Mulvey v Secretary of State for Social Security

A statutory power to recover a repayable social fund award by deducting sums from income support may continue after the beneficiary’s sequestration. The deduction is not compensation or set-off in bankruptcy where the statutory scheme was already operating, the benefit cannot pass to the permanent trustee, and the deduction does not diminish the estate available to creditors.

Nor is such a deduction diligence against income under section 32(5) of the Bankruptcy (Scotland) Act 1985. The deducted amount is never received by the debtor, and exercise of the statutory power is not a recognised form of diligence under Scots law.

The appellant had received repayable awards from the social fund. The Secretary of State recovered them by deductions from her income support under section 78(2) of the Social Security Administration Act 1992. The deductions continued after her estate was sequestrated.

The Lord Ordinary held that deductions could not continue after sequestration. The First Division of the Inner House of the Court of Session reversed that decision. The appellant appealed to the House of Lords.

The central question was whether the post-sequestration deductions constituted impermissible set-off of a pre-sequestration debt against a post-sequestration obligation, or diligence prohibited by section 32(5) of the Bankruptcy (Scotland) Act 1985.

1. The appeal was dismissed unanimously. Lord Jauncey of Tullichettle delivered the leading speech. Lord Browne-Wilkinson, Lord Mustill, Lord Slynn of Hadley and Lord Lloyd of Berwick agreed with his reasons. The interlocutor of the First Division dated 25 October 1995 was affirmed.

2. Per Lord Jauncey, the common-law rule against setting off a pre-sequestration debt against a post-sequestration obligation protects the general body of creditors. It prevents a creditor from gaining a preference by retaining property which would otherwise enter the sequestrated estate. It did not apply where the retained sum could never form part of that estate and the debtor sought to invoke the rule solely for her own financial advantage.

3. The appellant’s income support was inalienable. Section 187(1) of the Social Security Administration Act 1992 made clear that entitlement to the benefit could not pass to the permanent trustee. The trustee consequently had no right to demand any part of the benefit from the Secretary of State. The theoretical power under section 32(2) of the Bankruptcy (Scotland) Act 1985 to obtain surplus income did not alter that conclusion.

4. The deductions were made under a statutory scheme which had begun before sequestration. Before sequestration, the appellant could demand only her gross benefit less the notified deduction. Continued exercise of the statutory power under section 78(2) was unrelated to the sequestration, did not enforce a right against the trustee and did not confer a preference at the expense of other creditors. It was therefore neither compensation nor set-off in bankruptcy.

5. Section 32(5) of the Bankruptcy (Scotland) Act 1985 did not prohibit the deductions. First, it concerned income received by the debtor, whereas the deducted sums were never received. Secondly, statutory deduction was not diligence under Scots law. It was neither arrestment nor poinding, adjudication nor inhibition.

1. House of Lords: The appellant’s appeal was dismissed unanimously, and the First Division’s interlocutor of 25 October 1995 was affirmed.

2. First Division of the Inner House of the Court of Session: Held that the Secretary of State was entitled to continue deducting repayments from income support after sequestration.

3. Lord Ordinary: Held that the Secretary of State was not entitled to continue the deductions after sequestration.