Principal Amount of Secured Debt Excluded from Moratorium Debts under the Debt Respite Scheme Regulations

Introduction

Forbes v Interbay Funding Ltd ([2025] EWCA Civ 690) is a landmark decision of the England and Wales Court of Appeal, delivered on 6 June 2025 by Lord Justice Zacaroli (with whom Lord Justice Males and Lord Justice Baker agreed). The combined appeals arose from applications by Mr. Forbes, a borrower under two secured credit agreements, challenging the construction of the Debt Respite Scheme (Breathing Space Moratorium and Mental Health Moratorium) (England and Wales) Regulations 2020 (“the Regulations”). The central issue was whether the principal amount owing under a secured debt—called in by the lender before the moratorium began—falls within the definition of “arrears” and thus qualifies as a moratorium debt (entitling the borrower to a freeze on enforcement and interest) or remains a non-eligible debt excluded from moratorium protection.

The respondents in the two appeals were Interbay Funding Ltd and Seculink Ltd, each relying on a first legal charge over Mr. Forbes’s properties. The Court of Appeal unified both appeals to resolve the narrow but critical point of statutory interpretation.

Summary of the Judgment

The Court of Appeal unanimously dismissed Mr. Forbes’s appeals. It held that:

The principal sum of a secured debt, whether or not called in before the moratorium, is a “non-eligible debt” under Regulation 5(4)(a) and therefore not a “qualifying debt” or a “moratorium debt.”
The Regulations use the term “arrears” in a restricted sense—unpaid instalments of interest, capital or charges—excluding any part of the outstanding principal, even if it has fallen due.
Statutory context, the distinction drawn between capital and arrears, the separate treatment of “capitalised mortgage arrears,” and the insolvency background all confirm that Parliament did not intend to deprive secured creditors of their proprietary rights in relation to principal sums.

Analysis

Precedents and Authorities Cited

R (O (A Child)) v Secretary of State for the Home Department [2023] AC 255 – Principles of reading legislation in context and purpose.
Bennion, Bailey and Norbury on Statutory Interpretation – Guidance on interpreting delegated legislation and the presumption that every word has meaning.
Cadogan v McGirk [1996] 4 All ER 643 – Limits to applying the principle of legality in expropriatory statutes.
S Franses Ltd v Cavendish Hotel (London) Ltd [2019] AC 249 – Requirement that interference with proprietary rights be clearly expressed.
Bankruptcy and insolvency provisions (Insolvency Act 1986, Insolvency Rules 2016) – Comparative treatment of secured creditors in established personal insolvency regimes.

Legal Reasoning

1. Textual interpretation of “arrears”: Regulation 2 defines “arrears” as sums (other than capitalised mortgage arrears) payable to a creditor that have fallen due but remain unpaid in breach of the agreement. The Court read “arrears” in its natural sense—missed instalments of interest, capital or charges—rather than any outstanding principal called in by the lender.

2. Contextual distinctions: The Regulations separately exclude “capitalised mortgage arrears” from the definition of arrears. If principal sums called in were themselves arrears, the carve-out of capitalised arrears would be inexplicable. Additionally, Regulation 7(9) limits the freeze on interest during moratorium only to interest accruing on arrears—reinforcing that principal remains unaffected.

3. Purpose and insolvency background: The Debt Respite Scheme aims to shield borrowers from enforcement of accrued arrears and interest during a breathing or mental health moratorium, while preserving secured creditors’ established rights. Unlike a full bankruptcy regime, it does not wipe out or suspend a creditor’s proprietary claim over principal secured sums.

4. Principle of legality: Where a statute or delegated legislation interferes with proprietary rights, clear and express words or necessary implication are required. The Court found no such clear language in the Regulations to override secured creditors’ rights in respect of principal sums.

Impact of the Judgment

Secured creditors will retain the right to enforce payment of principal amounts called in before a moratorium commences, subject only to court permission where required by the Regulations.
Borrowers under the Debt Respite Scheme will receive relief only in respect of unpaid instalments (interest, capital or fees) that have fallen due but have not been paid—these qualify as moratorium debts.
Future litigation over moratorium debt definitions will follow this clear delineation, avoiding inconsistent treatment between called-in principal and periodic instalments.
The decision harmonises the Debt Respite Scheme with established insolvency law principles and secures commercial lenders’ expectations of treatment under personal insolvency regimes.

Complex Concepts Simplified

Moratorium Debt: Any qualifying debt (i.e., not expressly excluded) owed at the point of application for a debt respite moratorium, subject to information provided to the Secretary of State.
Qualifying Debt vs Non-Eligible Debt: A qualifying debt is all debts except those excluded by Regulation 5(4). “Non-eligible debts” include secured debts that do not amount to arrears (i.e., principal sums called in).
Arrears: Unpaid instalments of interest, capital or charges that have fallen due under the loan or mortgage agreement and remain unpaid.
Capitalised Mortgage Arrears: Arrears previously unpa‌id and then added to the outstanding mortgage balance to be repaid over the remaining term; these are separately excluded from the definition of arrears.

Conclusion

The Court of Appeal in Forbes v Interbay Funding Ltd has provided authoritative guidance on the construction of the Debt Respite Scheme Regulations. By confirming that called-in principal sums remain non-eligible debts, the court preserves secured creditors’ proprietary rights and confines moratorium relief to unpaid instalments. This ruling ensures coherence between the Debt Respite Scheme and established insolvency frameworks, striking a balance between debtor protection and creditor security. Legal practitioners and lenders should apply this clarity in advising clients and structuring lending and moratorium applications going forward.