Recovery of debts by deductions from benefits and Debt Relief Orders
Secretary of State for Work & Pensions v Payne & Anor  EWCA Civ 1431 (14 December 2010) held that it was unlawful for DWP to recovery debts by deductions from future benefit entitlement.
Debt Relief Orders (DRO)s were introduced in April 2009 as an alternative to bankruptcy for those debtors with under £15,000 of debt and little or no assets to realise with which to pay their debts. If a DRO is made there is a moratorium period of one year during which the debts specified in the order are frozen and the creditor “has no remedy in respect of the debt” (s.215G of the Insolvency Act 1986).
In R (Payne & Cooper) v Secretary of State for Work and Pensions  EWHC 2162 (Admin), the court was asked to decide whether a DRO moratorium prevented the Department for Work and Pensions (DWP) from reclaiming overpaid benefits and repayment of a budgeting loan, by deducting them from future entitlement to benefits. The DWP tried to rely on a previous case-law on the relationship between social security and insolvency. In R v Secretary of State for Social Security, ex parte Taylor and Chapman  BPIR 505 the court had decided that recovery of debts by future deductions from benefit could not be affected by a bankruptcy order and that the DWP were right to continue to recover their debt in this way, regardless of the bankruptcy order. Cranston J In Payne & Cooper however, decided that the DWP were unable to reclaim the debts listed on a DRO as the DRO deprives a creditor of “any remedy” for the duration of the DRO. This prohibition was a more wide ranging definition than that for bankruptcy.
In Secretary of State for Work & Pensions v Payne & Anor  EWCA Civ 1431, the Court of Appeal, by a majority, dismissed the DWP’s appeal against Cranston J’s judgment (Mummery LJ dissenting). The Court 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 in respect of DROs was intended. The held that 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 was some possibility of payment at least in part and, for that reason, there was no debt relief until the end of the process:
“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 ).
The Court therefore dismissed the appeal and confirmed that section 251(G)(2)(a) does not permit the Secretary of State make deductions at source in respect of a debt listed in a DRO.
The effect of the judgment is that deductions currently being made by the DWP where it relates to a qualifying debt on a DRO must cease. The judgment also applies to local authorities recovering overpayments of housing benefit and council tax benefit by deductions where these are listed on a DRO. The Court has stayed the requirement to repay deductions already made. pending the determination of any appeal by the DWP to the Supreme Court (click here for transcript).