The Debt Respite Scheme (Breathing Space Moratorium and Mental Health Crisis Moratorium) (England and Wales) Regulations 2020 (the "Regulations") enable eligible individuals to benefit from a period of moratorium (often referred to as a 'breathing space') in the face of creditor pressure.
Mr Justice Zacaroli recently had before him an appeal against the decision of District Judge Shorthose dated 24 November 2023, refusing to annul a bankruptcy order made against the appellant, Gavin Carter (the "Bankrupt").
The Bankrupt was the subject of an undisputed judgment debt in the sum of £42,000. The Court heard and adjourned two initial hearings of a bankruptcy petition (respectively in July 2022 and October 2022) owing to various factors. The petition returned before the Court once more on 28 February 2023 where, in the Bankrupt's absence, a bankruptcy order was made.
Unbeknown to the Court, on or about 6 January 2023, the Bankrupt had obtained a standard breathing space under the Regulations. In Mr Justice Zacaroli's judgment, he outlines that in those circumstances, the petitioning creditor should have notified the court of the moratorium, and the Court should have stayed the petition (unless, in using its discretion, it gave permission for the petition to be heard). This did not, however, happen (due to the solicitor with conduct of the proceedings not being aware) and the Court made the bankruptcy order.
The Bankrupt's Application
The Bankrupt applied to the Court seeking that the bankruptcy order be annulled in accordance with section 282(1)(a) of the Insolvency Act 1986 (the "Act") which provides that:
(1) The court may annul a bankruptcy order if it at any time appears to the court—
(a) that, on any grounds existing at the time the order was made, the order ought not to have been made, or …
It was common ground between the parties that the petition debt was a moratorium debt for the purposes of the Regulations, the effect of which was that the standard breathing space under the Regulations would mean that the petition should have been stayed and, accordingly, the bankruptcy order should not have been made at that stage.
District Judge Shorthose held, on hearing the Bankrupt's annulment application at first instance, that he retained a discretion under section 282(1)(a) of the Act given the use of the words "the Court may". In giving his judgment, various factors were considered and ultimately, he concluded with the fact that the moratorium was obtained with the benefit of flagrant non-disclosure, which ultimately trumped the failure of the petitioner to notify the court of the existence of the moratorium, and therefore dismissed the application.
The Bankrupt Appealed
The Bankrupt appealed on the grounds that: (1) by reason of the moratorium, the bankruptcy order was null and void. Accordingly, the judge erred in failing to set it aside; (2) in further grounds of appeal, it was contended that the judge was wrong in law not to have annulled the bankruptcy order for this was contrary to the statutory scheme, suggesting that the judge ought to have instead concluded that the County Court did not have the requisite jurisdiction to make such a bankruptcy order, given the circumstances, and therefore the order was null and void.
Mr Justice Zacaroli, after giving careful consideration as to the wording of the Regulations (in particular, Regulation 7(7), which sets out the enforcement action which cannot be taken during a breathing space, and Regulation 10(2), which provides that an existing bankruptcy petition should be stayed when the Court is notified of the breathing space by the creditor), found that the making of a bankruptcy order is not expressly null and void under the Regulations.
In his judgment, Mr Justice Zacaroli identifies that bankruptcy is not an enforcement action within Regulation 7, and therefore the making of the bankruptcy order is not null and void. Bankruptcy is not a collection process, but rather is a collective process, asthe making of a bankruptcy order impacts, or at least potentially impacts, third parties, including all other creditors of the debtor, whether they are owed qualifying debts or non-qualifying debts under the Regulations (including therefore the holders of debts not subject to the moratorium created by the breathing space). Further, paragraph 78 of his judgment notes that:
"The fact, however, that a bankruptcy order has consequences that impact on all creditors of the debtor, not merely those with moratorium debts, in my view justifies the conclusion that the drafter of the Regulations intended the court to maintain a discretion, in the event that a bankruptcy order was made in ignorance of the mandatory stay under Regulation 10(2)(a), to permit the bankruptcy order to remain."
Mr Justice Zacaroli concluded that District Judge Shorthose was correct to find that he retained a discretion under s.282(1)(a) of the Act. The appeal was therefore dismissed.
This is an interesting case where the petitioner's solicitor's inadvertent omission to notify the Court of the Bankrupt's standard breathing space (given that they had no knowledge of the same) was sufficient to engage the Court's discretion under section 282(1)(a) of the Act as "the Court may" annul the bankruptcy order on application.
This is an important reminder to practitioners assisting debtors who seek to rely upon the benefit of a moratorium under the Regulations, to ensure that any petitioning creditor, and indeed the Court, are aware of such a breathing space having been granted in advance of hearings. Failing this, the Court may enter a bankruptcy order against the debtor which, given Mr Justice Zacaroli's carefully considered analysis and judgment, it will be challenging to annul on grounds that the order ought not to have been made.
