Secretary of State for Work and Pensions v Payne and Cooper

This Court of Appeal considered whether the Secretary of State may continue to make statutory deductions from ongoing prescribed social security benefits to recover overpayments and Social Fund loans after a debtor has obtained a Debt Relief Order (DRO) under Part 7A of the Insolvency Act 1986. The key statutory provisions were ss 71 and 78 of the Social Security Administration Act 1992 (the deduction powers) and s251G(2)(a) of the Insolvency Act 1986 (the DRO moratorium: creditor "has no remedy in respect of the debt").

The majority held that the ordinary meaning of s251G(2)(a) prevents creditors from exercising any remedy in respect of qualifying debts during the moratorium, and that deduction at source under ss71 and 78 is such a remedy. The court relied on differences in purpose and structure between the DRO scheme (designed to give immediate relief to very low‑income debtors subject to investigation) and the bankruptcy regime, so that the bankruptcy authorities permitting deductions under s285 did not dictate the same result for DROs. Accordingly deductions specified in the respondents' DROs were unlawful during the moratorium period.

Background and parties. The respondents, Mrs Eunice Payne and Mrs Gail Cooper, were recipients of prescribed social security benefits. Each obtained a Debt Relief Order under Part 7A of the Insolvency Act 1986 which specified debts owed to the Secretary of State arising from a Social Fund loan and a benefit overpayment respectively. The Secretary of State continued making deductions from their ongoing benefits under ss71 and 78 of the Social Security Administration Act 1992 to recover those sums. Cranston J quashed the deductions and ordered repayment; the Secretary of State appealed.

Procedural history. The appeals were from Cranston J's judgment in the Administrative Court ([2010] EWHC 2162 (Admin)) and were expedited to this court ([2010] EWCA Civ 1431).

Nature of the application (i). The respondents succeeded in judicial review at first instance; the appeal concerned whether the Secretary of State lawfully continued statutory deductions from prescribed benefits during the DRO moratorium.

Issues framed by the court (ii). The central issue was whether the exercise of the statutory deduction powers under ss71 and 78 amounts to a "remedy in respect of the debt" within s251G(2)(a) of the Insolvency Act 1986 so as to be prohibited during the DRO moratorium, or whether DROs should be treated like bankruptcy orders so that deductions may continue.

Court’s reasoning and decision (iii). The majority (Smith LJ and Toulson LJ) concluded that the natural and ordinary meaning of s251G(2)(a) bars any remedy in respect of a qualifying debt during the moratorium and that deduction at source is such a remedy. They emphasised differences between the DRO scheme and the bankruptcy regime — DROs provide immediate relief and limited creditor notice with a moratorium designed for investigation and possible rescission — so the narrower language of s285 (referring to remedies against the bankrupt's property or person) is not equivalent. The majority therefore dismissed the Secretary of State’s appeal and upheld Cranston J’s orders quashing the deductions and ordering repayment.

Mummery LJ dissented, preferring an interpretation harmonising DROs with the bankruptcy pattern: he regarded the deduction power as not being a "remedy" within the meaning of the moratorium provision and would have allowed the appeal so deductions could continue, applying the established bankruptcy authorities and the "net entitlement" analysis.

Appeal dismissed by majority. The majority held that s251G(2)(a) of the Insolvency Act 1986, by its ordinary meaning and consistent with the purpose of the DRO moratorium, prevents creditors from exercising any remedy "in respect of the debt" during the moratorium and that statutory deductions under ss71 and 78 of the Social Security Administration Act 1992 are such remedies; accordingly the Secretary of State could not lawfully continue the deductions. A dissenting judgment would have allowed the appeal, treating the deduction power as not a barred remedy and seeking conformity with bankruptcy authorities.

Appeal from Cranston J in the Administrative Court (judgment reported as [2010] EWHC 2162 (Admin)); heard in the Court of Appeal and decided [2010] EWCA Civ 1431. The hearing was expedited on the appellant's application.