Secretary of State for Work & Pensions v Balding

This appeal is about the relationship between the provisions of the Insolvency Act 1986, as amended, (the 1986 Act) for the release of bankruptcy debts on the discharge of a bankrupt and the provisions of the Social Security Administration Act 1992 (the 1992 Act) empowering the Secretary of State for Work and Pensions to recover overpayment of social security benefits by deductions from prescribed benefits.

Mr John Balding, who brought these judicial review proceedings and is the respondent to this appeal, claimed and received income support over a number of years. Investigations revealed that he had failed to make disclosure of material facts about his residence at 32 Glencoe Avenue, Leicester and the mortgage interest payable in respect of it. He had been paid too much benefit. On 6 July 1994 an Adjudication Officer determined that the sum of £8680.45 was recoverable from him in respect of the period 19 March 1991 and 29 March 1993.

The calculation of the amount of the overpayment and obligation to pay it back was clearly explained to Mr Balding in the following letter from the Benefits Agency dated 17 October 1994:

“Income Support

We have paid you too much

Dear Mr Balding,

The Adjudication Officer has looked at your claim for Income Support. He has decided that we paid you £8680.45 too much income support from 19 March 1991 to 29 March 1993. This is because you failed to disclose that you were no longer liable to pay the mortgage on your former home. The Adjudication Officer has also decided that you have to pay this money back to us.

The table I have sent you with this letter shows you how the Adjudication Officer worked out this amount.

Adjudication Officers are people who decide whether the law says you are entitled to benefit or not. They also decide how much benefit the law says you are entitled to.

The Adjudication Officer’s decision is written on the sheets Adjudication Officer’s Decision in the words of the law.

If you think the decision is wrong.

You have the right to appeal. The sheet with the Adjudication Officer’s decision on it also tells you how to appeal.

If you do not want to appeal against this decision

Please pay back the £8680.45 as soon as you can.”

Rather than comply with the request to pay the money back Mr Balding appealed. His appeal was unsuccessful, save that in its decision of 8 December 1995 the Leicester Social Security Tribunal re-calculated the amount of the overpayment as £8335.35.

While the appeal was pending Mr Balding had presented his own bankruptcy petition on 15 June 1995. On the following day he was declared bankrupt by order of the Leicester County Court. Three years later, on 16 June 1998, Mr Balding was discharged from his bankruptcy. In the meantime the Secretary of State began recovery by way of deductions from prescribed benefits payable to Mr Balding. The deductions from prescribed benefits continued at the rate of about £7 per week after his discharge from bankruptcy, though this was not continuous because for some time he was not in receipt of prescribed benefits from which a deduction could be made. The bulk of the overpayment had still not been recovered by the Secretary of State when Mr Balding asserted that his liability to make repayment to the Secretary of State had been wiped out as a “bankruptcy debt” on his discharge from bankruptcy under the 1986 Act. The outstanding balance was over £7,500. Mr Balding was declared bankrupt for a second time on 7 August 2003, but his second bankruptcy has no bearing on the issue in this appeal.

The Secretary of State disputed Mr Balding’s claim that the right of recovery had ceased on his discharge from bankruptcy, contending that the determination of the Adjudication Officer under section 71(1) did not create a “bankruptcy debt.” There was a continuing right of recovery under section 71(8) of the 1992 Act by means of deductions from prescribed benefits. The Secretary of State argued that the effect of the authorised deductions was that he paid to Mr Balding his net entitlement to benefit under the statutory social security scheme.

On 12 September 2006 Mr Balding commenced his legal challenge by way of judicial review to the decision of the Secretary of State on this point. He succeeded in the Administrative Court, which quashed the Secretary of State’s decision in letters dated 14 June and 18 July 2006 that he had a right to continue to recover overpayment of income support by deductions from Mr Balding’s prescribed benefits. The court also made a mandatory order requiring the Secretary of State to pay to Mr Balding any sums that were withheld by way of purported recovery of the overpayment from 16 June 1998 onwards. It indicated that no interest was payable on such sums. The case is reported in [2007] 1 WLR 1805.

The Administrative Court granted permission to appeal, as the case raised an important question which the Court of Appeal should consider.

The relevant provisions of the 1986 Act and the 1992 Act are all fully cited by Davis J at paragraphs 13 to 23 of his judgment. Instead of unnecessary repetition, I shall summarise them, quoting the precise legislative language where relevant to the disputed questions of construction.

The judgment also contains a careful review of the authorities. They make it clear that the right of the Secretary of State to make deductions continues after the onset of bankruptcy but, as Davis J correctly observed in paragraph 40, they are not decisions on the effect of discharge from bankruptcy on the right to make deductions. The authorities do not answer, or help us to answer, that question.

In general, a “bankruptcy debt” is released when a bankrupt is discharged: section 281 of the 1986 Act. This does not apply if the debt was incurred in respect of any fraud or fraudulent breach of trust. No fraud was alleged against Mr Balding.

As a general rule and except in so far as the context otherwise requires, a “bankruptcy debt” means a liability to pay money, “including any liability under an enactment”: section 382(4) of the 1986 Act.

Under section 71 of the 1992 Act the Secretary of State is entitled to recover overpayments of income support benefits made as a result of misrepresentations or failure to disclose material facts. Recovery may be by deduction from prescribed benefits. This method of recovery is “without prejudice to any other method of recovery”: section 71(8). The determined overpayment is also recoverable by execution issued from the county court as if it were payable under an order of that court: section 71(9).

For the reasons stated in his excellent judgment Davis J, with whom Laws LJ agreed, held that Mr Balding had been released from his liability to repay the overpayment. The Court quashed the decision of the Secretary of State that he had a continuing right to recover overpayment of income support by means of deduction from prescribed benefits after the discharge of Mr Balding’s bankruptcy.

The court held as follows:

In submitting that the decision under appeal was wrong Mr Kolinsky, who appears for the Secretary of State on the appeal (but did not appear below), contended that a determination under it was a public law decision or a decision “in a public law context.” This decision did not itself give rise to or create a liability to pay money under an enactment. There was therefore no bankruptcy debt capable of being released on the discharge of Mr Balding.

He argued that, on a careful analysis of section 71(1) of the 1992 Act, the determination of the amount of overpayment in fact declares that the overpaid benefit is recoverable for the purposes of the statutory recovery mechanisms in the remainder of the section. The determination is a pre-condition for taking action under the section to recover benefit. The two routes for recovery from the person who has been overpaid are distinct and have different legal consequences.

As for recovery through the county court under section 71(9), Mr Kolinsky accepted that, for these purposes, the amount sought to be recovered can be “equated to” a liability to repay the overpaid benefit and is tantamount to a debt which is capable of being proved in the claimant’s bankruptcy. He agreed that it followed that this debt would be released on Mr Balding’s discharge from bankruptcy. Mr Kolinsky then turned to the second route, which was followed by the Secretary of State in this case.

Mr Kolinsky submitted that, in the case of deductions from ongoing prescribed benefits payable to Mr Balding, a claimant in the position of Mr Balding is only entitled to receive the net amount of the benefit after the deduction is made. In such a case the determination does not create a liability to pay money under the 1992 Act. It is only a statutory pre-condition of the possibility of the Secretary of State taking action, if he is minded to do so, under the statutory scheme for making deductions.

Mr Kolinsky reminded the court that the Secretary of State has a discretion whether to enforce his entitlement to repayment: see B v. Secretary of State for Work and Pensions [2005] 1 WLR 3796 at paragraph 41. He is under no obligation to recover the amount of the overpayment once a determination has been made: R (Steele) v. Birmingham City Council [2006] 1 WLR 2380 at paragraph 17. He also has a discretion as to which method of recovery to adopt, county court enforcement or statutory deduction.

If, as happened here, the Secretary of State exercised his discretion to take the deduction route, which is tightly regulated by the Social Security (Payments on Account, Overpayments and Recovery) Regulations 1988, he is not enforcing a liability against the claimant to pay money under the 1992 Act. He is actually exercising his statutory power to pay the recipient no more than the correct amount of net benefit due to him under the applicable social security legislation. The Secretary of State is only legally obliged to pay the net amount of the benefit to the claimant. The Secretary of State’s exercise of the statutory power to make a net payment to Mr Balding is outside the regime and reach of the 1986 Act, as are the future prescribed benefits from which the deductions may be made.

When asked when and how Mr Balding became legally liable to repay the overpayment, if not under section 71(1), Mr Kolinsky submitted that there was no liability until there was a decision by the Secretary of State to recover the overpayment. Liability to pay then arose on the decision of the Secretary of State to recover it. Further, the decision of the Secretary of State to deduct a sum created a liability only for the amount of the deduction, not for the full amount of the overpayment. There was no liability to pay the whole amount of the overpayment.

In brief, the court below erred in treating the determination itself as creating a liability to pay money under an enactment in the same way as the right to sue for the recoverable overpayment as a debt in the county court. The more sensible and natural analysis of section 71(1) is that the determination is a pre-condition to making deductions. When deductions are made from future prescribed benefits under section 71(8) the Secretary of State is only obliged to pay the net amount of the benefit due to the claimant. This benefit falls outside the operation of the 1986 Act.

I have reached the same conclusion as Davis J for the reasons given in his comprehensive judgment. As Laws LJ recognised in his concise concurrence, there is not much left to discuss in another judgment. There is no point in appeal court judges saying things at length simply for the sake of saying something. What follows is a short statement of my reasons for rejecting Mr Kolinsky’s criticisms of the judgment under appeal.

It is common ground that section 71 of the 1992 Act provides the Secretary of State with two particular methods of recovering overpaid benefits. Both methods presuppose that the Secretary of State has a right to recover the amount determined under section 71(1). The same is true of other methods of recovery expressly preserved by section 71(8). It would be fatuous for Parliament to specify or preserve methods for recovering overpayments, unless the Secretary had a pre-existing right to recover the amount and the overpaid recipient was under a corresponding liability to repay the amount determined under section 71(1).

As for the method of recovery by registration of the overpayment as a debt recoverable in the county court, I think that Mr Kolinsky accepted that, if the Secretary of State pursued this route, there would be a bankruptcy debt which would be released on Mr Balding’s discharge from bankruptcy. Even if Mr Kolinsky did not accept it, it is plainly the correct position in law.

As for recovery by deduction from the prescribed benefits, this method also requires a prior determination of the amount of the overpayment which Mr Balding is liable to repay. If Mr Balding were under no liability to repay the amount in question, it would be futile to arm the Secretary of State with the means of recovery from him.

Further, there is no rhyme or reason in the proposition that, in the case of one method of recovery (the county court), there is a liability to pay money under an enactment, but in the case of the other method (deduction) there is no such liability. In both cases there is a liability to pay money under the 1992 Act. Neither the existence of the right to recover money nor the existence of a liability on the recipient to repay money is dependent on or determined by the available methods of recovery. The Benefits Agency’s letter quoted in paragraph 3 is consistent with this position, in demanding payment of the whole sum.

In my judgment, on the natural and ordinary meaning of section 71, a determination under subsection (1) creates a liability on the recipient to repay the amount overpaid, which is accurately described as a liability to pay money under an enactment (i.e. under the 1992 Act). Liability in this form did not arise under any contract or under any general legal liability to make restitution. This liability has arisen from the statutory determination. It is available as the basis of all methods of recovery. There are no grounds for holding that it is irrelevant for certain other purposes, such as those of the 1986 Act.

Finally, it does not follow from the fact that the Secretary of State has elected to recover the overpayment by the deduction method, rather than by any other method available to him, and to make a net payment of prescribed benefit to Mr Balding, that there was no liability under the 1992 Act on Mr Balding’s part to pay the amount stated in the determination.

I would dismiss the appeal.

I add a statement of the obvious, which may not do any good, but will not do any harm. If, as may well be the case, Parliament thinks that the inability of the Secretary of State to recover overpayments by deduction from prescribed benefits after the discharge of a bankrupt claimant is unacceptable, it is within its power to remedy the legislative loophole. As it is plain under the current legislation that a liability under the 1992 Act to repay overpayments of income support is a “bankruptcy debt” within the 1986 Act, it is beyond the power of the courts to remedy the situation. It is not the role of the courts to perform the functions of Parliament.

I agree.

I also agree.