Secretary of State for Work and Pensions v Payne and another

The Supreme Court held that the Secretary of State may not continue to recoup Social Fund loans or benefit overpayments by deduction from prescribed benefit payments during the moratorium period following the making of a Debt Relief Order (DRO). The court treated the statutory power to deduct (under the Social Security Administration Act 1992 and equivalent provisions) as a "remedy in respect of the debt" within the meaning of the DRO moratorium in section 251G of the Insolvency Act 1986. By parity of reasoning the court rejected the so-called "net entitlement principle" and held that similar deductions are not permissible after the making of a bankruptcy order. The court distinguished but did not overrule the Scottish House of Lords decision in Mulvey (which rested on Scottish law) and upheld the effect of Balding that a liability to repay is discharged on discharge from bankruptcy or at the end of the DRO moratorium.

Background and parties

• This is an appeal by the Secretary of State for Work and Pensions against decisions below that he could not continue to deduct Social Fund loans and benefit overpayments from current benefits after a debtor obtained a Debt Relief Order (DRO).
• The respondents (Mrs Payne and Ms Cooper) were recipients of either Social Fund loans or overpaid benefits who obtained DROs; the Secretary of State continued to make deductions during the one-year moratorium and the claimants sought judicial review of the legality of those deductions.

Procedural posture

• The appeal came from the Court of Appeal ([2010] EWCA Civ 1431). Cranston J in the High Court had held the Secretary of State could not make the deductions ([2010] EWHC 2162 (Admin)); the Secretary relied on earlier authority (Taylor and Chapman) that deductions could continue in bankruptcy; Balding was authority that a discharged bankrupt’s liability to repay was discharged.

(i) Nature of the claim/application

• The claimants sought judicial review of the Secretary of State’s continued deduction of Social Fund loans and benefit overpayments from prescribed benefits following the making of DROs (and by parity after bankruptcy orders), asserting those deductions were prohibited by the DRO moratorium.

(ii) Issues framed by the court

• Whether recovery by deduction from prescribed benefits is a "remedy in respect of the debt" within section 251G(2) of the Insolvency Act 1986 so as to be prohibited during the DRO moratorium;
• Whether the same analysis applies to deductions after the making of a bankruptcy order (and whether earlier authorities such as Taylor and Chapman should stand);
• Whether decisions such as Balding and Mulvey are affected by that analysis.

(iii) Reasoning and conclusion

• The majority (Lady Hale, Lord Brown, Lord Mance, Lord Kerr, Lord Wilson agreeing with Lady Hale) concluded that the statutory power of deduction is, in ordinary language and in legal effect, a remedy in respect of the debt. Allowing such deductions during the DRO moratorium (or after a bankruptcy order) would be incoherent with the statutory prohibition on remedies and with the statutory scheme that discharges qualifying debts at the end of the moratorium or on discharge from bankruptcy.
• The court rejected the "net entitlement principle" — the notion that deductions are merely adjustments to benefit entitlement rather than enforcement of a debt — and concluded Taylor and Chapman was wrongly decided. The court recognised that Mulvey (a Scottish House of Lords decision) rested on a different statutory and common-law background and therefore was not overruled but indicated doubts about its wider applicability in English law. The court accepted Balding as correctly decided: a liability to repay is released on discharge and cannot be made to depend on the method of recovery chosen by the Secretary of State.
• The court dismissed the appeal, holding deductions could not continue during the DRO moratorium (and the same reasoning applies in the bankruptcy context), and invited any policy change to be effected by legislation.

Appeal dismissed. The Supreme Court held that recovery by deduction from prescribed benefits is a "remedy in respect of the debt" for the purpose of the DRO moratorium in section 251G of the Insolvency Act 1986, and therefore the Secretary of State cannot continue such deductions during the moratorium (and, by parity of reasoning, cannot continue them after the making of a bankruptcy order). The court rejected the "net entitlement principle" and upheld that liabilities listed in DROs (or bankruptcy) are discharged at the end of the moratorium or on discharge; Mulvey (Scottish law) was distinguished but not overruled, and Balding was affirmed as correctly decided in principle.

Appeal from the Court of Appeal [2010] EWCA Civ 1431 (majority holding that deductions could not continue); earlier proceedings in the High Court: Cranston J (claimants succeeded) [2010] EWHC 2162 (Admin). Relevant earlier authorities considered include R v Secretary of State for Social Security, Ex p Taylor and Chapman [1997] BPIR 505 and R (Balding) v Secretary of State for Work and Pensions [2007] EWHC 759 (Admin) / [2008] EWCA Civ 1327.