Secretary of State for Work & Pensions v Payne & Anor

This appeal is from orders of Cranston J dated 26 July 2010 based on his judgment [2010] EWHC 2162 (Admin) in two test cases. He allowed judicial review applications made by the respondents challenging the lawfulness of deductions made from their on-going social security benefit entitlements. The appellant Secretary of State made the deductions pursuant to ss 71 and 78 of the Social Security Administration Act 1992 (the 1992 Act). The judge granted leave to appeal on the basis that it “was a matter of public importance and the Secretary of State’s submissions were, on the authorities, arguable”.

Section 71 creates an entitlement in the Secretary of State to recover sums from benefit claimants. It provides that:-

“(1)

Where it is determined that, whether fraudulently or otherwise, any person has misrepresented or failed to disclose any material fact and in consequence of the misrepresentation or failure-

(a)

payment has been made in respect of a benefit to which this section applies; or

(b)

any sum recoverable by or on behalf of the Secretary of State in connection with any such payment has not been recovered

the Secretary of State shall be entitled to recover the amount of any payment which he would not have made or any sum he would have received but for the representation or failure to disclose.”

Section 71(8) confers a specific power to make deductions from prescribed benefits in order to recover public money:-

“Where any amount paid…is recoverable under-

(a)

subsection (1) above”..

“it may, without prejudice to any other method of recovery, be recovered by deduction from prescribed benefits.”

In the case of the respondent Mrs Gail Cooper the deductions were made from her incapacity benefit, a “prescribed benefit” that she continued to receive, in order to recover an overpayment of benefit in the sum of £1,195.07 which occurred when, while in receipt of those benefits, she worked part time.

Section 78 provides for the recovery by the Secretary of State of Social Fund loans: -

“(1)

A social fund award which is repayable shall be recoverable by the Secretary of State.

(2)

Without prejudice to any other method of recovery the Secretary of State may recover an award by deduction from prescribed benefits…”

The respondent Mrs Eunice Payne obtained a Social Fund budgeting loan of £843 in September 2007. She was liable to repay that loan. Deductions started to be made in August 2009 from her income support, which is a “prescribed benefit”, to recover the Social Fund loan.

The core question is whether the making of a Debt Relief Order (DRO), which is available under Part 7A of the Insolvency Act 1986, as amended (the 1986 Act) as an alternative to the established process of bankruptcy, has a different impact than a bankruptcy order under the same Act on the statutory power of the Secretary of State to continue making the deductions from prescribed benefits.

Mrs Payne applied for and obtained a DRO in August 2009. Her Social Fund loan was specified in her DRO. The Secretary of State started to make deductions from her income support after the DRO was made.

Mrs Cooper applied for and obtained a DRO on 13 January 2010. The overpayment was one of the debts specified in her DRO. The Secretary of State continued to make deductions from her incapacity benefit.

In the case of a bankruptcy order against a debtor in receipt of benefit the authorities indicate that the Secretary of State has specific power, during the period of the bankruptcy order, to continue to make deductions from on-going entitlements, in order to recover an overpayment of benefits or a Social Fund Loan. This is so even though the 1986 Act provides that : (a) during a period of bankruptcy a creditor has no remedy against the property or person of the bankrupt in respect of any debt or liability to which a person is subject at the commencement of the bankruptcy, and (b) discharge from bankruptcy releases the bankrupt from all debts to which the bankrupt was subject at the commencement of the bankruptcy (bankruptcy debts) including liability for overpayments and for repayment of Social Fund Loans. They fall within “bankruptcy debts” which are released on discharge from bankruptcy: s281.

It is provided by s285 that:-

“(3)

After the making of a bankruptcy order no person who is a creditor of the bankrupt in respect of a debt provable in the bankruptcy shall-

(a)

have any remedy against the property or person of the bankrupt in respect of that debt, or

…

(4)

Subject as follows subsection (3) does not affect the right of a secured creditor of the bankrupt to enforce his security.”

The specific statutory power of deduction from the bankrupt’s social security benefits, which, by virtue of s187 of the 1992 Act, are not vested in the trustee in bankruptcy for the benefit of creditors, is unaffected by that section. It is submitted on behalf of the Secretary of State that the controlling principle is that a recipient of social security benefits is only entitled to receive the amount of the benefit left after statutory deductions have been made (“the net entitlement principle.”)

The issue on the appeal is whether, as a matter of statutory interpretation, Cranston J was wrong to hold that the power to make deductions from the on-going benefits of Mrs Payne and Mrs Cooper ceased to be available when they became subject to DROs under the 1986 Act.

DROs made their appearance as a new form of personal insolvency procedure when they were introduced by amendments to the 1986 Act with effect from the 24^th February 2009: see the Tribunals, Courts and Enforcement Act 2007 s108 and Schedule 17 and the Insolvency Amendment Rules 2009 (SI 2009/642). They sit beside and complement bankruptcy. They form part of a legislative programme of debt-solution procedures, such as Debt Repayment Plans, Administration Orders and Individual Voluntary Arrangements, which provide a flexible choice of paths for the relief of those who are unable to pay their debts. The Consultation Paper produced by the Department for Constitutional Affairs in July 2004 (“A Choice of Paths - Better options to manage over-indebtedness and multiple debt”) estimated that in 2002 net lending rose by almost £10bn per month and that adults in this country owed an average of £18,000 each. The Paper predicted that if, in the context of “the historically high levels of borrowing”, there should be “an economic downturn….a far greater number of people would be at risk of financial difficulties.”

The scheme, structure and purpose of DROs broadly reflect the regime of bankruptcy orders: the effect of the order is to stay enforcement of the debts by creditors and the debts are discharged after a specified period (1 year in the case of DRO). While the order is in force the debtor is subject to similar restrictions and obligations as in bankruptcy. The main differences are that the DRO process does not require the intervention of the court and it is accessible to people who do not have the financial means to pay the higher fee for access to the bankruptcy procedure i.e. debtors who cannot afford to make themselves bankrupt. It is less elaborate, being initiated administratively by the Official Receiver on the application of the individual debtor via a debt advisor who is an “approved intermediary” and on the basis of specified criteria as to assets, income and liabilities. Unlike bankruptcy there is no trustee in whom the assets of the debtor are vested for distribution to creditors. DROs are thus meant for those over-burdened with debt who have relatively low levels of liabilities, no assets in excess of £300 in value and no monthly surplus income over £50 with which to come to an arrangement with creditors. The applicant must not have been the subject of a DRO within the previous 6 years.

An individual who is unable to pay his debts may apply via an “approved intermediary” to the Official Receiver for a DRO under Part 7A of the 1986 Act. The DRO is made in respect of the applicant’s “qualifying debts” up to a maximum of £15,000. Overpayments of social security benefits and Social Fund loans are “qualifying debts”. (Secured debts are excluded, as are some other kinds of debt). The debts of Mrs Cooper and Mrs Payne to the Secretary of State were specified as such in the respective DROs obtained by each respondent.

The DRO has the effect of imposing a moratorium on “qualifying debts” for a period of 1 year at the end of which the debt is discharged from the specified qualifying debts: ss 251H and 251I.

Section 251G, which broadly mirrors s285, provides that, during the moratorium, the creditor to whom the specified qualifying debt is owed “has no remedy in respect of the debt” (subs (2)(a)) and may not commence a creditor’s petition in respect of it or otherwise commence any action or other legal proceedings against the debtor for the debt, except with the permission of the court (subs (2)(b)).

The judge quashed the determinations of the Secretary of State in respect of deductions and ordered the repayment by 10 August 2010 of the sums deducted from the social security benefits of Mrs Payne and Mrs Cooke. He refused a stay. The hearing of the appeal was expedited by order of Stanley Burnton LJ on 9 August 2010 with a stay on the judgment in the meanwhile.

In a careful and clearly reasoned judgment Cranston J concluded that the 1986 Act provisions governing DROs operated differently from the bankruptcy provisions as regards the statutory power of deduction under the 1992 Act. That power is a “remedy” for the purposes of s251G. It is not available to the Secretary of State during the moratorium period. Approaching the matter as one of statutory construction, he said:-

“47.

.. In my view, the construction of section 251G(2)(a) of the Insolvency Act 1986 is such that the term “remedy” includes the Secretary of State’s powers under sections 71 and 78 of the Social Security Administration Act 1992 to recover overpayment of social security benefits and repayment of social fund loans. Thus, when a benefit recipient has obtained a debt relief order specifying the overpayment or loan as a debt covered by the order the Secretary of State is also precluded from pursuing that overpayment or loan during the moratorium period.”

The judge also held that “the net entitlement principle” was not determinative of the case:-

“41.

No doubt before a debt relief order is made a social security recipient may be subject to deduction from ongoing benefits for overpayment and repayment of a social fund loan. His or her entitlement is to a net benefit payment. That is the effect of the social security legislation, in particular sections 71 and 78 of the Social Security Administration Act 1992. For the Secretary of State to continue to make deductions after the debt relief order is made, however, would be to exercise a remedy in respect of the debt which the benefit recipient owes. That in my view is prohibited by the plain words of section 251G (2)(a) of the Insolvency Act 1986.”

Cranston J rejected the Secretary of State’s submission that Parliament intended that the deduction powers were to be operated in the same way in relation to DROs as the courts had decided in the case of bankruptcy. He held that the language of s251G(2)(a) was different from s285(3)(a) and that the purpose of DROs and bankruptcy differed in material respects.

Mr Sheldon’s detailed submissions in support of the Secretary of State’s appeal essentially make the following points.

The important similarities of statutory language, structure and purpose of the DRO and bankruptcy regimes in the 1986 Act are such that the evident purpose of Parliament was that the deduction powers should operate in the same way for both regimes. On the judge’s approach they operate differently so that, surprisingly, a benefits claimant who obtains a DRO is put in a better position than a benefits claimant who is bankrupt and a benefits claimant who is not bankrupt.

For the sake of coherence, the court should take account of how the relevant deduction powers apply in a bankruptcy where the regime is in key respects similar as regards the identification of debts affected, the imposition of a moratorium and the discharge of debts at the end of that moratorium period. There is no objective justification for a difference in treatment of the power to deduct given the backdrop against which Parliament enacted the DRO provisions.

The concept of “remedy” as used in ss 251G(2)(a) and 285(3)(a) is not apt to embrace the exercise of the statutory power of deduction and according to the bankruptcy jurisprudence it does not include that power: see R v. Secretary of State for Social Security, ex p Taylor and Chapman [1997] BPIR 505 at 513H; Mulvey v. Secretary of State for Social Security 1997 SC (HL) 105 at 109D; Razzaq v. Pala [1997] 1 WLR 1336 at 1343 E-G; and R(Balding) v. Secretary of State for Work and Pensions [2007] 1 WLR 1805 (DC); affirmed on appeal [2008] 1 WLR 564 (CA).

Finally, “the net entitlement principle” should be applied. The benefit claimant is only entitled to the net amount of the benefit which is paid out of public funds for the purpose of providing state support for those in need. The deduction power gives effect to that principle. Otherwise a benefit claimant who obtains a DRO would, during the moratorium period, receive more benefit than a bankrupt benefit claimant would receive either before or after he became bankrupt. There is no good reason for such differences of outcome.

In his excellent submissions Mr Richard Drabble QC appearing for the respondents seeks to uphold the judgment of Cranston J as correct in all respects. I will summarise the points canvassed by him before discussing my conclusions.

The DRO provisions should be construed afresh as a new scheme. They are not just insertions into same legislation in order to extend the bankruptcy regime. The Barras principle (Barras v. Aberdeen Steam Trawling and Fishing Co Ltd [1933] AC 402) that Parliament intends a word or term interpreted in a judicial ruling (e.g.“remedy” in s285(3)(a) of the 1986 Act) to have the same meaning in the same or a similar context does not apply to this case.

I agree with Mr Drabble that proper consideration must be given to the differences between DROs and bankruptcy orders. The fact that they are in the same Act and that there are similarities in the language and structure of the provisions do not necessarily mean that they have the same legal consequences. In particular I note the linguistic difference between s251G(2)(a) which says that the creditor to whom a specified qualifying debt is owed “…has no remedy in respect of the debt…” and s285(3)(a) which says the in the case of a bankrupt no creditor of the bankrupt in respect of a provable debt shall have “…any remedy against the property or person of the bankrupt in respect of that debt…”

Mr Drabble says that it is wrong to suggest that the benefit recipient subject to a DRO would obtain windfall amounts by virtue of the halting of deductions from benefit. The amount of the deduction is an amount of benefit to which the recipient is entitled under the decision made by the Secretary of State and which the recipient would be entitled to receive in the absence of a power to make deductions. The whole purpose of a DRO is to provide the debtor with relief from debt so that it is inherent in it that those coming within the scheme will be better off as a result.

The application of “the net entitlement principle” is disputed as being unsupported by the case law and contrary to the structure of the social security legislation. It is argued that, properly understood, the position under social security legislation is that the claimant is entitled to the amount of benefit fixed by an award and the amount of the award not altered if deductions are made. The use of the machinery in ss71 and 78 of the 1992 Act to deduct from that entitlement is a remedy by way of statutory set-off for the recovery of overpayments.

Finally Mr Drabble contends that the authorities cited by the Secretary of State do not provide the answer to the proper interpretation of s251G(2)(a).

Bradley-Hole v. Cusen [1953] 1 QB 300 at page 310 was cited as an instance of the exercise of a statutory right of deduction similar to s71 of the 1992 Act not being the exercise of a remedy contrary to the bankruptcy provisions. It is not an authority on s251G. The tenant exercised a statutory right to recover overpaid rent by withholding ongoing payments of rent from a landlord who became bankrupt. The trustee in bankruptcy argued unsuccessfully that the predecessor of s285 of the 1986 Act (s 7 of the Bankruptcy Act 1914) precluded the tenant from making the deductions. The Court of Appeal held that the trustee could not be in a better position than the landlord against whom the tenant was entitled to be treated as having paid rent in advance. As the landlord had no right to the rent being withheld, the tenant was not exercising any remedy against him.

Mulvey is not an authority on s251G. It is a case on the Scots bankruptcy legislation and the operation of the doctrine of compensation, which was held to be inapplicable to the right of the Secretary of State to make deductions from income support benefit to recover loans from the social fund prior to bankruptcy.

In Taylor and Chapman Keene J dealt with the effect of the exercise of a remedy in s285(3)(a) and gave it what Mr Drabble described as a narrow meaning. He also appeared to decide that deduction was not a remedy against the property of the debtor, as the claimants had no property right in the amount of the benefit. But that does not assist, as s251G (2)(a) precludes all remedies in respect of the debt, not just those against “the property or person” of the debtor. As this is the closest authority to the present case, I return to it in a more detailed discussion below.

Balding is a bankruptcy case relating to recovery of overpayment of benefits. The issue was whether the claimant was released from liability on his discharge from his bankruptcy and it was held that he was and the Secretary of State lost the judicial review application made by the claimant. Mr Drabble relies on it as indicating that the correct approach is to decide whether the provision under consideration in the 1986 Act has the effect of rendering the deductions unlawful. In the case of s251G(2)(a) it does, as the Secretary of State is exercising a remedy in respect of the social security debts owed and listed in the DROs.

Prior to the DROs obtained by Mrs Payne and Mrs Cooper the Secretary of State had a specific statutory power to make deductions from their prescribed benefits. It is not suggested that there was any legal basis for challenging the lawfulness of the deductions for the recovery of public money.

The object of Mrs Payne and Mrs Cooper in applying for and obtaining the DROs was to secure a breathing space for a moratorium period at the end of which they would be relieved of their debts. The DROs were not made for the purpose of securing for them a larger amount of social security benefits during the currency of the DROs than they had received or would have received before obtaining the DROs.

Reliance on s251G(2)(a) as a ground for invalidating the continuation in force of the statutory power to make deductions is misconceived. The purpose of that section (similar to the purpose of s285 in the case of bankruptcy orders) in placing an embargo on creditors’ remedies during the moratorium period is to maintain the integrity of the insolvency process. It is not the purpose of the section to enhance the amount of the social security benefits paid to the debtor during that period or to remove the specific statutory power conferred on the Secretary of State to make deductions from prescribed benefits in order to recover public money.

In exercising the power to make deductions either before or after the DROs the Secretary of State was not exercising a “remedy” in respect of the debt of Mrs Payne or of Mrs Cooper. He was simply relying on a specific statutory power to adjust the level of the benefits payable out of public funds by taking proper account of their liability for overpayment of income support or for the repayment of the social fund loan. Mrs Payne and Mrs Cooper would cease to be entitled to the full amount of the social security benefit or social fund loan to which, in the absence of an authorised adjustment, they would have been entitled. The 1986 Act did not remove that specific statutory power either expressly or by the sidewind of imposing a restriction on creditors’ remedies in respect of debts during the moratorium.

This outcome in the case of DROs under the 1986 Act is consistent with the outcomes in the case of benefit claimants who become bankrupt under the 1986 Act. Both as a matter of insolvency law and social security law there is no good reason why the Secretary of State would have the power to make deductions from the prescribed benefits of a bankrupt but not from the prescribed benefits of a debtor subject to a DRO. In each case the Secretary of State exercises that power in order to recover public money.

There is no direct or binding authority on the interpretation of s251G and its application to benefit claimants subject to a DRO. On a literalist approach there is a sense in which the power of deduction may be characterised as a “remedy” in respect of the debt i.e the overpaid benefits and overdue social loans. However, the trend of the bankruptcy order authorities supports an interpretation that the statutory power available to the Secretary of State is not a “remedy” in respect of the debt within s251G(2(a) and that the Secretary of State may exercise the statutory power to make deductions from prescribed benefits after the bankruptcy order.

On this point I find the reasoning of Keene J in Taylor and Chapman most persuasive. The applicants in that case were social security claimants whose benefits were being deducted at source under the 1992 Act to recoup a loan from the social fund and an overpayment of income support. They became bankrupt. The question on their application for judicial review of the deductions was whether the statutory power was inhibited by the operation of s285(3)(a) of the 1986 Act. In deciding that, on a purposive approach to the legislation, Parliament had not intended bankrupts to be immune from the power of deduction, Keene J held that in these cases it could not be said that the Secretary of State was exercising a “remedy” against the property of the bankrupt within the meaning of s285(3)(a) and that the deductions did not fall within that provision. He agreed (at page 512 B-E) with counsel for the Secretary of State that the approach of the Court of Appeal in Bradley-Hole to deductions of rent by the tenant to a bankrupt landlord was applicable and that, in making the deduction, the Secretary of State is to be treated, as against the claimant, as having paid benefit in advance. The fact that social security benefits do not form part of the bankrupt’s estate (cf rent payable to a bankrupt landlord) was not, Keene J held at page 512F, a reason for holding that the outcome should be different.

Keene J accepted the submission (at page 512G-H) that the court in Bradley-Hole also seems to have been saying that the tenant making the deductions is not exercising a remedy against the landlord, but is simply refraining from making a payment and can then use the pre-existing debt to him as a defence to any action for the rent: s285(3) does not deprive a person of a defence to a claim by a bankrupt.

In any event Keene J held (at page 513A-D) that the Secretary of State was not, in making the deductions, seeking to go against the property of the bankrupt within s285(3). On the approach of Lord Clyde in the Inner House in Mulvey 1996 SC 8 at page 15H-16B the benefit claimant only had an entitlement to the net amount of the benefit, not to the full amount. In making deductions, the Secretary of State is not exercising a right to retain a payment due to the claimant: it is a case of deduction at source in calculating the amount of benefit that the claimant is to receive rather than a case of clawback of a payment due to the claimant.

Finally, there is a lot of good sense in Keene J’s observation (at page 513G) that:

“It is difficult to see why someone who goes bankrupt should be in a better position so far as state benefits are concerned than some who does not.”

The same could be said in the case of DROs. As DROs have been inserted into and associated with the existing insolvency framework established by the 1986 Act, I think that the adoption of an interpretation that is harmonious with the position in bankruptcy is more likely to reflect the legislative purpose of the provision than one that is not. As the concept of “remedy” has already acquired a particular significance in the pattern of personal insolvency law the court should not ignore that: indeed, it is preferable to stay within that established pattern and avoid a probable misinterpretation of the more modern extension of personal insolvency in the form of DROs.

I have reached a different conclusion from Lady Justice Smith and Lord Justice Toulson. I would allow the appeal. For the above reasons the judge was wrong to hold that the DROs obtained by the respondents rendered it unlawful for the Secretary of State to continue to make deductions from their prescribed benefits so as to recover the overpayments and the social fund loan during the moratorium period provided for under s251G of the 1986 Act.

I have read the judgments of Mummery LJ and Toulson LJ in draft and am grateful to them for their expositions of the facts and the law. They reach differing conclusions. Mummery LJ’s judgment expressed the view that I had formed by the end of the hearing and I was minded simply to say that I agreed with it. That was so until I read the judgment of Toulson LJ which has given me cause to reconsider and to change my earlier view. I will explain my reasons quite briefly as the arguments have been canvassed very fully in the other two judgments.

The question is whether or not section 251G(2)(a) of the Insolvency Act 1986 as amended, which provides that, during the moratorium after a DRO has been made, the creditor ‘has no remedy in respect of the debt’ should be construed so as to prevent the Secretary of State from deducting at source an amount in respect of the debt from each payment of benefit to which the debtor is entitled. It is established that an analogous provision at section 285 of the Act which provides that during a bankruptcy no creditor shall ‘have any remedy against the … property of the bankrupt’ has been construed so as to permit the Secretary of State to deduct an amount in respect of the debt from each benefit payment: see R v Secretary of State for Social Security, ex parte Taylor and Chapman [1997] BPIR 505.

Mr Sheldon for the Secretary of State submitted (and Mummery LJ accepted) that the two provisions should be construed in conformity with each other so as to produce a consistent result whether the debtor is undergoing bankruptcy or debt relief by DRO. Parliament must have intended that the two methods of dealing with insolvency, bankruptcy and debt relief by DRO, should operate in a consistent way. The difference in wording between the two provisions is not such as suggests that the effect should be different. To hold that the two provisions have a different effect would result in an anomaly: during the moratorium following a DRO, the debtor would be better off than a debtor undergoing bankruptcy and one who has not yet been declared bankrupt.

Mr Drabble for the respondents submitted (and Toulson LJ accepted) that the difference of wording is significant and intentionally produces a different result. The ordinary natural meaning of the words ‘has no remedy in respect of the debt’ would be to prevent any deduction by the Secretary of State because deduction at source would ordinarily be regarded as a remedy, the remedy of set-off. On the other hand, the words ‘shall (not) have any remedy against the property of the debtor’ would allow the Secretary of State to deduct at source because the benefit in payment is not the property of the debtor.

On reflection, I have come to accept Mr Drabble’s submissions. I do see that, other things being equal, one would wish to construe two similar provisions within one statute in the same way. But I am now satisfied that other things are not equal. The scheme of bankruptcy is different from the scheme of debt relief by DRO. Bankruptcy entails the administration of the bankrupt’s property by his trustee, a process which takes some time, and there is no relief from the debts until that process has been completed. By contrast, a DRO does not entail any such administration; there is no property to administer. The purpose of the moratorium is quite different from the purpose of the period of bankruptcy. Its purpose is to allow for objections to be considered. If objections are sustained, the order might be rescinded altogether or altered so that certain debts might be excluded from its scope. But unless such an order is made, at the end of the moratorium, the DRO stands as it did on the day on which it was made. The effect of a DRO is to give immediate debt relief, subject only to the possibility of rescission or alteration.

These differences between the two schemes are perfectly sensible. The DRO can apply only in cases where the creditors’ position is hopeless, where there is no realistic possibility of them ever being paid. Immediate debt relief is therefore sensible. In bankruptcy on the other hand, there may well be some possibility of payment at least in part and, for that reason, there is 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. That is entirely sensible as the debt has already been relieved, subject only to the possibility of rescission or alteration. In its ordinary natural meaning, section 285 prevents a creditor from exercising a remedy against the bankrupt’s property. The purpose is to prevent a creditor from interfering in the administration of the property by the trustee. That provision does not bite on social security benefits in payment because they are not the property of the bankrupt which the trustee can administer. So the Secretary of State is permitted to deduct at source.

For those reasons, I would hold that section 251G(2)(a) does not permit the Secretary of State to make deductions at source in respect of a debt listed in a DRO. I would dismiss the appeal.

I have reached a different conclusion from Mummery LJ and agree with the decision of Cranston J. The case involves a narrow question of statutory interpretation, but it is important both for the Secretary of State and for those people like the respondents who have minimal income and have debts in respect of past benefit payments. I begin with the natural meaning of the words to be construed and consider the question whether that meaning fits with the characteristics and general purpose of the Debt Relief Order (DRO) scheme. I then consider the arguments of the Secretary of State based on comparing the DRO scheme with the bankruptcy scheme, previous case law and “the net entitlement principle”.

There is no need for me to repeat the statutory provisions which Mummery LJ has set out. The case turns on the proper interpretation of the words in s251G(2)(a) of the Insolvency Act 1986, as amended:

“During the moratorium, the creditor to whom a specified qualifying debt is owed (a) has no remedy in respect of the debt.”

To set the issue in context, the Official Receiver made DROs in which debts owed by the respondents to the appellant in respect of past benefit payments were specified as qualifying debts.

The material parts of the order relating to Mrs Payne, dated 6 August 2009, were as follows:

“THE INSOLVENCY ACT 1986

Debt Relief Order

Re: EUNICE VANESSA PAYNE

…

Upon the application of the above named debtor, who is described as:

Eunice Vanessa Payne, unemployed of 2 Tower Road, Epping, Essex, CM16 5DL…

And it appearing from the information provided that such an order is appropriate

A debt relief order is hereby made pursuant to the provisions of Section 251E of the Insolvency Act 1986, in respect of the above named debtor and the qualifying debts scheduled below:-

Department for Work and Pensions £843.58

…”

The debt relief order relating to Mrs Cooper, dated 13 January 2010, was in similar form. It included in the list of specified qualifying debts a debt to the department of £1,195.07.

Mr Sheldon accepted, in my view correctly, that if the words of s251G(2)(a) are given their natural and ordinary meaning (or, as he preferred to put it, their colloquial meaning), the making of deductions from the amount of benefit paid to each respondent on account of the relevant specified debt was a “remedy in respect of the debt”.

At the risk of labouring a point which is conceded, if anyone were to ask the question “What remedies are available to the Department for Work and Pensions in a case where a benefit claimant owes money to the department?”, the answer from anyone familiar with the benefit system would be that the department has a choice of remedies, and that its generally preferred remedy is to deduct the amount owed from subsequent benefit payments.

The next question is whether this interpretation of the words would so militate against the purpose of the DRO scheme that Parliament cannot be supposed to have used them in their ordinary sense and that they ought to be given a narrower meaning.

In the explanatory notes to the Tribunals Courts and Enforcement Act 2007, which amended the Insolvency Act to introduce the DRO scheme, reference was made (at para 456) to two consultation documents. The first, issued by the Department for Constitutional Affairs in July 2004, was entitled “A Choice of Paths – Better options to manage over-indebtedness and multiple debt”. The second, issued by the Insolvency Service in March 2005, was entitled “Relief for the Indebted - an Alternative to Bankruptcy”.

The first consultation paper divided debtors into the categories of “Won’t pay”, “Could pay” and “Can’t pay”. In the third group were those with “No income No assets”, shortened to “NINA”. For NINAs it proposed a new scheme for clearing the decks. The proposed scheme was developed more fully in the second consultation paper, which suggested criteria for being able to apply for a DRO and explained how the scheme was intended to operate. The current DRO scheme resulted from this process of consultation.

It was intended to be, and is, essentially a simple scheme.

The class of persons who may apply for a DRO is limited. Schedule 4ZA sets out a number of conditions which must be met. The debtor’s monthly surplus income must not exceed a prescribed amount, which is currently set by subordinate regulations at £50. The total value of the debtor’s property must not exceed a prescribed amount. Currently, the applicant must not own a vehicle worth more than £1,000 or have things of value or savings or a pension fund worth over £300. In order words, it is a special scheme for the very poor with debts. The debts must not exceed £15,000. There is a check against a person making use of the scheme habitually. Under the schedule a person is not eligible for a DRO if a similar order has been made in relation to them in the previous 6 years.

There are also limits on the debts in respect of which a DRO may be made. By s251A(2), a qualifying debt must be for a liquidated sum (payable either immediately or at some certain future time) and must not be “an excluded debt”.

Under the version of the Insolvency Rules which has been in force since 6 April 2009 (by reason of the Insolvency (Amendment) Rules 2009/642 schedule 1, para 1), among the types of debt excluded for the purposes of a DRO are certain government loans, namely loans made to students under the Teaching and Higher Education Act 1998 or the Education (Student Loans) Act 1990, but not loans from the social fund or benefit overpayments.

An application for a DRO is made to the Official Receiver via an “approved intermediary” ie a debt advisor. By s251B the application must include a list of the debts to which the debtor is subject, giving details of the amount and the creditor, and such other information about the debtor’s affairs (including his creditors, debts and liabilities and his income and assets) as may be prescribed. The subordinate regulations effectively require full disclosure of the debtor’s financial circumstances. If the information provided by the debtor appears to be in order, and the Official Receiver has no reason to believe that the information supplied is incomplete or inaccurate, he must make a DRO and give notice of it to the creditors named in the order.

A DRO has no effect in relation to any creditor or debt not specified in the order, for example, a creditor to whom an excluded debt is owed or a person to whom the debtor has an unliquidated liability.

On the making of a DRO there is a moratorium period during which objections, investigations and revocation may be made under ss251K and 251L. In particular, any person specified in a debt relief order as a creditor to whom a specified qualifying debt is owed may object to the making of the order, to the inclusion of the debt in the list of the debtor’s qualifying debts or to the details of the debts specified in the order. Since under the scheme a creditor who will be affected by a DRO is not given notice in advance of the debtor’s application for the order, it is obviously right that the creditor should have a period of time after the order is made in which to make an objection if, for example, the information supplied by the debtor is incorrect or the debt should not properly be classified as a qualifying debt.

The moratorium period under s251H is 12 months unless it is terminated early or is extended by the Official Receiver or by the court. It is notable that the power of the Official Receiver to extend the moratorium period is limited by s251H to cases where the purpose of the extension is to carry out or complete an investigation under s251K, or, with the court’s permission, to take action which he considers necessary in relation to the order or, where he has decided to revoke the order, to provide the debtor with an opportunity to make arrangements for making payments towards his debts. The limited grounds on which the Official Receiver may extend the moratorium serve to emphasise that the purpose of the moratorium is to allow time for objections and investigations concerning the correctness of the order. In the meantime, the debts specified in the order are frozen by s251G and the creditor “has no remedy in respect of the debt”.

If the debtor has an increase in his income or acquires property during the moratorium period, he must notify the Official Receiver under s251J(5). That is a natural adjunct to a moratorium designed to allow time for investigation.

I see nothing in the purpose of the moratorium which would lend support for giving a narrower than natural meaning to the words “During the moratorium, the creditor to whom a specified qualifying debt is owed has no remedy in respect of the debt”. Rather, the reverse. The purpose of the scheme is to provide immediate relief, but with a period allowed for investigation during which the order may be set aside.

I turn to the Secretary of State’s arguments based on comparison of the DRO scheme with the bankruptcy scheme under the same Act and previous case law. The schemes have in common that they are both insolvency schemes but they differ in a number of respects. Whereas a DRO is intended to be entirely for the benefit of the debtor – it is a form of debt relief, pure and simple – bankruptcy is more complex. Bankruptcy proceedings may be initiated either by a debtor or by a creditor. The effect of the making of a bankruptcy order is to place the bankrupt’s assets into the hands of his trustee in bankruptcy (with limited exceptions). The function of a trustee in bankruptcy is to ascertain the bankrupt’s assets and liabilities, to collect the assets and to see that they are distributed in accordance with the law. Unlike a DRO, which affects only the creditors and debts specified in the order, a bankruptcy order affects all creditors, and they have the opportunity of proving what is owed to them as part of the bankruptcy process. Whereas no question of undue preference can arise as between creditors who are owed qualifying debts specified in a DRO, because the relief granted against them is equal and comprehensive, a key part of the bankruptcy scheme is aimed at preventing one creditor from obtaining unjustified preferential treatment over another.

In that context, s285(3) of the Act provides:

“After the making of a bankruptcy order no person who is a creditor of the bankrupt in respect of a debt provable in the bankruptcy shall –

(a)

have any remedy against the property or person of the bankrupt in respect of that debt, or

(b)

before the discharge of the bankrupt, commence any action or other legal proceedings against the bankrupt except with the leave of the court and on such terms as the court may impose.”

That section dates back to s7 of the 1914 Act, which in turn dated back to s9 of the 1883 Act. The reference in s285(3)(a) to “any remedy against the …person of the bankrupt” harks back to the days when there could be committal for debt (as in Re Manning (1885) 30 Ch D 480, where an imprisoned debtor obtained his release by invoking s9 of the 1883 Act).

The reference to “any remedy against the property…of the bankrupt” is apposite, because if one creditor were to exercise a remedy against the property of the bankrupt it would diminish the property available to others.

Mr Sheldon submitted in his well presented argument that the words of s251G(2)(a) “During the moratorium, the creditor to whom a specified qualifying debt is owed has no remedy in respect of the debt” should be interpreted in a way which is narrower than their natural meaning, because of the interpretation which the courts have placed on s285(3) in relation to bankruptcy orders.

I am not persuaded by that argument. The language of s251G(2)(a) and s285(3) is not identical. It is possible to entertain different views as to the likely reason why the language should be different, but the court’s task is to apply the ordinary meaning of the language which Parliament has in fact used unless to do so would not be sensibly compatible with the obvious purpose of the legislative scheme of which it forms part. I do not believe that this would be so in the present case. Further, I do not regard it as remarkable that the language is not identical, given the differences in the objects of the schemes. Mr Sheldon submitted that the drafter of s251G(2)(a) must have had in mind the language of s285(3), but I do not think that the argument assists him when the choice of words is different.

Mr Sheldon submitted that the words of s251G(2)(a) “has no remedy in respect of the debt” were intended to be a modern, simpler counterpart to the words “have any remedy against the property or person of the bankrupt in respect of that debt”. My analysis, admittedly speculative, is that the drafter has come to s285(3) in relation to bankruptcy and s251G(2)(a) in relation to DROs from somewhat different starting points, reflecting the different nature of the schemes; and, whether that speculation be right or wrong, the words which the drafter has ended in using do not in my view carry the same natural meaning. This requires some explanation.

As already noted, an important part of the operation of the bankruptcy scheme entails the preservation of the bankrupt’s assets in order that they should be available for fair distribution. It is for that reason that the assets are transferred into the hands of a trustee, and the same object explains the provision that during the period of the bankruptcy no creditor in respect of a debt which is provable in the bankruptcy should be able to exercise a remedy “against the property…of the bankrupt”. By contrast, the purpose of the DRO scheme is unadulterated debt relief, and it is entirely consistent with the nature of the scheme that from the making of the DRO a creditor to whom a specified qualifying debt is owed should have no “remedy in respect of the debt”.

As to the natural meaning of the words “any remedy against the property…of the bankrupt”, the question whether the payment to a social security claimant of a reduced amount of benefit under the statutory powers contained in ss71(8) and 78(2) of the Social Security Administration Act 1992 fell within that phrase was considered by Keene J in R v Secretary of State ex p Taylor and Chapman [1997] BPIR 505, 511-514. He accepted the argument of counsel for the Secretary of State in that case that the deduction did not fall within the phrase. I fully see the force of the argument that the withholding of benefit did not amount to exercising a remedy “against the property” of the benefit claimant, since the claimant did not receive property against which a remedy was exercised; he or she simply received a lesser sum. Mr Drabble QC has not argued that the decision was wrong, but he submitted that it afforded no reason for giving a narrower interpretation to the phrase used in s251G(2)(a) “remedy in respect of the debt” than its natural meaning. I agree with that submission.

Mr Sheldon argued strongly that it would be anomalous that the Secretary of State should be entitled to make deductions under s71(8) or s78(2) when paying benefits to an undischarged bankrupt, but not when making payments to a debtor in respect of whom a DRO had been made and which was still in the moratorium period. There was no sensible policy reason why Parliament should have wished to make such a distinction, which would result in the latter obtaining what Mr Sheldon described as a windfall benefit as compared with an undischarged bankrupt. I do not find the reference to windfall helpful because the whole purpose of the DRO scheme is to provide debt relief. That may be described as a windfall, but use of the description does not help in determining the extent of the relief provided by the scheme.

The anomalies or potential anomalies are not one way. Under the bankruptcy scheme, it has been held that whereas the Secretary of State has power to make deductions under ss 71(8) and 78(2) in the case of a claimant who is an undischarged bankrupt (Taylor and Chapman), the power ceases on the bankrupt’s discharge: R (Balding) v Secretary of State for Work and Pensions [2007] EWHC 759 (Admin), [2007] 1 WLR 1805 (Divisional Court) and [2007] EWCA Civ 1327, [2008] 1 WLR 564 (Court of Appeal). That distinction may be regarded as an oddity in the sense that it is hard to see any policy reason why Parliament should positively have intended that the power of deduction should continue while the claimant is an undischarged bankrupt but terminate on his discharge from bankruptcy. The distinction is more likely to have been a fortuitous product of the language used than to have been consciously planned. It was apparent from Mr Sheldon’s submissions that the distinction is not one with which the Secretary of State is entirely happy, because he reserved the Secretary of State’s right to argue that Balding was wrongly decided, should the opportunity arise to argue the point before the Supreme Court, but he accepted that it was not open to him to argue that point before this court.

In relation to the DRO scheme, Mr Sheldon similarly accepted that he could not dispute before this court that the Secretary of State’s power to make deductions under ss71(8) and 78(2) would cease at the end of the moratorium period, when the debtor would be discharged by s251I from all the qualifying debts specified in the order. This acceptance was subject to the reservation about the correctness of the decision in Balding to which I have referred.

Debts resulting from social fund loans or benefit overpayments might have been excluded from the DRO scheme. Alternatively, Parliament might have provided that the Secretary of State’s power to make deductions under ss71(8) and 78(2) should be altogether unaffected by any DRO. However, neither of those things has been done, and the argument before this court is confined to argument about the Secretary of State’s power to make such deductions during the moratorium period.

Whether or not the statutory language has the effect of enabling the Secretary of State to make such deductions during the period of the moratorium (which is the issue that the court must decide), I cannot believe that it was any part of the purpose of the moratorium that the power to make such deductions should subsist for that limited period. I have already commented on the general purpose of the moratorium. The period of the moratorium is unrelated to the amount of any debt, and the Official Receiver would have no power to extend it in order that deductions from the debtor’s benefits could continue to be made.

Both parties therefore point to what they say would be oddities if the other party’s argument on construction were accepted. Mr Sheldon’s argument that there is no policy reason why Parliament should have wished to create a difference between an undischarged bankrupt and a debtor who has obtained a DRO is countered by Mr Drabble’s argument that there is no policy reason why Parliament should have wished that a debtor’s ongoing benefit payments should be subject to deduction during but not after the moratorium period. I do not believe that the solution to this case lies in searching for an unattainable symmetry between schemes which, despite their similarities, in some respects have different purposes and are expressed in different language; nor in a comparison of anomalies involving speculation about which was least likely to have been intended by Parliament if it had consciously considered them.

I have referred only briefly to Taylor and Chapman and Balding, and I have not referred to the various other cases which were cited, because none of them bear directly on the language of s251G(2)(a) with which we are concerned.

Mr Sheldon advanced one other argument to which I should refer. He relied on what he described as the “net entitlement principle”, that a claimant who would otherwise be entitled to a certain amount in respect of a prescribed benefit is only entitled to the net amount after deduction of sums which the Secretary of State is entitled to deduct under s71(8) or s78(2) of the 1992 Act. We are concerned with a question of statutory interpretation, which must axiomatically depend on the language of the statutory provisions under consideration. Cranston J made the point pithily at para 40 when he said that:

“There are no trump cards emblazoned “net benefit principle” which the Secretary of State can play in these proceedings to determine the outcome of the necessary exercise of statutory interpretation.”

In Balding the Secretary of State argued unsuccessfully that a person in the position of Mr Balding, who had received his discharge from bankruptcy, was still only entitled to the net amount of benefits after deduction had been made under the 1992 Act. The argument failed because the court held that this was not the correct construction of the relevant provision of the Insolvency Act. In the present case, as I have said, Mr Sheldon has accepted for the purposes of the argument at the present level that the “net entitlement principle” would not apply after the end of the moratorium. Whether it applies during the period of the moratorium depends on the proper interpretation of the words which Parliament has used in s251G(2)(a).

Having considered the Secretary of State’s arguments, I end where I began. The debts owed by Mrs Payne and Mrs Cooper to the Secretary of State were “qualifying debts” and were specified in the DROs. For the Secretary of State to recoup those debts by deducting the amount owed, or a portion of it, from subsequent benefits would be to exercise a “remedy in respect of the debt” in the ordinary meaning of those words, contrary to s251G(2)(a). I do not consider that this interpretation conflicts either with the overall purpose of the DRO scheme or with the particular purpose of the moratorium period. My reasoning is in substance the same as that of Cranston J and I would dismiss the appeal.