When is a debt not a "moratorium debt"? Helpful clarity for lenders with debtors in a breathing space

In a helpful decision for lenders, the Court of Appeal has confirmed in Interbay Funding Limited v David Terence Forbes [2025] EWCA Civ 690 that the capital part of a "secured debt" does not form part of a "moratorium debt" under the Debt Respite Scheme (Breathing Space Moratorium and Mental Health Moratorium) (England and Wales) Regulations 2020 (Regulations). This means that mortgage providers and asset finance providers can continue to take enforcement action against debtors for the non-payment of such debts, despite those debtors entering into a breathing space moratorium or mental health crisis moratorium under the Regulations.

What happened?

In 2016, Mr Forbes borrowed £1.3m from Interbay on an interest only basis for 10 years on monthly payments. The debt was secured on real estate. He fell into arrears in 2018, and in 2019 Interbay made a formal demand for repayment of the whole capital sum due plus arrears. In 2022 Mr Forbes applied for a mental health crisis moratorium. Interbay started proceedings for possession a year later.

In 2023, Interbay obtained a possession order in respect of Mr Forbes' property. Mr Forbes appealed. In a joined appeal, Mr Forbes also owed a principal debt of £260,000 to Seculink under a bridging loan which was secured against a number of properties.

The key question was whether the capital part of the secured debts were to be considered "arrears" if they were called in before the moratorium – because if they were then they would be moratorium debts under the Regulations, such that enforcement action could not be taken.

What do the regulations say?

The Regulations are made under s.6 of the Financial Guidance and Claims Act 2018 with the stated intention of providing a debt respite scheme designed to: "(a) protect individuals in debt from the accrual of further interest or charges on their debts during the period specified by the scheme, (b) protect individuals in debt from enforcement action from their creditors during that period, and (c) help individuals in debt and their creditors to devise a realistic plan for the repayment of some or all of the debts".

The Regulations create two types of moratorium: a breathing space moratorium, providing a 60-day period of protection from various creditor action; and a mental health crisis moratorium, in which the period of protection can continue indefinitely. Mr Forbes had entered a mental health crisis moratorium.

While a moratorium is in place, Regulation 7(6) provides that a creditor cannot (without the permission of the Court) take any of the follows steps: "(a) require a debtor to pay interest that accrues on a moratorium debt during a moratorium period, (b) require a debtor to pay fees, penalties or charges in relation to a moratorium debt that accrue during a moratorium period, (c) take any enforcement action in respect of a moratorium debt (whether the right to take such action arises under a contract, by virtue of an enactment or otherwise), or (d) instruct an agent to take any of the actions mentioned in sub-paragraphs (a) to (c)".

Regulation 7(7) confirms that, among other things, the prohibition of "enforcement action" means that a creditor cannot "(a) take a step to collect a moratorium debt from a debtor, (b) take a step to enforce a judgment … issued by a court … before or during a moratorium period regarding a moratorium debt, (c) enforce security held in respect of a moratorium debt, (d) obtain a warrant", or "(f) start any action or legal proceedings against a debtor relating to or as a consequence of non-payment of a moratorium debt".

In light of these provisions, many lenders have until now taken a cautious approach and placed all enforcement action on hold upon a debtor entering into a moratorium. However, in light of the Court of Appeal's decision, it is apparent that such action can in fact continue.

So what is a moratorium debt?

The key question is what is a "moratorium debt"?

As the Court of Appeal noted, under Regulation 6 it is "any qualifying debt" that was incurred by a debtor in relation to whom a moratorium is in place, that was owed by the debtor "at the point at which the application for the moratorium was made" and about which information had been provided to the Secretary of State by a debt advice provider under the Regulations. We then need to work our way through several more defined terms to reach the answer of what this actually means.

A "qualifying debt" is defined by Regulation 5(1) as "any debt or liability other than a non-eligible debt". A "non-eligible debt" is then defined by Regulation 5(4), which sets out a number of categories of debt, including a "secured debt which does not amount to arrears in respect of secured debt" (emphasis added).

In turn, 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". Regulation 2 further defines a "secured credit agreement" as "an agreement under which a creditor provides credit to a debtor and the agreement provides for the obligation of the debtor to repay to be secured (a) by a mortgage on land, (b) on assets whose value at least equals the amount of the debt, or (c) on a letter of credit or guarantee". Regulation 2 also contains definitions of a "hire purchase agreement" and a "conditional sale agreement" (in effect, agreements pursuant to which title to the relevant goods will only pass upon some future event).

Reading all of these provisions together, the Court of Appeal stated that to determine whether the capital part of a "secured debt" is to be regarded as a "moratorium debt", the key question is whether the capital part is to be regarded as amounting to "arrears" for the purposes of Regulation 5(4). 

So the next question is, what are "arrears"? The term "arrears" is defined under Regulation 2, in effect as any sum which has fallen due and which has not been paid at the date of the application for a moratorium, other than capitalised mortgage arrears.

In deciding that the capital part of a secured debt is not to be regarded as arrears, the Court of Appeal noted a number of points:

• That the term “arrears” naturally carries a more restricted meaning than the whole of a secured debt which has fallen due for payment – i.e. it naturally means only "such of those periodic instalment payments which have fallen due but remain unpaid".
• That this reading of the meaning of "arrears" is consistent with its definition under the Regulations, which excludes capitalised mortgage arrears which have been added to the principal balance. As the Court observed, "In order for something to be added to the outstanding balance it must be different from the outstanding balance itself".
• This is also consistent with the drafting of the Regulations more broadly, which draw a distinction between “arrears” and the underlying debt which the arrears are due in respect of, namely the “secured debt”.
• If on the other hand the entirety of a secured debt is to be regarded as arrears once it had been called in (and therefore be treated as a moratorium debt), this would give rise to the anomaly that a creditor could not charge interest on the entirety of its debt if it had called in the debt for payment the day before a debtor entered into a moratorium, but could continue to charge interest on the principal debt if it had not called it in for payment.
• Finally, the Court of Appeal believed its interpretation of the Regulations to be consistent with the personal insolvency regime provided by the Insolvency Act 1986, which generally does not impinge on the rights of secured creditors.

For all of these reasons, the Court of Appeal found that "the principal sum of secured debt – whether or not called in prior to the commencement of the moratorium – is non-eligible debt, and thus neither a qualifying debt nor a moratorium debt".

Practical implications

Following the Court of Appeal's decision it is now clear that if a lender has demanded repayment of the principal part of a secured debt and it remains outstanding, then the lender may commence (and continue) enforcement action, irrespective of the debtor subsequently entering into a breathing space or mental health crisis moratorium. Similarly, a lender may take such action if the right to demand repayment arises after the beginning of a moratorium, for example due to further arrears accruing or because the term of a loan has expired.