Luke Oliver discusses the risk of adverse costs orders for debtors and debt advice providers arising from creditor applications for cancellation of breathing space moratoriums or mental health crisis moratoriums, in the light of preliminary guidance from the Treasury.
The creditor review request
Under the Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 SI No 1311 (the DRS regs), a creditor who wants to cancel the inclusion of their debt in a breathing space moratorium (BSM) or a mental health crisis moratorium (MHCM) must submit a written request for a review of the moratorium to the debt advice provider (DAP) (see reg 17).
The DAP must then determine whether the moratorium should be cancelled in respect of some or all of the moratorium debts, either because the moratorium ‘unfairly prejudices the interests of the creditor’, or there has been ‘some material irregularity in relation to any of the matters specified in paragraph (2)’ (reg 17(1)).
‘Unfair prejudice’ is not defined in the DRS regs but was considered in
Axnoller Events Ltd v Brake and another (mental health crisis moratorium) (Rev1)
[2021] EWHC 2308 (Ch), 17 August 2021, at paras 27–47. The grounds of ‘material irregularity’ are that: (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 (reg 17(2)).
If the DAP receives a valid review request, they must conduct the review and carry out certain steps within the relevant timescale contained in the DRS regs.
1Before the end of the period of 35 days from the start of the moratorium or, for additional debts, the day on which the moratorium took effect in relation to the additional debt: reg 18(1). Having completed the review, the DAP must cancel the moratorium in respect of some or all of the moratorium debts if they consider there is sufficient evidence proving the required grounds (reg 18(2)).That is unless the debtor’s personal circumstances would make cancellation ‘unfair or unreasonable’ (reg 18(3)).
If the DAP decides that there is insufficient evidence of the required grounds for cancellation, or that cancellation would be unfair or unreasonable, the moratorium will continue. The creditor may then choose to make an application to the court for cancellation on the same grounds (reg 19(1)).
The creditor application to court
Creditor applications are made under Civil Procedure Rules 1998 (CPR) Part 23 on form N244D (CPR
Practice Direction (PD) 70B para 2.1). This provides for only the debtor to be entered as respondent, rather than the DAP. Despite this, notice should be given to the debtor, any joint debtor and the DAP (CPR PD 70B para 2.2).
If a DAP is considering cancellation following a requested review, they must consult the debtor. However, the DAP’s final decision is not bound by the debtor’s wishes (reg 18(4)(b)(i)). This lack of debtor control means that the current process of automatically joining debtors as parties seems unfair, given the debtor’s probable increased exposure to costs risks compared with a non-party. One solution might be to introduce some statutory costs protection, which the regulations currently lack.
Specific and limited grounds upon which a BSM can be cancelled
The grounds for cancellation of a BSM upon creditor review request or at the midway review are exhaustively provided for in the DRS regs (at regs 17(2) and 27(5) respectively). A DAP does not have discretion to cancel a BSM for any other reason, for example, because the client requests it, or to avoid client exposure to a potential creditor application and associated costs risks.
Therefore, if the requisite grounds requiring cancellation are not proven, then it seems the DAP cannot cancel the BSM. This is despite non-cancellation being potentially contrary to client instructions and the Financial Conduct Authority
Consumer Credit Sourcebook.
2CONC 8.3.2 R(1)(a) requires that DAPs must ensure: ‘(1) all advice given and action taken by the [DAP]: (a) has regard to the best interests of the customer.’Specific issues concerning cancellation of a MHCM
In contrast to the position for a BSM cancellation, the DAP must cancel a MHCM if the debtor requests it (reg 34(1)(b)). A MHCM application can be made on behalf of the debtor, by various specified third parties, without the debtor’s consent if the debtor lacks capacity (reg 29(1)).
3Debt respite scheme (breathing space): guidance on mental health crisis breathing space, HM Treasury, March 2021, paras 3.8–3.9. However, third parties cannot unilaterally request cancellation. In addition, the DRS regs only require consultation with the debtor prior to cancellation, not a third party who may have applied for the MHCM (regs 18(4)(b) and 34(4)(a)).
A vulnerable debtor could be entered into a MHCM (without their consent) by a third party who would then have no right to request cancellation or even to be consulted regarding possible cancellation. This is concerning because MHCMs raise the possibility of a creditor cancellation application over which the third party would have no control, and which could expose the debtor to costs risks.
How does the DAP appropriately respond to the notice if they are not made a respondent party to the application?
In response to these concerns being raised, the Treasury has issued some preliminary guidance, pending a full document, which states:
... The debt advice provider is not a party to the proceedings but is given notice of the application so that they can provide the appropriate advice to the debtor if asked, and for their information.
The court is not reviewing the debt advice provider’s decision-making prior to the application, but making its own decision on the application ... Accordingly, the court does not need the debt advice provider at court to consider these types of application, but should they wish to be there to support the debtor in these applications as an interested party they are notified and can submit evidence or attend court where necessary.
The Treasury guidance appears to suggest that the DAP could effectively be treated as a
non-party respondent. This possibility is envisaged in
The Civil Court Practice commentary on the definition of ‘respondent’ in the CPR, which includes ‘such other person as the court may direct’.
4The Civil Court Practice 2022 (The Green Book), Lexis Library, April 2022, at [CPR 23.1 [1] ] (accessed online 22 April 2022). The evidence that the Treasury suggests DAPs could submit where necessary should be in the form of a witness statement.
In the author’s view, given the potential costs risks for the client, it is not appropriate to respond without either client instruction or the court’s direction. The decision on whether and how to respond should be escalated to senior managers as it potentially has implications for the DAP service.
Potential costs risks for the debtor arising from a reg 19 application
In
Axnoller Events Ltd v Brake and another (Consequential matters) [2021] EWHC 2343 (Ch), 19 August 2021, the High Court considered the matter of awarding costs in relation to a creditor application for a MHCM to be cancelled. Only the debtors were joined as parties.
The applicant (Guy) parties were awarded a sum upon summary assessment of £20,470 because, despite the court’s refusal to cancel the moratorium, they were granted their application for ‘unless’ orders and were therefore adjudged to be the ‘successful party in the litigation’ (see para 7). This decision to award costs to be summarily assessed is consistent with the CPR for Part 23 applications and so cannot necessarily be viewed as an anomaly.
5See CPR PD 23A paras 13.1–13.2 and The Green Book at [CPR 23 [9] ] (accessed online 22 April 2022), which comments: ‘It will be the frequent practice of the court to make a summary assessment of costs on any application …’.On the issue of debtor-incurred costs, the Treasury has commented as follows:
... The court will be aware that the debtor has applied for a breathing space, which is intended to protect people in problem debt. This could form part of the judge’s consideration on costs. It is possible that a debtor could be required to pay costs where the court finds them to have been at fault in some way (eg, having made false statements).
Could the DAP be joined as a party to proceedings?
On this question, the Treasury guidance states the following:
Bearing in mind the potential impacts on debt advice providers, the government does not consider that it would be appropriate to include debt advice providers alongside or instead of debtors as parties to all such applications.
It seems possible (if unlikely) that a court could join the DAP as a defendant party, without their consent, if to do so would be desirable so that the court can resolve all the ‘matters in dispute’ in the proceedings.
6Civil Procedure (The White Book 2022), Westlaw UK, commentary on CPR 19.2 at para 19.2.1–19.2.2 (accessed online 26 April 2022). Given that the relevant matters of dispute are whether the grounds for cancellation are proven, this seems plausible. That said, the High Court held in
Molavi v Hibbert and others [2020] EWHC 121 (Ch) (at paras 59–60) that where assistance to the court can be achieved by treating the person as a witness, rather than joining them as a party, this is preferable and in accordance with the overriding objective to avoid unnecessary costs and delay.
Costs risks for DAPs
The Treasury guidance assumes that the DAP will not be joined as a party but acknowledges that a costs risk (albeit small) exists even for non-parties:
… Because the debt advice provider would not be a party to the proceedings the question of a debt advice provider having to pay any other party’s costs cannot be ruled out, but should not normally arise where the provider has complied with the regulations. Civil Procedure Rule 46.2 sets out the procedures for the court.
This underlines the key importance of DAPs being able to evidence their consideration of all the relevant matters in the DRS regs (regs 17 and 18) when deciding whether to cancel. While the DRS regs do not require the DAP to specify their reasons for refusing cancellation, it will be prudent to record these carefully and provide them to the creditor with the required outcome notification (reg 18(4)(a)). This will hopefully minimise the risk of an adverse costs order in the event of a creditor application.
The White Book summarises some general principles for courts considering costs orders against non-parties. Such orders are exceptional in the sense that they are outside the ordinary run of cases that parties pursue or defend for their own benefit and at their own expense. Also, the key question in any such case is whether, in all the circumstances, it is just to make the order. This will be fact-specific to some extent.
7The White Book 2022 at para 46.2.2 (accessed online 26 April 2022). Hopefully, the risk of an adverse costs order will be low and reserved for circumstances where the DAP decision is made in bad faith or is deemed irrational. However, the risk cannot be ruled out completely. Presumably, if a DAP is joined as a party, the risk of costs will be increased. Nonetheless, the risk of non-party costs orders will inevitably have implications for DAPs and their contracts with insurers.
The DAP’s decision: to cancel or not to cancel?
On this question the following Treasury guidance is relevant:
... to determine whether to cancel a breathing space … under regulation 18, the debt advice provider must balance what is fair or reasonable for the client against the evidence of unfair prejudice or material irregularity provided by the creditor. This could include anticipating the consequences for the debtor of continuing a breathing space where the debt adviser considers that the creditor has provided sufficient evidence of one of the grounds …
In the author’s view, a DAP who considered that the grounds for cancellation were proven would be exposing the debtor to an unacceptable costs risk by refusing to cancel on grounds that it would be unfair or unreasonable. While the court retains discretion to refuse cancellation even where the grounds are proven (reg 19(3)), it cannot be safely assumed that it would do so.
A less clear decision for the DAP might be where there is legal uncertainty over whether the grounds are proven. As the DRS regs are still new and there is little case law, such uncertainty is not uncommon.
Can the DAP be confident the court will share their view if their refusal to cancel leads to a creditor application? To what extent should they support the debtor as the defendant party to oppose the application, given that time spent engaging the creditor’s lawyers and the court in opposing the application will increase adverse costs if awarded? Concerningly, DAPs might ultimately feel compelled to cancel moratoriums to avoid potentially exposing the client (and themselves) to costs risks, despite a belief that the grounds for cancellation are not proven.
A longer version of this article with the Treasury preliminary guidance in full is available here.