Steele, R (on the application of) v Birmingham City Council

Overpaid social security benefit may constitute a bankruptcy debt even where the authority’s recovery decision is made after the bankruptcy order. A liability to repay may already exist, or may be contingent, where the underlying facts giving rise to recovery existed before bankruptcy and only the extent or method of enforcement remained to be determined. Such a debt is released on discharge unless legislation clearly provides otherwise.

By contrast, benefit paid after the bankruptcy order does not become a bankruptcy debt merely because the underlying award was made beforehand. In that situation the liability arises only when the overpayment is made. Statutory deductions may therefore continue for those post-bankruptcy overpayments.

The claimant was made bankrupt on 14 September 2001 and discharged on 14 September 2003. Birmingham City Council sought to recover overpaid housing benefit, while the Secretary of State sought to recover overpaid income-based jobseeker’s allowance, by deductions from continuing benefit entitlement.

The overpayments arose in different periods. Some benefits had been paid before the bankruptcy order but were determined recoverable afterwards. Other benefits were paid after the bankruptcy order under awards made before it. The central issues were whether the liabilities were bankruptcy debts under the Insolvency Act 1986, and whether recovery could continue after discharge.

1. The claim succeeded in part. The decisions to recover overpayments falling within category (2)—benefit paid before the bankruptcy order, with recovery determined afterwards—were quashed. The parties were left to calculate the relevant amounts. Costs were subject to detailed assessment if not agreed.

2. Before discharge, deductions from ongoing benefit could lawfully be made. Such deductions did not affect the bankrupt’s general creditors because benefits were excluded from the trustee’s control by section 187 of the Social Security Administration Act 1992.

3. The liability to repay category (2) overpayments fell within section 382(1)(b) of the Insolvency Act 1986. The liability had already arisen in substance, and was also a contingent liability within section 382(3). The underlying facts giving rise to recovery had occurred before bankruptcy. Only the extent and method of enforcement remained to be selected by the authorities.

4. The court rejected the argument that overpaid benefits were merely advance payments of benefit which could be deducted from future entitlement. They were payments relating to specific periods which became overpayments because of misrepresentation. There was no express or implied statutory exclusion preventing section 281(1) from releasing the debt on discharge.

5. Category (3) overpayments—benefit paid after the bankruptcy order under a pre-bankruptcy award—were different. At the bankruptcy date there had been no restitutionary obligation because no overpayment had yet been made. Nor was there a contingent liability, since the mistaken calculation might have been corrected before any overpayment occurred. The liability arose only when the overpayment was made, so deductions remained recoverable.

6. The court made no specific determination concerning category (4), which had been conceded by the claimant, and did not quantify the category (2) overpayments.