Secretary of State for Work & Pensions v Payne & Anor

During the moratorium under a debt relief order, a creditor cannot recover a specified qualifying debt by deducting sums from the debtor’s continuing prescribed benefits. The ordinary meaning of remedy in respect of the debt in section 251G(2)(a) of the Insolvency Act 1986 includes deduction at source under sections 71(8) and 78(2) of the Social Security Administration Act 1992. The provision is not narrowed by analogy with bankruptcy, which uses different language and serves a different purpose. The so-called net entitlement principle cannot displace the statutory construction. The appeal was dismissed by a majority.

Mrs Payne and Mrs Cooper obtained debt relief orders under Part 7A of the Insolvency Act 1986. Their debts to the Secretary of State consisted respectively of a Social Fund loan and an overpayment of social security benefit. Each debt was specified in the relevant order, but deductions continued from the respondent’s prescribed benefits during the moratorium.

Cranston J allowed their judicial review applications and held that the statutory deduction powers were a remedy in respect of the debts prohibited by section 251G(2)(a). His judgment, reported at [2010] EWHC 2162 (Admin), was appealed. The central issue was whether a debt relief order had the same effect as bankruptcy on the Secretary of State’s power to continue deductions.

By a majority, the appeal was dismissed. Smith and Toulson LJJ held that the deductions were unlawful during the moratorium.

1. The natural and ordinary meaning of the words in section 251G(2)(a) of the Insolvency Act 1986 included deduction at source from subsequent benefit payments. Such deduction was a remedy in respect of a specified qualifying debt.
2. The debt relief order and bankruptcy schemes could not be treated as identical merely because they appeared in the same Act and shared some structural features. The debt relief order scheme provided immediate debt relief and used the wider expression remedy in respect of the debt. Bankruptcy instead concerned the administration and preservation of the bankrupt’s property. The different wording and purposes justified different consequences.
3. The bankruptcy authorities did not require a narrower construction. In Taylor and Chapman ([1997] BPIR 505), the deduction of a reduced benefit was not a remedy against the bankrupt’s property because the claimant received only a lesser sum. That reasoning did not determine the meaning of the separate words in section 251G(2)(a). Toulson LJ also referred to the historical distinction illustrated by Re Manning ((1885) 30 Ch D 480).
4. The so-called net entitlement principle was not a substitute for statutory interpretation. The entitlement to benefit during the moratorium depended on the language Parliament had used. Comparisons with the apparently anomalous results in Taylor and Chapman and Balding did not justify departing from that language.

Mummery LJ dissented. He considered that the Secretary of State was relying on a specific statutory power to adjust the level of benefit payable, rather than exercising a remedy against the debt. He would have construed the debt relief order provisions harmoniously with bankruptcy and allowed the appeal.

• Court of Appeal (Civil Division) — By a majority, Smith and Toulson LJJ dismissed the Secretary of State’s appeal. Mummery LJ would have allowed it. The decision is reported at [2010] EWCA Civ 1431.
• High Court of Justice, Administrative Court — Cranston J allowed the respondents’ judicial review applications, quashed the deduction determinations and ordered repayment. The judgment is reported at [2010] EWHC 2162 (Admin).