England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT
(MR JUSTICE GIBBS)

		Royal Courts of Justice Strand London, WC2A 2LL
		16 December 2005

SIR MARTIN NOURSE:

Introduction

1. The principal question on this appeal is whether a liability to repay benefit, in this case jobseeker's allowance, which, subsequent to the claimant's bankruptcy, is determined to have been a recoverable overpayment pursuant to section 71(1) of the Social Security Administration Act 1992 ("the 1992 Act") is, at the date of the bankruptcy, a "contingent liability" and thus a "bankruptcy debt" within section 382 of the Insolvency Act 1986 ("the 1986 Act"). If it is a contingent liability, it is agreed that, when the claimant is discharged from bankruptcy, he is also, by virtue of section 281(1) of the 1986 Act, discharged from liability to repay the amount of the overpayment. Although the answer to the principal question depends on the true construction of section 382 of the 1986 Act, it is first necessary to give careful consideration to the provisions of section 71(1) of the 1992 Act. There is also a subsidiary question which will only arise if section 382 is held to apply.

The facts

2. On or about 10th December 1999 the claimant, David William Steele, made a claim to the Secretary of State for jobseeker's allowance. In filling up the necessary form he represented that he was not in receipt of an occupational pension, when in fact he was. It is important to note at the outset that the Secretary of State does not allege that the misrepresentation was fraudulent. On 21st December 1999 Mr Steele was awarded jobseeker's allowance with effect from 10th December of that year. On 14th September 2001, on his own petition, it was ordered by the Birmingham County Court that Mr Steele be adjudged bankrupt. On 1st March 2002 the Secretary of State, pursuant to section 71 of the 1992 Act, made a determination that Mr Steele had been overpaid £1,684.29 jobseeker's allowance between 10th December 1999 and 29th March 2001. The determination, headed "Overpayment Decision", stated:

"On 20 December 1999 Mr David Steele misrepresented the material fact that on signing his JSA3 form he declared that he was not in receipt of an Occupational Pension, when in fact he was in receipt of an Occupational Pension.

As a consequence, Jobseeker's Allowance amounting to £1684.29 from 10 December 1999 to 29 March 2001 (both dates included), as detained on the schedule, was paid which would not have been paid but for the misrepresentation.

Accordingly, that amount is recoverable from Mr David Steele."

3. In addition to jobseeker's allowance, Mr Steele was entitled to receive, and was receiving, incapacity benefit. Following the determination, pursuant to section 71(8) of the 1992 Act and the relevant regulations, the Secretary of State began to recover the overpayment of the jobseeker's allowance by means of a weekly deduction from Mr Steele's incapacity benefit. On 16th June 2003 Mr Steele informed the Department of his bankruptcy, whereupon the Secretary of State, in exercise of his discretion, decided to suspend recovery of the overpaid jobseeker's allowance until Mr Steele's bankruptcy had been discharged. It was discharged as from 14th September 2003 by a further order of the Birmingham County Court made on 6th October 2003. On 19th November 2003 the Secretary of State wrote to Mr Steele stating:

"You were informed of the overpayments after the date of the bankruptcy order and you are still liable for this debt. Your bankruptcy order has now been discharged and we will now pursue recovery."

The letter also gave notice of an intention to resume weekly deductions from Mr Steele's incapacity benefit.

4. On 8th December 2003 Mr Steele issued a judicial review claim form challenging the decision made in the letter of 19th November 2003. On 18th April 2003 the application came for an effective hearing in the Administrative Court before Gibbs J who, in a judgment delivered on the following day, granted it and quashed the decision. He granted the Secretary of State permission to appeal and the appeal has now come before us.

The statutory provisions - social security

5. Section 71 is the first section in part III of the 1992 Act entitled "Overpayments and Adjustments of Benefit". Section 71 is headed "Overpayments-General". For the purpose of considering the principal question it is only necessary to examine subsection (1), which provides:

"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) 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 which he would have received but for the misrepresentation or failure to disclose."

By subsection 11(aa), it is provided that the section applies to a jobseeker's allowance.

6. The following features of section 71(1) are clear and not in dispute:

(1) Before any benefit can be recovered it is necessary for the Secretary of State to make a determination to that effect.

(2) Before a determination can be made it is necessary for there to have been a misrepresentation of, or a failure to disclose, a material fact, in consequence of which an overpayment of benefit has been made.

(3) Where a determination has been made the Secretary of State is not obliged to recover the amount of the overpayment; he is "entitled" to do so.

Two further provisions of the Social Security legislation should be mentioned. First, the effect of section 187 of the 1992 Act is that entitlement to benefit does not pass to the trustee in bankruptcy of a recipient of benefit. Second, section 12 of the Social Security Act 1998 gives a right of appeal to a Social Security Appeal Tribunal against a determination under section 71(1).

The statutory provisions - insolvency

7. That being the state of affairs under the Social Security legislation, it is now necessary to refer to section 382 of the 1986 Act which, so far as material, provides:

"(1)'Bankruptcy debt', in relation to a bankrupt, means... any of the following -

(a) any debt or liability to which he is subject at the commencement of the bankruptcy,

(b) any debt or liability to which he may become subject after the commencement of the bankruptcy (including after his discharge from bankruptcy) by reason of any obligation incurred before commencement of the bankruptcy,...

(3) For the purposes of references in this Group of Parts to a debt or liability, it is immaterial whether the debt or liability is present or future, whether it is certain or contingent or whether its amount is fixed or liquidated, or is capable of being ascertained by fixed rules or as a matter of opinion; and references in this Group of Parts to owing a debt are to be read accordingly.

(4) In this Group of Parts, except in so far as the context otherwise requires, 'liability' means (subject to subsection (3) above) a liability to pay money or money's worth, including any liability under an enactment, any liability for breach of trust, any liability in contract, tort or bailment and any liability arising out of an obligation to make restitution."

8. Section 281(1) of the 1986 Act provides:

"Subject as follows, where a bankrupt is discharged, the discharge releases him from all the bankruptcy debts..."

Subsection (1) goes on to provide that the discharge has no effect on the outstanding functions of the trustee in bankruptcy or on the operation, for the purposes of the carrying out of those functions, of the material provisions of the 1986 Act. Subsections (2) to (7) provide for exceptions from the discharge, including (by subsection (3)) a provision that it does not release the bankrupt from any bankruptcy debt which he incurred in respect of any fraud. It is agreed that none of the exceptions applies to this case, so that, if section 382 applies, Mr Steele will, subject to the outcome of the subsidiary question, have been discharged from liability to repay the amount of the overpayment.

The principal question

9. It is a requirement of subsection (1) of section 382 that the debt or liability should be one to which the bankrupt is subject at the commencement of the bankruptcy. Subsection (3) then provides that it is immaterial (amongst other things) whether the debt or liability is present or future or whether it is certain or contingent; subsection (4) that "liability" means (subject to subsection (3)) a liability to pay money or money's worth, including any liability under an enactment. It is not suggested that Mr Steele's liability at the date of the commencement of his bankruptcy was anything more than contingent. So the principal question is reduced to this: Was the amount of jobseeker's allowance which was subsequently determined to be recoverable from him a "contingent liability" of Mr Steele on 14th September 2001?
10. There being no definition of the expression "contingent liability" in the 1986 Act, it is necessary to resort to general principles of insolvency law to be derived from decided cases on the question. Mr Stagg, for Mr Steele, submits that, the misrepresentation having been made as part of the claim for jobseeker's allowance, Mr Steele came under an immediate liability to repay the overpaid benefit, which only needed to be crystallised by a formal decision that it was recoverable. Accordingly, he says, it was a liability which was contingent within the meaning of section 382(3), the contingency being the issuing of a formal decision by the Secretary of State. That was the view of Gibbs J who said (para 49):

"In my judgment, the liability to repay on the part of the claimant is a liability which has already arisen. In that sense it can be contrasted with a liability to pay costs which arises in future. Only the extent of enforcement of the liability and the method of enforcement are to be determined by the [Secretary of State] as actual or potential creditor of the claimant."

11. The contrast made by the judge between the present case and one where there is a potential liability to pay costs was occasioned by the reliance placed by Mr Kolinsky, for the Secretary of State, on the decision of this court in Glenister v Rowe [2000] Ch 76, a decision which must be considered with some care. There Mr Glenister had acted as Mrs Rowe's solicitor, and in 1985 she began proceedings against him for alleged negligence and breach of trust. In June 1991 the proceedings were struck out in the High Court and Mrs Rowe was ordered to pay the costs. On 29th July 1991 Mrs Rowe lodged an appeal against that order. On 24th June 1992 Mr Glenister was made bankrupt. On 24th June 1995 Mr Glenister was discharged from his bankruptcy. On 25th July 1995 the Court of Appeal allowed Mrs Rowe's appeal and ordered her costs to be paid by Mr Glenister up to 8th June 1992 (that was not a significant date). Those costs were later taxed and made the subject of a statutory demand which Mr Glenister sought to set aside. It was held by this court (Butler-Sloss, Thorpe and Mummery LJJ) that the costs which were the subject of the order made on 25th July 1995 were not a contingent liability of Mr Glenister at the date of his bankruptcy on 24th June 1992. The statutory demand was held to be good.
12. In giving the leading judgment, Mummery LJ examined the earlier authorities, both on costs and in other contexts. In the latter category the principal authority referred to was Re Sutherland Deceased [1963] AC 235, where the House of Lords, by a majority of three to two, held that, for the purposes of section 50(1) of the Finance Act 1940 (a provision relating to the value of a deceased's estate for the purposes of the charge to estate duty under section 55 of that Act)) an existing legal liability was not essential to the creation of a contingent liability. That decision was much relied on by counsel for Mr Glenister. My impression is that Mummery LJ, at any rate for insolvency purposes, preferred the dissenting judgment of Lord Hodson, from which he read a passage at p.83D. But whether that be right or wrong, at p.84F Mummery LJ dealt with Re Sutherland Deceased in this way:

"(4) Even if, as Mr Arnold forcefully contends on the authority of Re Sutherland Deceased, a contingent liability can exist for insolvency purposes without any existing or underlying obligation, the discretionary nature of the court's power to order costs indicates that there is no liability, contingent or otherwise, in the absence of a court order."

Whether or not there be a conflict between Re Sutherland Deceased and Glenister v Rowe (as to which I express no opinion), it is plain that, in an insolvency case, we are bound by the latter decision.

13. Earlier, at [2000] Ch p.84A, Mummery LJ had reached the conclusion that the claim for costs of Mrs Rowe was not a contingent liability of Mr Glenister at the date of his bankruptcy. His first three reasons for reaching that conclusion were expressed as follows:

"(1) Costs of legal proceedings are in the discretion of the court. Until an order for payment of costs is made there is no obligation or liability to pay them and there is no right to recover them.

(2) Once legal proceedings have been commenced there is always a possibility or a risk that an order for costs may be made against a party and, in certain circumstances, even against a non-party or the representative of a party. I would accept that an order for costs is a 'contingency' which may or may not happen at some stage during or at the conclusion of the proceedings.

(3) The fact that an order for costs (a) creates an obligation to pay money and (b) is a contingency in legal proceedings is not sufficient, however, to make a claim that the court should exercise its discretion to make such an order a 'contingent liability' of the person against whom such an order may ultimately be made. It is accepted that before an order is made there is no present liability to pay. Nor can there be a future liability: there is no certainty that the court will exercise its discretion to make such an order. If, as some of the authorities hold, a contingent liability must arise out of an existing or underlying liability, no such liability can exist simply by reason of a claim for costs made in a writ, summons, application or notice of appeal to the judge or to the Court of Appeal."

At p.82D Thorpe LJ said:

"In my judgement Mr Arnold's endeavour to uphold the judge founders on his inability to distinguish between liability and risk of liability. Of course when his client issued his strike-out application he exposed himself to the risk of a liability for costs contingent on the future exercise of the court's discretion when determining the pending application. The element of contingency is certainly satisfied but, in my judgment, the element of liability is not. The future exercise of the court's discretion might eliminate that risk of liability. Equally it might elevate the risk of liability into an actual liability, either present, in diem, or subject to taxation. This essential distinction between incurring a liability and exposing oneself to the risk of liability should not be undermined."

14. In my judgment the reasoning of Mummery and Thorpe LJJ in Glenister v Rowe (with which Butler-Sloss LJ agreed) is equally applicable to the present case. Until the Secretary of State had made his determination under section 71(1) Mr Steele was under no obligation or liability to repay the overpaid benefit. Since it was necessary, before the determination was made, for the Secretary of State to be satisfied that there had been a misrepresentation of a material fact in consequence of which the overpayment had been made, it is impossible to treat the determination as being a mere formality. To adapt the words of Mummery LJ, on 14th September 2001 there was no present liability to pay, nor, since there was no certainly that the determination would be made, could there be a future liability. I must respectfully disagree with the judge's view that it was only the extent of the enforcement of the liability and the method of enforcement that were to be determined.
15. Mr Stagg has further submitted that the Secretary of State, being a party interested in the outcome of the determination, is in a different position from the court in exercising its discretion as to costs. I am unable to see why that should be a material distinction. Other considerations apart, a claimant against whom a determination is made has a right of appeal to an independent appeal tribunal which decides the case for itself on the material before it.
16. Mr Stagg has advanced an alternative submission in relation to the principal question. He says that Mr Steele was under a common law obligation to make repayment of the overpaid benefit by way of restitution as soon as he was paid it. Accordingly, Mr Stagg submits that Mr Steele was under an "obligation incurred before the commencement of the bankruptcy" within section 382(1)(b) of the 1986 Act. This submission was based on a misunderstanding of something which was said by myself (Millet LJ expressed himself in similar terms) in Chief Adjudication Officer v Sherriff (4th May 1995) Ref CIF/545/1992. The main question in that case was whether the claimant had had the necessary mental capacity to make a claim. At p.5 I said:

"The claim and the misrepresentation being indivisible, if the claimant lacked the capacity to make a misrepresentation, she lacked the capacity to make the claim. In that event benefit was paid to her in the mistaken belief that a claim that had not been made had been made and, there being no power to pay without a claim, is recoverable by the Secretary of State, not under section [71(1)] but on ordinary principles of restitution."

Millet LJ spoke to the same effect at p.7. It is clear that our observations were directed simply to the case where the benefit is paid without a claim having been made. Once a claim is made, the machinery of section 71 is invoked and there is no room for recovery at common law, whether by way of restitution or otherwise. Mr Stagg's alternative submission must be rejected.

17. For these reasons I would decide the principal question in favour of the Secretary of State. That makes it unnecessary to consider a further possible argument, by which I have been much attracted, to the effect that the absence of an obligation on the Secretary of State to recover the amount of the overpayment, once a determination has been made, is in any event decisive of the principal question. In this connection it is clear from the observations of Sedley LJ in the recent case of B v Secretary of State for Work and Pensions (20th July 2005) [2005] EWCA Civ 929, at paras. 41 to 43, that the discretion not to enforce recovery is independent of the determination, real and important. However, Mr Kolinsky was not disposed to advance this argument as a second string to his bow and I therefore express no view on it.

The subsidiary question

18. Had the liability to repay the overpayment been held to be a bankruptcy debt within section 382 of the 1986 Act, it would have been necessary to decide whether, by virtue of section 281(1), the discharge of Mr Steele's bankruptcy on 14th September 2003 had the effect of precluding the Secretary of State's recovery of the overpayment by means of deductions from Mr Steele's incapacity benefit. Having now held that the liability was not a bankruptcy debt, I prefer to express no opinion on that question.

Conclusion

19. I would allow the appeal, discharge the judge's order and reinstate the Secretary of State's decision of 19th November 2003.
20. LADY JUSTICE ARDEN: Section 71(1) of the Social Security Administration Act 1992, set out in paragraph 5 of the judgment of Sir Martin Nourse, creates a self-standing remedy whereby, subject to the satisfaction of a number of conditions, the Secretary of State can recover overpaid jobseeker's allowance. The question on this appeal is whether a person who meets those conditions but in relation to whom, as at the date of his bankruptcy, the Secretary of State has not yet made a determination under section 71(1), is subject to contingent liability in respect of the claim of the Secretary of State for the purposes of section 382(1) and (2) of the Insolvency Act 1986. At that date the Secretary of State is not entitled to recover any sum from the debtor, and therefore there is no legal obligation on him.
21. As Sir Martin Nourse has explained, in Re Sutherland deceased, Winter v IRV [1963] AC 235, the House of Lords by a majority of three to two held that, for the purposes of section 50(1) of the Finance Act 1940, an existing legal liability was not essential to the creation of a contingent liability. In the words of Lord Reid, for instance, a contingent liability "is a liability which, by reason of something done by the person bound, will necessarily come into being if one or more certain events occur or do not occur" (page 249). The holding of the majority gives a very wide meaning to contingent debt. It does not follow, however, that the concept of contingent liability has the same meaning for all purposes. It is not a term of art. Its meaning depends on the context. Thus, for example, for the purposes of the statutory accounts of a company, provision must be made not simply for those liabilities for which there is an existing liability, but also for those liabilities which are "likely to be incurred" (Companies Act 1985, schedule 4, para 89). Accordingly a manufacturer of goods may need to set up a provision in its accounts for claims by ultimate consumers for defective products which it expects to receive, even though this provision may exceed the amount of claims which have actually been made or arisen, out of products supplied in the relevant period, by the date on which the accounts are approved.
22. This appeal, however, concerns a very different statute from that under consideration in Re Sutherland. We are concerned with section 382 of the Insolvency Act 1986. If a liability may be described as a contingent debt for the purposes of section 382 even though at the date of the bankruptcy order there is no legal obligation, then the range of liabilities which are provable in a bankruptcy is enlarged. Such liabilities would include the case where a party is exposed to a risk of an order for costs because he is involved in litigation but has not yet become subject to a liability to pay costs because the court has not made an order for costs against him. This was the situation in Glenister v Rowe [2000] Ch 76, where, as Sir Martin Nourse has explained, this Court held that the risk of an order for costs did not give rise to a contingent liability for the purposes of section 382, the very provision with which we are concerned on this appeal.
23. This narrower meaning of contingent liability is also applied for the purposes of deciding who is a contingent creditor who may apply to the court for a winding up order against a company. The meaning of this expression as used in a statutory predecessor of the current section, namely section 224(1) of the Insolvency Act 1986 (the predecessor section being section 224(1) of the Companies Act 1948), considered by Pennycuick J in Re William Hockley Limited [1962] 1 WLR 555, at 558. Pennycuick J held that, although the expression "contingent creditor" was not defined in the Companies Act 1948, it denoted "a person towards whom under an existing obligation, a company may or will become subject to a present liability on the happening of some future event or some future date". This decision was applied by the High Court of Australia in Community Development Pty Ltd v Engwirda Construction Company Ltd [1969] 120 CLR (Barwick CJ, and Kitto, Taylor Windeyer & Owen JJ). This case concerned the provision of the Australian Companies Act 1961 to 1964 which, so far as material, also provides for the power of the court to make a winding up order on the application of a contingent creditor. Kitto J noted that "the importance of these words [of Pennycuick J] for present purposes lies in their insistence that there must be an existing obligation and that out of that obligation a liability on the part of the company to pay a sum of money will arise in a future event, whether it be an event that must happen or only an event that may happen."
24. Pennycuick J appears to have been of the opinion that the expression "contingent liability" includes the case where a company will become subject to a present liability on some future date. Likewise Kitto J appears to have been of the view that a contingent liability includes a liability to pay a sum of money on a future event which must happen. With respect to both learned judges, these liabilities would in my judgment be future or prospective liabilities, not contingent liabilities. But that point does not affect the fact that both judges considered that for there to be a contingent liability for the purposes of provisions with which they are concerned there had to be an existing legal obligation.
25. I agree that it follows from the authorities cited by Sir Martin Nourse that a person who may become subject to a determination under section 71(1) of the 1990 Act but who was not so subject at the date of his bankruptcy is not subject to a contingent liability for the purposes of section 382 of the Insolvency Act 1986. That conclusion is supported by a decision of Pennycuick J in Re William Hockley Ltd. I say that because the same basic rule as to proof of debt applies to both corporate and individual insolvency. That is contained in Insolvency Rule 12.3(1) which provides that:

"Subject as follows, in both winding up and bankruptcy, all claims by creditors are provable as debts against a company or, as the case may be, the bankrupt, whether they are present or future, certain or contingent, ascertained or sounding only in damages.

26. This basic rule thus includes contingent claims. There is an obvious relationship between section 124 of the Insolvency Act 1986 and the Insolvency Rule 12.3. A creditor with a contingent claim should be able to apply for the winding up of a company if he has a provable claim but not otherwise.
27. I would add that both Re William Hockley Limited and Community Development were cited in the argument of counsel in Glenister v Rowe, and a summary of that argument may be found in the judgment of Mummery LJ in that case. I would also add that I am only considering the meaning of contingent liability for the purposes of section 382 of the Insolvency Act 1986. It may well have a different meaning for the purpose of other statutory provisions or for the purposes of a particular written instrument.
28. I turn to a separate point. In my judgment, it is not necessary on this appeal to express a view on the question whether section 71 supersedes any remedy at common law. Mr Steele's liability under section 31 arose after the bankruptcy order was made against him. That liability cannot therefore be a bankruptcy debt which was released on his discharge from bankruptcy. In my judgment that would be the position even if there were at the date of the bankruptcy order a separate liability at common law to repay benefits overpaid; and that liability constituted a provable debt (as to which I express no view) which was released on Mr Steele's discharge or was displaced by the determination of the Secretary of State under section 71(1). In other words, if Mr Steele were to be subject at the date of his bankruptcy order to a liability at common law, and thereafter to a liability under section 71(1), I do not consider that those liabilities should be treated as a single, continuing liability for the purposes of section 281(1) of the Insolvency Act 1986. If the position were otherwise, the Secretary of State might find that the liability to him under section 71(1) had been released before he had ever made the determination.
29. I agree that it is not necessary to decide the subsidiary question identified by Sir Martin Nourse on which I express no view. I likewise express no view on the question considered by him as to the question whether the absence of an obligation of the Secretary of State to recover the amount of the overpayment once the determination has been made is, in any event, decisive of the principal question.
30. For the reasons which I have given, and subject as above, for those given by Sir Martin Nourse, I would allow this appeal.
(Appeal allowed).