UK: Having Your Cake and Eating it: Debt Relief Orders and the Public Purse

Last Updated: 23 November 2010
Article by Pinar Coktas

Part V of the Tribunals, Courts and Enforcement Act 2007 and the Insolvency Act 1986 gives an applicant the right to apply for a debt relief order ('DRO').

Section 251(A) of the Insolvency Act 1986 provides:

"An individual who is unable to pay his debts may apply for an order under this Part ('a debt relief order') to be made in respect of his qualifying debts."

It is intended to give debt relief to people in England and Wales who owe relatively little money, have little or no disposable income and no assets to repay what they owe and cannot afford to make themselves bankrupt. A DRO has implications different to that of a person subject to a bankruptcy order. Most importantly, one is to obtain protection form creditors, whereas the other is to preserve assets for a bankrupt's creditors.

An applicant must satisfy the following criteria to apply for a DRO, the applicant must:

  • be unable to pay his/her debts
  • have debts of less than £15,000 and be able to provide details of his/her secured and unsecured debts
  • have available income of less than £50 a month
  • have assets worth less than £300 or less including money in bank accounts or building societies.

The applicant must not:

  • be an undischarged bankrupt;
  • have petitioned for his own bankruptcy;
  • be subject to a creditors' petition for bankruptcy;
  • be currently involved in an Individual Voluntary Arrangement
  • be subject to a Bankruptcy Restriction Order.

Section 251G provides:

"(1) A moratorium commences on the effective date for a debt relief order in relation to each qualifying debt specified in the order ('a specified qualifying debt').

(2) During the moratorium, the creditor to whom a specified qualifying debt is owed -

(a) has no remedy in respect of the debt, and

(b) may not -

(i) commence a creditor's petition in respect of the debt, or

(ii)otherwise commence any action or other legal proceedings against the debtor for the debt, except with the permission of the court and on such terms as the court may impose.

(5) Nothing in this section affects the right of a secured creditor of the debtor to enforce his security."

The recent test case of R (Cooper and Payne) v Secretary of State for Work and Pensions [2010] EWHC 2162 (Admin) addressed the question of whether recovery of 'accidental' - as opposed to fraudulently obtained - overpayments of benefits during a DRO moratorium was unlawful. It should be noted that the circumstances of the two Claimants were different: one had failed to declare a change in circumstances; the omission on her part led to overpayment of benefits, the other had received a social fund loan but had not repaid the loan.

'Qualifying debts' for the purposes of a DRO are debts for liquidated sums payable immediately or in the future and which are not 'excluded debts'. Overpaid social security benefits do not fall within the categories of excluded debts set out in the Insolvency Rules, rule 5A.2. The excluded debts are secured debts, court fines, child support and maintenance payments, student loans, any debts incurred outside England and Wales and benefit overpayments obtained through fraud.

To come to a conclusion therefore, both the Social Security Administration Act 1992 and the Insolvency Act 1986 had to be read together; it was decided that the right to recover overpayment of social security benefits did not prevent a debtor's right to be relieved from his/her liability during the moratorium as per the insolvency legislation.

In his judgment, Cranston J held that:

(1) In the absence of any indication to the contrary, "remedy" should be given its normal meaning to include methods of self-help such as abatement and set-off, and the Secretary of State was effectively exercising a statutory right of set-off. Making of a debt relief order precludes the Secretary of State for Work and Pensions from recovering overpaid benefits or social fund loans by making deductions from ongoing entitlement to benefit, because in doing so the Secretary of State would be exercising a "remedy in respect of the debt" within the meaning of section 251G(2)(a) of the Insolvency Act 1986.

(2) The 'net entitlement principle' under which, prior to consideration of insolvency law, a claimant was only entitled to receive an amount of benefit net of deductions, did not detract from that conclusion and did not, properly understood, preclude section 251G(2)(a) from having the effect contended for by the claimants. The Secretary of State would be obtaining an unfair preference to the prejudice of the general body of creditors by making the deductions.

(3) Given the differences between the DRO schemes and the differences in language used, it was not possible to attribute an intention by Parliament, in enacting the DRO legislation in 2007, to adopt the conclusion in the cases of Mulvey and Taylor (1997) BPIR 505 QBD that bankruptcy left the Secretary of State's right of recovery unaffected prior to discharge.

Accordingly, the Secretary of State's continued withholding of benefits was found to be unlawful.

The Secretary of State was given permission to appeal. On 12 August 2010 the Court of Appeal granted DWP a stay of the judgment, so presently the DWP and local authorities can recover overpayments. The DWP have also confirmed that they attended a hearing on 20 October 2010 but as yet judgment has not been handed down.

Although Cranston J stated that public policy issues were irrelevant to the legal issues before him, it will be interesting to see how the Court of Appeal will consider the implications of this case in light of the crisis in public finances.

Furthermore, the right to receive benefits is still in place during the moratorium. Whilst it is one thing to hold that a loan applied for and granted by the Secretary of State should be treated as any other loan, different issues arise in the other case. Is the right to be released from recovery of overpayment of benefits, where the cause of the overpayment is the fault of the debtor fair, given that the overpayed state benefits have been claimed at the expense of the taxpayer?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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