Mental health debt moratorium: can we learn from others?

On Wednesday 13 September, the Economy & Fair Work Committee of the Scottish Parliament heard evidence regarding the general principles of the Bankruptcy and Diligence (Scotland) Bill. The committee is responsible for examining the bill at stage 1 and making a recommendation about whether the Parliament should support the main purpose of the bill.

During the session, the committee spent a good deal of time discussing with those invited to give evidence in relation to the proposed mental health moratorium ("MHM"). The bill contains an enabling power to establish a MHM, that would prevent debt recovery action by creditors against individuals who are receiving treatment from mental health specialists for a mental health disorder. The aim is to help and improve the lives of people who are struggling with debt which may be exacerbated by mental health issues, bringing increased protection for those who need it.

Emerging scheme

How the MHM will work in practice will be set out in regulations that have still to be made. The bill sets out a non-exhaustive list of what the regulations may include provision about, including:

• the conditions for the moratorium to apply;
• the types of debts in respect of which the moratorium applies;
• the time period for which the moratorium is to apply; and
• the actions creditors must, may or may not take during the moratorium period.

A MHM working group of mental health professionals and key stakeholders has been established to consider the practical aspects that will ultimately be introduced through secondary legislation. The first meeting of the working group took place on 28 February 2023.

The committee heard evidence that a similar MHM has been in force in England & Wales since 2021. While the committee was told that any MHM should be tailored to the specific Scottish context, it was acknowledged that there may well be lessons that can be learned from down south. We suggest that there are important lessons, in particular regarding the protections available to creditors in the case of abuse of the provisions by debtors.

The "standard" moratorium

The general purpose of a moratorium is to provide a person who is experiencing debt issues with the time and space needed to receive advice and take the most appropriate action to deal with those issues.

Currently in Scotland, a debtor can apply for a six month "standard" moratorium by completing a simple application form and submitting this to the Accountant in Bankruptcy. The period of the moratorium was six weeks when first introduced, but increased to six months during the Covid pandemic and has remained there due to concerns over the impact of the cost of living crisis.

Contrast this with the position in England, where the "standard breathing space" available to anyone with debt problems is only 60 days. Debtors can only access this breathing space by seeking debt advice from a debt adviser, who considers each application and can, if appropriate, decide that a breathing space is not suitable for the debtor.

As was noted before the committee, six months is a significant period of time for a creditor to wait. It was recognised that creditors themselves are likely to owe debts that require to be paid and therefore anything that prevents them from recovering their debts could have wider negative economic consequences. It is for that reason that the Government has undertaken to keep the six month period under review.

Mental health crisis moratorium

In addition to the "standard breathing space" moratorium, the UK Government introduced (in England & Wales) an additional protection for people receiving mental health crisis treatment. If an approved mental health professional ("AMHP") certifies that a person is receiving mental health crisis treatment, the AMHP’s evidence can be used by a debt adviser to start a mental health crisis moratorium ("MHCM").

The MHCM continues for the duration of the treatment, plus 30 days. Therefore, it has the potential for being in place for a significantly longer period than the standard breathing space. A creditor can ask a debt adviser to review the breathing space if they consider that this unfairly prejudices their interests or the debtor does not meet at least one of the eligibility criteria. If the debt adviser decides not to cancel the breathing space, the creditor can apply to the court to cancel the breathing space.

While only recently introduced, the English courts have already had to grapple with the practical effects of the MHCM, which we consider below.

Kaye v Lees [2023] EWHC 758 (KB)

In this case, a creditor applied to the court and was successful in having a MHCM cancelled for material irregularity and unfair prejudice. Controversially, the court also granted an injunction restraining the debtor from obtaining a further moratorium for two months so that the creditor could complete the sale of the debtor's property.

In March 2023, a different judge, while agreeing that the MHCM should never have been granted in the first place, disagreed that the court had the power to prevent a debtor from applying for a further moratorium. It was noted that Parliament intended to confer a "complete and unfettered right" on debtors to apply to debt advisers for a MHCM. Creditors could challenge a MHCM by asking for a review, and if necessary, by applying to the court for a cancellation. However, the primary decision maker was the debt adviser, not the court. It was for the debt adviser to consider whether the eligibility criteria were met for a MHCM. In that regard the debt advisers had a quasi-judicial role, in assessing the medical evidence provided by the debtor and then determining whether they were suffering from a crisis which required a MHCM.

The fact that the debt adviser had come to the wrong conclusion with respect to the first MHCM should not prevent the debtor from applying again, as it might be that the debtor would be able to provide fresh evidence that demonstrated that the eligibility criteria were met.

Interestingly, following the decision in Kaye v Lees, the Insolvency Service published guidance that, in certain situations, debt advisers should consider taking additional steps to confirm a debtor’s eligibility for a mental health crisis moratorium. In particular, where the debtor is claiming to be receiving "crisis, emergency or acute care or treatment in hospital or in the community from a specialist mental health service in relation to a mental disorder of a serious nature", the guidance suggests that the AMHP must be satisfied that the debtor is being treated for a mental health disorder of a comparable severity to that caught by the preceding regulations (which refer to a person in hospital or a "place of safety").

Guy v Brake [2023] EWHC 1560 (Ch)

In this case, the debtor was entered into a MHCM in late August/early September 2022. The creditor applied for a review, but the debt adviser decided that the criteria for cancellation were not met. The creditor applied to the court for cancellation. The parties disagreed over what directions the court should give so that the court could determine the substantive application.

The creditor wanted the debtor to disclose various medical documents and other information and to be examined by an expert of the creditor's choosing. The debtor objected to these demands, arguing that the court had no jurisdiction to order an examination. The debtor also argued that the court could not go behind the AMHP's opinion.

The court ordered the disclosure of the debtor's medical records, on the basis that the court would need them to ensure the MHCM only applied to cases where the eligibility criteria were satisfied. It was considered that such disclosure was an appropriate and proportionate means by which the court could determine the matter before it. In relation to the examination, the court considered that this would not be intrusive or require the debtor to be away from home for any length of time. Therefore, the creditor was ordered to submit to an examination by the creditor's expert.

What can we learn?

The committee was concerned about who the "gatekeepers" would be for the MHM. The debt advice sector is extremely stretched as it is. Can it cope with this additional "quasi-judicial" role of determining whether debtors are eligible for a MHM? The suggestion from England & Wales is that there will need to be clear guidance given to debt advisers on how they are to perform this new role.

Protections available to creditors in situations where there might be abuse of the regulations by debtors need to be robust. It appears that the first judge in Kaye v Lees was not convinced that the protections struck the right balance, and therefore required the court to grant injunctive relief. There will need to be care taken in deciding how a creditor can challenge a MHM, to ensure that debtors who need the moratorium can access it while those who may be tempted to abuse the system are prevented from doing so. It may also be helpful for the regulations to specify what information a creditor might want to ask for when challenging a MHM.

There are important discussions to be had regarding the detail of the scheme. It is key that nothing frustrates access for individuals to the MHM, where there is a genuine need for this. However, if the cases from England & Wales are anything to go by, the ability of creditors to test the authenticity of the debtor's situation will need to be carefully considered.