UK: The Court Of Appeal Considers Debt Relief Orders

SECRETARY OF STATE FOR WORK & PENSIONS v (1) EUNICE PAYNE (2) GAIL COOPER [2010] EWCA Civ 1431

As flagged in our earlier article 'Having your cake and eating it' The Secretary of State appealed against a decision ((2010) EWHC 2162 (Admin)) that he had unlawfully deducted sums from the social security benefits of the respondents (C and P). That appeal has now been decided.

C had been overpaid incapacity benefit, and P had obtained a social fund loan that required repaying. Each obtained a debt relief order ('DRO') which had the effect of imposing a one-year moratorium on specified qualifying debts, which included the deductions, during which time the creditor had "no remedy in respect of the debt" pursuant to the Insolvency Act 1986 s.251G(2)(a).

The Secretary of State began or continued to make the deductions after the orders were made, and C and P applied for judicial review. Cranston J held that "remedy" included the Secretary of State's powers to recover overpayments of benefits and repayment of social fund loans, with the effect that he was precluded from continuing to make the deductions from C and P's benefits after the debt recovery orders were made.

The Secretary of State argued at first instance and upon appeal that s.251G(2)(a) should be construed narrowly so as to be consistent with the meaning given to "remedy against the property or person of the bankrupt" in s.285(3), which permitted the Secretary of State to make deductions during a benefit recipient's bankruptcy. He argued that there was no policy reason why Parliament should have wished to create a difference between an undischarged bankrupt and a debtor who had obtained a debt relief order, and that it was contrary to the "net entitlement principle": i.e. that a claimant for a prescribed benefit was only entitled to the net amount after any lawful deduction.

Mummery L.J. agreed with the Secretary of State's argument. He stated that reliance on s.251(G)(2)(a) as a ground for invalidating the continuation in force of the statutory power to make deductions is misconceived. He held that the purpose of that section (similar to the purpose of s.285 in the case of bankruptcy orders) in placing an embargo on creditors' remedies during the moratorium period is to maintain the integrity of the insolvency process. It is not the purpose of the section to enhance the amount of social security benefits paid to the debtor during that period or to remove the specific statutory power conferred on the Secretary of State to make deductions from prescribed benefits in order to recover public money.

Furthermore, he stated that he would have allowed the appeal as the judge was wrong to hold that the DROs obtained by the respondents rendered it unlawful for the Secretary of State to continue to make deductions from their prescribed benefits so as to recover the overpayments and the social fund loan during the moratorium period provided for under s251G of the 1986 Act.

HELD: Mummery L.J dissenting as above. For the Secretary of State to deduct the amount owed by C and P from subsequent benefits would be to exercise a "remedy in respect of the debt" on the ordinary meaning of those words, contrary to s.251G(2)(a). There was nothing in the purpose of the debt relief order scheme or the moratorium period that lent support for giving a narrower than natural meaning to "remedy" in s.251G(2)(a). The words of s.251G(2)(a) and s.285(3) did not have the same natural meaning, and the respective schemes had different purposes. The bankruptcy scheme entailed preservation of the bankrupts' assets so that they should be available for fair distribution; by contrast, the purpose of the debt relief order scheme was unadulterated debt relief. The net entitlement principle did not assist with the statutory interpretation (see paras 77, 83-85, 95 of the judgment). As Toulson LJ acknowledged, this reasoning iss essentially the same as that of Cranston J below.

Given the importance of the question, and the split decision in the Court of Appeal, there must now be a prospect that this question will have to be finally settled by the Supreme Court.

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