Child Maintenance and Enforcement Commission v Beesley & Anor

For an individual voluntary arrangement (IVA), the creditors entitled to participate and bound by the arrangement are confined, by necessary implication from the Insolvency Act 1986 Part VIII scheme, to persons capable of compromising the relevant debt or liability. Child support arrears are bankruptcy debts, but they are excluded from proof and release in bankruptcy and from debt relief orders. The same coherent policy applies to IVAs. Because the Commission could not compromise child support arrears under the law then in force, it was not a creditor for IVA purposes and had no standing under section 262. Alternatively, the IVA unfairly prejudiced its interests by substituting a small dividend for the possibility of full recovery from future income and after-acquired assets.

The Commission appealed from an order of His Honour Judge Pelling QC dated 11 March 2010. The judge declared that the Commission was a creditor capable of being bound by the second respondent’s IVA under section 260(2)(b) of the Insolvency Act 1986. He also set aside the IVA under section 262 on the ground of unfair prejudice. The central issues were whether the Commission was a creditor entitled to vote at, and bound by, the IVA, and whether the IVA unfairly prejudiced its interests.

Etherton LJ delivered the leading judgment. Tomlinson LJ and Ward LJ agreed.

1. Appeal allowed. The Commission was not a creditor entitled to vote at the creditors’ meeting or capable of being bound by the IVA.
2. Child support liability was a bankruptcy debt within section 382 of the Insolvency Act 1986, and the Commission was a creditor for bankruptcy purposes whether or not an application had been made for collection or enforcement. However, arrears were not provable in bankruptcy and were excluded from release on discharge. They were likewise excluded from debt relief orders. This statutory treatment reflected a policy that child support should remain recoverable in full from assets outside the bankrupt estate, including future income and after-acquired assets.
3. An IVA is a consensual arrangement by which creditors compromise or release their rights against the debtor. Against the statutory background of bankruptcy and debt relief orders, the creditors entitled to participate in and be bound by an IVA must therefore be confined to creditors capable of compromising the relevant debt or liability. The Commission had no power under the then-current Child Support Act 1991 to accept less than the assessed arrears. That necessary implication from Part VIII meant that it was not an IVA creditor. The approach in Re Bradley-Hole (A Bankrupt) [1995] 1 WLR 1097 supported that conclusion. Russell v Russell [1999] 2 FCR 137 and Re A Debtor (No. 488 IO of 1996), JP v A Debtor [1999] 2 BCLC 571 did not extend the contrary way.
4. Alternatively, the IVA unfairly prejudiced the Commission within section 262. Unfair prejudice required an evaluative comparison between the creditor’s position under the IVA and its position without it, including in bankruptcy. On the facts, the Commission would have been able to seek recovery of the arrears from future income and after-acquired assets, whereas the IVA provided only 27 pence in the pound over five years.
5. The declaration was replaced by a declaration that the Commission was not a creditor capable of being bound by the IVA under section 260(2)(b). The order setting aside the IVA was also set aside because the Commission lacked standing to make that application.

• Court of Appeal (Civil Division) — appeal allowed. The declaration was substituted, and the order setting aside the IVA was set aside.
• High Court, Chancery Division — by order dated 11 March 2010, His Honour Judge Pelling QC declared the Commission a creditor capable of being bound by the IVA and set the IVA aside for unfair prejudice.