Test case on the power to recoup social security debts by deductions where the claimant is insolvent under a debt relief order

Wednesday 14 December 2011

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Secretary of State for Work and Pensions v Payne and another [2011] UKSC 60

The Supreme Court has ruled that the Secretary of State for Work and Pensions has no power to recoup Social Fund loans or overpayments by deductions from existing awards of benefits where the claimant is subject to a debt relief order and that the same principle applies to bankruptcy orders - Ex p Taylor and Chapman [1997] overruled

The Supreme Court has today (14 December 2011) held that as a matter of statutory construction the Secretary of State has no power to recoup Social Fund loans and benefit overpayments by deduction from current benefit payments where a debt relief order ('DRO') had been made, and the social security debt is one of the debts listed on the DRO, thereby upholding the decisions of Cranston J in the High Court and the majority of the Court of Appeal (Smith and Toulson LJJ).

The Secretary of State had argued that the statutory power of deduction is not a "remedy" within the terms of the insolvency legislation but is rather an adjustment to the level of benefit which the claimant is entitled to receive and that Mrs Payne and Ms Cooper were only ever entitled to the net sum (after the deduction was made); and both the loan and the overpayment were to be regarded as payments in advance of future benefit. The Court rejected this analysis saying that: (i) the claimant to social security benefit has a statutory entitlement to the amount of benefit which is awarded by the Secretary of State or a tribunal; (ii) such awards cannot regarded as an advance payment of future benefit as the claimant's circumstances may change; and (iii) the liability to repay Social Fund loans or overpayments arises independently of the claimant's entitlement to any benefit from which the Secretary of State may later decide to recoup it (para [21]).

The Court went on to say that, in order to bring coherence to this area of the law, the same principle applied to the bankruptcy scheme. Consequently, the Secretary of State has no power to recoup social security debts on the making of a bankruptcy order, which meant R v Secretary of State for Social Security, Ex p Taylor and Chapman [1997] BPIR 505 (HC) was wrongly decided (para [23]). Finally, the Supreme Court said that R (Balding) v Secretary of State for Work and Pensions [2007] EWCA Civ 1327, [2008] 1 WLR 564 (CA) was rightly decided when it held that a social security debt was wiped out when the bankrupt was discharged. The Court said Balding applied equally to the discharge of a DRO (para [26]).

The Supreme Court's ruling also affects the power to recover overpayments of Housing and Council Tax Benefit by local authorities (see Urgent Bulletin HB/CTB U6/2011 issued at the time of the Court of Appeal decision) and Tax Credits administered by HM Revenue and Customs. The Supreme Court was told that considerable sums of money owed to HMRC, the Secretary of State and other public bodies are listed in DROs. The figures quoted were respectively nearly £9m to HMRC, nearly £8m to the Secretary of State, of which over £6m was in respect of Social Fund loans, and £20.7m to 'other public bodies'. Lady Hale SCJ said:

"It would, of course, be open to the Government to promote delegated legislation to exclude these liabilities from the definition of "qualifying debts" in the DRO scheme altogether (and, indeed, to seek corresponding amendment to section 382 with regard to "bankruptcy debt"), but that would raise policy issues which are not for this Court." (At para [29]).

For Urgent Bulletin HB/CTB U6/2011, click here.

For press summary, click here.

For the judgment, click here.

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