Principal secured debts not moratorium debts

This insight was jointly drafted by Counsel, Roger Laville from Five Paper

On 6 June 2025, the Court of Appeal handed down its judgment in the above conjoined appeals, resolving the question of whether the principal amount owing in respect of a secured debt that has fallen due prior to the start of a breathing space moratorium is a “moratorium debt”.

Lord Justice Zacaroli (with the agreement of Lord Justices Males and Baker) ruled that the principal amount of a secured debt is a “non-eligible debt” even when it has already fallen due for payment, meaning that it is not a moratorium debt.

Therefore, the creditor can continue to charge interest on the principal amount and take action to enforce it within a moratorium period.

Background

The appeals concerned two separate credit agreements entered into by Mr Forbes which were secured over properties he owned.  Mr Forbes defaulted on both loans and the creditors, Interbay and Seculink (the Creditors), took action to enforce their debts, including calling in the principal amounts and seeking possession orders.

Mr Forbes applied for a mental health crisis breathing space under the Debt Respite Scheme (Breathing Space Moratorium and Mental Health Moratorium) (England and Wales) Regulations 2020 (the Regulations) and this came into effect on 2 July 2022.

The question before the Court of Appeal was whether the principal amount of Mr Forbes’ secured debts was a “moratorium debt”.  If so, the Creditors would have been prevented from taking enforcement action and charging interest on the principal debt during the period of the moratorium. In the County Court and the High Court respectively, the Creditors had been successful in arguing that the debt was a non-eligible debt. The wording of the Regulations is notoriously opaque, and the question of whether they cover secured debts has been the subject of significant debate and disagreement.

Mr Forbes appeal was on the basis that the lower courts were:

• wrong to conclude that the principal amounts of the secured debts were non-eligible debts;
• wrong to find that the Creditors were not prevented (without the court’s permission) from requiring Mr Forbes to pay interest on the debts or taking enforcement action in respect of the debts;
• wrong to find that the possession proceedings were not null and void because they were in breach of the Regulations.

Mr Forbes’ argument focussed on the definition of “arrears” of secured debt, and the extent to which those arrears fell within the moratorium.

The Creditors responded setting out reasons to support the conclusion of the lower courts that the principal secured debt was not a moratorium debt.

Five key points

In reaching the conclusion that the principal amount owing in respect of a secured debt is not a moratorium debt, the court determined the following:

1. The definitions of a “non-eligible debt” and “secured debt”: regulation 5(4)(a) sets out that a “secured debt” is a non-eligible debt “unless it amounts to arrears” in respect of the secured debt. Regulation 2 defines what a secured debt is; an agreement under which credit is provided to the debtor with the obligation for the debtor to repay the amount secured by a mortgage on land or on other assets. It also defines arrears as “any sum other than capitalised mortgage arrears payable to a creditor by a debtor which has fallen due and which has not been paid at the date of the application for a moratorium”.

2. The interpretation of “arrears”: the court interpreted “arrears” in the context of the Regulations as bearing its natural meaning of missed periodic instalments (of capital, interest or charges), and not the entire principal sum that had been called in. In doing so the court looked in particular at the language in Regulation 5 and the fact that the definition of “capitalised mortgage arrears” indicates a contradistinction between the arrears and the outstanding balance.

3. Treatment of secured debts in the insolvency regime: the court considered it was important that the treatment of secured debts within the moratorium regime under the Regulations is consistent with their treatment within the insolvency regime under the Insolvency Act 1986. Secured debt generally sits outside of the bankruptcy process unless the secured creditor voluntarily surrenders its security. Likewise, with debt relief orders, secured debts are not qualifying debts, and IVA proposals cannot affect the rights of a secured creditor without their agreement. The court noted that “in no other insolvency regime does the secured creditor lose altogether the right to any part of the accruing interest on its debt”. It would require clear wording to take a different approach with mental health crisis moratoria.

4. Interest on principal secured debt: As the principal debt is not included in the moratorium, interest can be added to it during the breathing space period, even though creditors are not allowed to charge interest on arrears during the moratorium.

5. Mixed debts comprising both principal debt (not included in the moratorium) and arrears (included in the moratorium) and whether enforcement action could be taken in respect of those debts during a moratorium: Mr Forbes raised a new argument that a creditor holding a mixed debt could not take enforcement action during a moratorium because it would be impossible to sever the different parts of the debt. The court did not determine this point as it had not been fully developed and there was insufficient time to consider it properly.

What it means for you

The judgment provides welcome clarity on the status of principal secured debts when a debtor enters into a breathing space or mental health crisis breathing space.  However, the court left open the question of whether enforcement action can be taken during a moratorium if the debt is made up of the principal secured debt and other debts (e.g. arrears of contractual monthly instalments) that would be caught by the moratorium.

TLT and Roger Laville of Five Paper Chambers have extensive experience in this area. Please do not hesitate to contact Heff Heathcote if you would like to discuss this further.

Contributors: Heff Heathcote, Roger Laville, Hannah Franklin and Amy Earlam

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at June 2025. Specific advice should be sought for specific cases. For more information see our terms & conditions.