The Court Of Appeal Considers Debt Relief Orders


As flagged in our earlier article 'Having your cake and eating it' The Secretary of State appealed against a decision ((2010) EWHC 2162 (Admin)) that he had unlawfully deducted sums from the social security benefits of the respondents (C and P). That appeal has now been decided.

C had been overpaid incapacity benefit, and P had obtained a social fund loan that required repaying. Each obtained a debt relief order ('DRO') which had the effect of imposing a one-year moratorium on specified qualifying debts, which included the deductions, during which time the creditor had "no remedy in respect of the debt" pursuant to the Insolvency Act 1986 s.251G(2)(a).

The Secretary of State began or continued to make the deductions after the orders were made, and C and P applied for judicial review. Cranston J held that "remedy" included the Secretary of State's powers to recover overpayments of benefits and repayment of social fund loans, with the effect that he was precluded from continuing to make the deductions from C and P's benefits after the debt recovery orders were made.

The Secretary of State argued at first instance and upon appeal that s.251G(2)(a) should be construed narrowly so as to be consistent with the meaning given to "remedy against the property or person of the bankrupt" in s.285(3), which permitted the Secretary of State to make deductions during a benefit recipient's bankruptcy. He argued that there was no policy reason why Parliament should have wished to create a difference between an undischarged bankrupt and a debtor who had obtained a debt relief order, and that it was contrary to the "net entitlement principle": i.e. that a claimant for a prescribed benefit was only entitled to the net amount after any lawful deduction. Mummery L.J. agreed with the Secretary of State's argument. He stated that reliance on s.251(G)(2)(a) as a ground for invalidating the continuation in force of the statutory power to make deductions is misconceived. He held that the purpose of that section (similar to the purpose of s.285 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 social security benefits paid to the...

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