Deductions from benefits and Debt Relief Orders

Friday 17 December 2010

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The Queen on the application of Payne & Cooper v The Secretary of State for Work and Pensions, [2010] EWCA Civ 1431, 14 December 2010, (Mummery LJ dissenting)

The Court of Appeal held, by a majority of 2:1, that on a proper construction of section 251G(2)(a) of the Insolvency Act 1986, the Secretary of State for Work and Pensions is prohibited from making deductions from ongoing benefits to recover a social security debt listed on a Debt Relief Order (DRO).

The Court distinguished R v Secretary of State for Social Security, ex parte Taylor and Chapman [1997] BPIR 505 which decided that the power to deduct from ongoing benefits in order to recover a social security debt was not affected by a bankruptcy order or the prohibition in section 285 of the 1986 Act. Toulson and Smith L.JJ accepted the respondents' submission that the different wording used in section 251G(2)(a) (in respect of DROs) compared to section 285 (in respect of bankruptcy) was significant, and that the statutory context indicated that a different outcome was intended. The effect of a DRO is to give immediate debt relief, as there is no realistic possibility of creditors ever being paid, whereas in bankruptcy there is some possibility of payment at least in part and, for that reason, there is no debt relief until the end of the process. Smith LJ said:

"Because of these differences in the purpose and effect of the two insolvency schemes, there is no need to strive to construe section 251(G)(2)(a) in the same way as section 285. The two provisions have different wording. In my view, each can and should be given its ordinary natural meaning. By its ordinary meaning, section 251G (2)(a) prevents any listed creditor from exercising any remedy against the debtor; that includes the remedy of set off or deduction at source" (at para [56]).

The judgment also affects the ability of local authorities to recover overpayments of housing benefit and council tax benefit by deductions where these are named as a qualifying debt on a DRO.

For the full judgment, click here.

Mrs Payne was represented by Desmond Rutledge of Garden Court Chambers, led by Richard Drabble QC, instructed by Edwards Duthie Solicitors.


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