Secretary of State for Work and Pensions v Payne and another

A statutory entitlement to social security benefit is an entitlement to the amount awarded. A pre-existing liability for a Social Fund loan or overpaid benefit remains a separate debt; there is no principle that the claimant is entitled only to benefit net of deductions.

Deduction from current benefit is a self-help remedy in respect of that debt. It is therefore barred during the moratorium following a debt relief order under section 251G(2) of the Insolvency Act 1986. The same reasoning applies after a bankruptcy order under section 285(3). At the end of the relevant period, the outstanding debt is discharged. A different result would require legislative amendment.

Two benefit claimants obtained debt relief orders which listed, respectively, a Social Fund loan and an overpayment of incapacity benefit as qualifying debts. The Secretary of State nevertheless deducted repayments from their current benefits during the statutory moratorium.

Cranston J held that the deductions were unlawful: [2010] EWHC 2162 (Admin). A majority of the Court of Appeal upheld that decision: [2010] EWCA Civ 1431. The Secretary of State appealed.

The central issue was whether recovery by deduction constituted a “remedy in respect of the debt” prohibited during the moratorium by section 251G(2) of the Insolvency Act 1986. The appeal also required the court to consider the corresponding position during bankruptcy and after discharge.

1. The appeal was dismissed unanimously. Lady Hale gave the leading judgment, with which Lord Kerr agreed. Lord Brown agreed fully. Lord Mance concurred, although with misgivings about the practical consequences. Lord Wilson agreed for Lady Hale’s reasons and associated himself with the concurring observations.

2. There is no “net entitlement principle”. A claimant has a statutory entitlement to the benefit awarded. Liability to repay an overpayment or Social Fund loan arises independently of any later benefit entitlement and of the Secretary of State’s chosen method of recovery. A loan or overpayment cannot generally be treated as an advance payment of an unrelated future benefit: per Lady Hale at [21].

3. On the ordinary meaning of section 251G(2) of the Insolvency Act 1986, deduction from current benefit is a “remedy in respect of the debt”. Self-help remedies fall within that expression. Otherwise the separate prohibition on commencing legal proceedings would add nothing, and the statutory scheme would irrationally prohibit one method of recovery while permitting another: per Lady Hale at [22].

4. The same analysis applies to section 285(3) during bankruptcy. Differences in the language and purposes of the bankruptcy and debt relief order regimes do not alter the nature of the liability or the deduction power. R v Secretary of State for Social Security, Ex p Taylor and Chapman was wrongly decided. The Secretary of State loses the power to deduct upon a bankruptcy order just as upon a debt relief order: per Lady Hale at [23].

5. Mulvey v Secretary of State for Social Security was distinguishable because it depended upon Scottish common law and the Bankruptcy (Scotland) Act 1985, which lacked an exact counterpart to the English provisions. The court could not overturn that Scottish decision in an English appeal, but placed a question mark against its reasoning insofar as it supported net entitlement: per Lady Hale at [24]. Bradley-Hole v Cusen remained distinguishable because an overpayment of rent could sensibly be treated as conferring a right to occupy rent-free until exhausted: at [25].

6. R (Balding) v Secretary of State for Work and Pensions was rightly decided. A debt cannot exist or cease to exist according to the creditor’s chosen recovery method. Discharge from bankruptcy releases the debtor from the outstanding liability, and the same principle applies when a debt relief order moratorium ends: at [26], [42]–[43]. The Government could legislate to exclude these liabilities from qualifying or bankruptcy debts, but that policy decision was not for the court.

1. United Kingdom Supreme Court: Dismissed the Secretary of State’s appeal unanimously and affirmed that deductions could not continue during the debt relief order moratorium: [2011] UKSC 60.
2. Court of Appeal: By a majority, upheld the High Court’s decision that the Secretary of State could not continue the deductions: [2010] EWCA Civ 1431, [2011] 1 WLR 1723.
3. High Court: Cranston J held that the deductions were unlawful: [2010] EWHC 2162 (Admin), [2010] BPIR 1389.