrears” in Regulation 2(1) is: “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…”
It was common ground that under the Regulations: (a) “arrears” covered any unpaid interest repayments under a mortgage prior to the date of the application for a moratorium by the debtor; but (b) “arrears” did not include unpaid interest repayments (or the capital of the loan) falling due after the date of the moratorium. The issue was whether the capital or principal of the secured debt itself was “arrears” if called in prior to the moratorium. If it did, it enjoyed the protections of a moratorium under the Regulation.
Decisions of the Lower Courts
The Deputy District Judge held that the called in capital was not moratorium debt and made a possession order in Interbay's favour in July 2023 in respect of Mr Forbes's property in Purley. HHJ Evans-Gordon dismissed Mr Forbes' appeal in June 2024. Lewison LJ granted Mr Forbes permission to appeal in September 2024. Newey LJ in May 2025 allowed parties from another case, which also happened to involve Mr Forbes as the appellant (Seculink Ltd v Forbes), to have the same ground of appeal in their appeal heard with Interbay's appeal and to make limited submissions. Sir Anthony Mann (sitting in retirement) had held in that case that the called in capital was not moratorium debt. Like HHJ Evans-Gordon, he placed particular reliance on the exclusion from the definition of “arrears” of “capitalised mortgage arrears” finding there to be no rational basis for excluding such arrears added to the capital sum but not the capital itself.
Decision of the Court of Appeal
The Court of Appeal (with Zacaroli LJ giving the leading judgment with which Males and Jonathan Baker LLJ agreed) dismissed the appeal. Zacaroli LJ's reasoning is at [48-71]. In summary:
- There was an attractive simplicity to Mr Westgate KC's point for Mr Forbes that the definition of “arrears” was broad and could capture any sum (including the capital if called in) the debtor had not paid under a “secured credit agreement” by the date of his application for a moratorium. However, the appellant's arguments could not be accepted for the following reasons.
- Zacaroli LJ placed less emphasis than the Courts below on the exclusion from the definition of “arrears” of“capitalised mortgage arrears”. Instead, he focused on the ordinary word “arrears” which he held carried a more restricted meaning i.e. periodic instalment payments which have fallen due but remain unpaid. “Secured debt” was defined in the Regulations to include mortgages on land, hire-purchase and conditional sale-agreements, all of which (particularly in the case of individuals likely to take advantage of the debt respite regime) invariably involve periodic instalment payments in respect of a principal sum.
- Zacaroli LJ held that the phrase “any sum … payable to a creditor by a debtor which has fallen due…” was not intended to have the breadth which it might have if taken out of context. It was setting out to define the meaning of the word “arrears”. It started from the recognition that it is generally understood as referring to missed instalments (whether of capital, interest or fees and charges), but imposed three requirements before arrears are excluded from non-eligible secured debt: (1) the arrears must have been due as at the date of the application for the moratorium; (2) the arears must be of instalments that the debtor failed to pay in breach of the agreement or applicable legislation or rules and (3) the arrears cannot be those which have already been capitalised.
- Zacaroli LJ emphasised 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. He found support for this in submissions made by Counsel for Interbay and Seculink on a distinction drawn in Regulation 5(4)(a) between “arrears” and that which they are to be in respect of, namely the “secured debt”. He held this to be reinforced by Regulation 7(9) which limits the restriction on the recovery of interest (during the moratorium period) – in the case of a secured debt – to “interest that accrues on any arrears on the debt”.
- The appellant's construction would lead to anomalies such as a creditor being able to enforce on the capital if it happened to call in the loan the day after a moratorium but not if it called it in the day before.
- Zacaroli LJ found further support for his interpretation in the exclusion of secured debt in the personal insolvency context under the Insolvency Act 1986.
- Where the appellant's construction led to a significant interference with the rights of a secured creditor, particularly in comparison with other personal insolvency regimes, the “principle of legality” in statutory interpretation, whilst not decisive, provided support for resolving ambiguity in the Regulations in favour of the respondent lenders.
Significance
This is the first case about the Regulations in the Court of Appeal. The Regulations are increasingly relied on by debtors given they can prevent enforcement and interest on debts during a moratorium or that interest being recovered even when the moratorium is lifted. The meaning and effect of the Regulations are now a regular source of disputes in the Courts.
The judgment offers guidance on the construction of the Regulations which may be instructive for numerous matters arising under the Regulations as well as that raised by the present appeal.
It resolves the important question of whether the capital of a secured debt (in this case a mortgage) was moratorium debt or not. That question arises not only when lenders routinely call in secured debts but also when the capital sum otherwise becomes due such as upon the expiry of a loan.
It may have significant financial and practical effects because the debtor had argued that no interest could be charged on the (much larger) capital sum during the moratorium as well as on the (smaller) monthly missed interest repayments; and argued that the creditor could not enforce respect of the capital part of the debt and therefore gain possession to realise its security.
Practicioners may also note the strict view take by the Court, in accepting Interbay's submissions that it should not hear Mr Forbes's second ground appeal, to raising points not before the Courts below and adding new material into “replacement” skeletons which expand the scope of an existing ground of appeal.
Mr Forbes is seeking permission to appeal to the Supreme Court.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
