England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
MANCHESTER DISTRICT REGSISTRY

		Manchester Civil Justice Centre 1 Bridge Street West Manchester M60 9DJ
		11th March 2010

HH Judge Pelling QC: :

Introduction

1. Since 1^st November 2008, the Applicant has exercised the functions of the Secretary of State for Work and Pensions ("the Secretary of State") under the Child Support Act 1991 ("CSA"). The CSA makes provision for the assessment collection and enforcement of periodical maintenance payable by parents of children not in that parent's care. Such parents are referred to by the Applicant as non-resident parents ("NRPs") and are so described in this judgment. The Second Respondent ("Mr Whyman") is a NRP who is liable to pay child maintenance for his child by a previous relationship. As at the 11^th March 2009, Mr Whyman was £25,610.90 in arrears with the periodical maintenance payable by him. On that date an Individual Voluntary Arrangement ("IVA") was approved by Mr Whyman's creditors. The supervisor of Mr Whyman's IVA is the First Respondent. The proposal that was accepted was that Mr Whyman's creditors would receive a total of £0.27p in the pound over a period of 5 years in full and final settlement of his liabilities.
2. Over 94% of Mr Whyman's total debts at the date when the proposal for an IVA was first put forward were represented by arrears of child maintenance. The Applicant was aware of the proposal but did not attend the meeting at which the proposal was approved because it contends that child maintenance is not a debt which can be included within an IVA. Had the Applicant attended and voted, it would have been able to defeat the approval of the IVA, assuming that it was entitled to vote.
3. The position adopted by Mr Whyman and the First Respondent is that the Applicant is bound by the terms of the IVA. This is a source of concern to the Applicant because it contends that if Mr Whyman and the First Respondent are correct in this assertion it would provide a relatively easy means by which a NRP in arrears could evade his or her liability to pay all the arrears that had accrued.
4. The Applicant's primary case is that it is not a creditor for the purposes of an IVA, in consequence that it is not entitled to vote at a creditors meeting called to approve the IVA and thus is not bound by its terms. Accordingly, pursuant to s.263((3) of the Insolvency Act 1986 ("IA"), the Applicant challenges the decision of the First Respondent that the Applicant is such a creditor. In the alternative, if the Applicant is to be treated as a creditor for the purposes of the IVA, then the Applicant seeks an Order made pursuant to IA, s.262 revoking the approval given to Mr Whyman's proposal on the ground that the terMrs of this particular IVA are unfairly prejudicial to the Applicant.

The Statutory and Legal Framework

5. The Child Support Act 1991

Section 1 of the Child Support Act 1991 ("CSA") imposes a duty on each parent to maintain a qualifying child and on the NRP to pay child maintenance by periodical payments assessed in accordance with the Act. By CSA s.4 a parent may apply to the Secretary of State for a "maintenance calculation" in relation to a qualifying child. Where such a calculation has been made, the Secretary of State may on the application of the applying parent arrange for collection of the sums due from the NRP following the making of a maintenance calculation and enforcement of the duty imposed on the NRP by CSA s.1(3) to pay in accordance with the calculation. It is common ground that the parent with care ("PWC") in this case applied for such a calculation and has applied to the Secretary of State for collection and enforcement.

6. CSA ss.29-41B contains detailed provisions concerning collection and enforcement. There are broadly two routes by which payment may be enforced – the making of a Deduction from Earnings Order ("DEO") (CSA s.31) and an application to a Magistrates Court for a Liability Order (CSA s.33). The PWC has no right to enforce. All rights to collect and enforce are vested in the Secretary of State – see R(Kehoe) v. Secretary of State for Work and Pensions [2005] UKHL 48, [2006] 1 AC 42 per Lord Bingham at Paragraphs 4 and 7. The CSA and the regulations made pursuant to it create a comprehensive code for collection (by the making of a DEO) and enforcement (by application for a Liability Order) – see R(Kehoe) (ante) and Department of Social Security v. Butler [1995] 1 WLR 1528 per Evans LJ at 1531-2. The duty to pay imposed by CSA s.1(3) does not create a civil debt because it can only be enforced by the Secretary of State and then only in the restricted ways identified in the CSA – see Department of Social Security v. Butler (ante) per Evans LJ at 1531-2 and Morritt LJ (as he then was) at 1540-1. There is no power that enables the Secretary of State to agree to accept a lesser sum in satisfaction of an accrued liability under a maintenance calculation unless the calculation is first reviewed superceded or appealed in accordance with CSA, ss.16, 17 and 20.
7. Personal Insolvency

There are three possible regimes to which resort can be had in circumstances of personal insolvency – bankruptcy, Debt Relief Orders and the IVA regime. In relation to Debt Relief Orders ("DRO") [a new low cost regime introduced by the Tribunals Courts and Enforcement Act 2007 from 24^th February 2009 by the insertion into the IA of a new Part 7A], an individual who is unable to pay his debts may apply for a DRO in respect of his "qualifying debts". A "qualifying debt" is defined as being a liquidated sum payable either immediately or at a certain future date that is not an "excluded debt" – see IA, s.251A(1) and (2). Any obligation arising under a maintenance assessment under the CSA is an "excluded debt" for the purposes of IA Part 7A – see r. 5A.2(a) of the Insolvency Rules 1986 ("IRs"). In relation to bankruptcy, although such arrears are a "Bankruptcy debt" by operation of IA, s.382(1)(a) and s.382(4), such arrears are not provable in the bankruptcy – see IRs, r.12.3(2) - and (absent a direction from the Court) discharge from bankruptcy does not release the bankrupt from any bankruptcy debt arising under a maintenance calculation made under the CSA – see IA, s.281(5)(b). Since arrears are not provable IA s.285(3) is of no application and thus the making of a bankruptcy order does not preclude the making of either a DEO or an application for a liability order.

8. In relation to IVAs the position is different. The regime is contained in IA, Part 8. The basic principles are not controversial between the parties. Where a debtor wishes to enter into an IVA he must submit details of his proposal and a statement of affairs to an insolvency practitioner – see IA s.256(2) (where an interim order has been made) and s.256A(2) (where no interim order is made). The statement must include all "… his debts and other liabilities …". Since by IA s.382(4), "liability" means "… a liability to pay money or money's worth including any liability under any 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" it is common ground between the parties that on any view the debtor must include any child maintenance arrears in his statement of affairs. Once the nominee has reported to the court that a creditors meeting should be convened, the nominee is required to convene such a meeting on the date and at the time and place specified in the report – see IA, s.257(1). The timing of the meeting is prescribed by IRs, 5.17(1) and in a case where no interim order has been made must take place not less than 14 days or more than 28 days from the date when the report was filed with the court. The persons required to be summoned to the meeting are "… every creditor of the debtor of whose claim and address the person summoning the meeting is aware" – see IA s. 257(2).
9. At the meeting, every creditor to whom notice has been given is entitled to vote – see IRs 5.21(1). In order for a proposed IVA to receive approval there must be a majority of three quarters by value of those voting either in person or by proxy – see IRs, r.5.23(1) – unless more than half by value of those voting who are not associated with the debtor vote against the resolution - see IRs r.5.23(4). If approved, then (subject to any challenge under IA, s.262) the IVA becomes binding on every person who was entitled to vote or would have been entitled to vote if that creditor had received notice of the meeting as if that creditor was a party to the arrangement – see IA s.260(2)(b). Thus if the Applicant is to be regarded as being a creditor then the IVA (if and when approved) becomes binding on it whether or not it had notice of the meeting or if it had notice whether it voted or not.
10. The meaning of "creditor" in this context receives only a partial definition being that to be found in IA s.257(3). This definition applies only to "… the creditors of a debtor who is an undischarged bankrupt …". Mr Whyman is not and was not at any time material to these proceedings an undischarged bankrupt so that this definition does not assist directly. However, the creditors of such a person are defined as being those who are creditors of the bankrupt "… in respect of a bankruptcy debt". It was common ground between the parties before me that arrears of child support maintenance are a "Bankruptcy debt" within the meaning of IA s.382 because such arrears are a "… debt or liability to which he is subject at the commencement of the bankruptcy", because IA s.382(4) defines "liability" as including a liability under any enactment and because IA s.281(5) impliedly treats such arrears as being "bankruptcy debt". The fact that the definition within IA s.382 is of the phrase "Bankruptcy debt" rather than "bankruptcy debt" is not significant in my judgment as is apparent from use of the lower case "b" in IA,s.383(1).

Issue 1 – Is the Applicant Bound by the Terms of the IVA

11. Although the Applicant is concerned that the consequence of it being concluded that the Applicant is a creditor for IVA purposes is that an escape route will be provided which will enable non paying NRPs to evade compliance with their duty under CSA s.1(3), that is not a necessary or inevitable consequence that follows from such a conclusion. It is always open to the Applicant (if in law it is capable of being bound by an IVA) to attend at the creditors meeting called to approve the proposed IVA and vote, or vote by proxy, against the proposal. In a case such as this the outcome would be a foregone conclusion and the proposed IVA would be defeated. It is open to the Applicant to negotiate like other creditors concerning the terms of the IVA and if the IVA is approved by creditors it is open to the Applicant (as it has, in the alternative, in this case) to apply to the court under s.262 of the Insolvency Act 1986 ("IA") for an order revoking the terms of the IVA concerned on the basis that it is unfairly prejudicial to the interests of the Applicant. It is said that there are practical difficulties because although notice of creditors meetings is routinely given to the Applicant's local offices, the information usually does not reach the legal department of the Applicant until after the meeting has taken place. In my judgment that is an immaterial consideration. If the Applicant is someone who will be bound by an IVA it is incumbent on the Applicant to put in place the administrative arrangements necessary to ensure that its interests are properly represented.
12. I have come to the conclusion that the Applicant is to be regarded as a creditor for present purposes. I say this for the following reasons. First it was open to the legislature to exclude arrears due to the Applicant from the IVA regime other than for the purpose of including it within the debtor's statement of affairs. It chose not to do so. It is said that there is no obvious policy reason for adopting this distinction. Amendments to the IA were only added to the Child Support Bill in the course of its passage through the House of Commons – see Paragraph 7 of Mr Caddick's Supplemental Note dated 5^th March 2010. It is possible therefore that the absence of an express exclusion may be the result of legislative oversight. However even if that is so it is very difficult for a Judge to correct such an error by construction in the circumstances of this case. It is noteworthy that no attempt of this sort was made in any of the three cases concerning analogous situations referred to below.
13. Secondly, whilst it is of course true to say that IA s.257(3) is of no direct application to the facts of this case, because Mr Whyman was not an undischarged bankrupt at any material time, there is no reason to suppose that it was intended that creditors of a debtor who was not an undischarged bankrupt at the material time would be defined more narrowly than is the case in relation to a debtor who was an undischarged bankrupt at that time. Indeed reading IA ss. 257(2) and 257(3) together suggests that the opposite was the case. It would be bizarre for it to be concluded that the Applicant was not a creditor for the purposes of IA s.257(2) in relation to a debtor who was not an undischarged bankrupt but was in relation to a debtor who was an undischarged bankrupt.
14. I do not see any proper basis on which it can be concluded that child maintenance arrears are not a "bankruptcy debt" within the meaning of IA s.257(3)(a). However, that is the conclusion that would have to be reached in order to hold that the Applicant was not to be treated as a creditor for IVA purposes whilst at the same time avoiding the consequence referred to in the previous paragraph. It is noteworthy that neither party argued for this conclusion before me. Nonetheless I have considered the point and set out my conclusions below.
15. The definition of the phrase "bankruptcy debt" is to be found in IA s.382. The core definition is that in sub paragraph (a) – "any debt or liability to which [the debtor] is subject at the commencement of his bankruptcy". Whilst it is possible credibly to conclude that such arrears are not a "debt" within the meaning of IA s.382(1)(a) following the reasoning of the Court of Appeal in Department of Social Security v. Butler (ante), it is more difficult to reach this conclusion by reference to "liability". In order to advance such an argument it would have to be argued that the statutory duty to pay imposed by CSA s.1(3) did not constitute a liability for present purposes. In my judgment not merely is such an argument conceptually difficult but it is not realistically arguable given the definition of liability contained in IA s.382(4) namely "… a liability to pay money … under any enactment …" and is inconsistent with the provisions of IA s.281(5)(b) which refers to "… any bankruptcy debt which … arises … under a maintenance calculation made under the Child Support Act 1991".
16. Thirdly, the fact that the arrears are a non provable debt is not a relevant consideration for present purposes. A debt or liability that is capable of being a "bankruptcy debt" for present purposes is not precluded from being a bankruptcy debt by reason of that debt not being provable.
17. Finally the conclusion that I have reached is consistent with the judgment of Rimer J (as he then was) in Re Bradley-Hole (A Bankrupt) [1995] 1 WLR 1097, the judgment of Chadwick J (as he then was) in Russell v. Russell [1999] 2 FCR 137 and the judgment of Sir John Vinelott in Re A Debtor (No.488 IO of 1996), JP v. A Debtor [1999] 2 BCLC 571 where the two earlier judgments were applied.
18. It was submitted on behalf of the Applicant that this analysis would be inconsistent with the inability of the CSA to accept a lesser sum than that which has been calculated unless the calculation has first been reviewed superceded or appealed. It was submitted that if the CSA is not entitled to agree to accept a lesser sum in full and final settlement of a NRP's liability then it cannot have been intended to be a creditor entitled to vote on an IVA. I do not accept this submission. First, the argument assumes that all IVAs will have the effect of requiring the Applicant to accept a lesser sum. That is not necessarily the case. More importantly however, merely because the Applicant is not entitled to vote at a creditors meeting in support of a proposed IVA that will have the effect of it agreeing to accept a lesser sum in full and final settlement of child maintenance arrears does not lead to the conclusions that it is not a creditor and is not entitled to attend and vote or vote by proxy at such a meeting. Whether the Applicant is to be treated as a creditor for present purposes depends upon the terms of the statutory provisions to which I have referred above. If as I conclude is the case, the Applicant is a creditor for present purposes it can attend the meeting either by a representative or by proxy and vote against the proposal. In that event either the proposal will fail or alternatively it will be passed but in that event the outcome will be imposed on the Applicant as a matter of law. Neither event involves the Applicant accepting a lesser sum in settlement of accrued child maintenance arrears.

Issue 2 – Are the Terms of this IVA Unfairly Prejudicial To the Applicant

19. This issue arises in the context of the application by the Applicant under IA s.262(1). On the basis of the analysis set out above, there is no doubt that the Applicant is entitled to bring such an application since it would be entitled to vote at a creditors meeting – see IA s.262(2)(b)(i). Such applications have to be brought within the time limits referred to in IA s.262(3). It has not been argued by Mrs Walmisley that this provision has not been complied with and I proceed therefore on the basis that the application was brought within time.
20. On such an application, if the court is satisfied that an IVA "… unfairly prejudices the interests of a creditor of the debtor …" it may revoke approval given by the creditors meeting and/or give a direction for the summoning of a further meeting to consider any revised proposal. The court retains a discretion whether to make such an order even if the pre-conditions to the making of such an order are made out.
21. The Applicant's case is that it has been unfairly prejudiced by the approval of the IVA because it has lost the rights that it would otherwise have had to collect or enforce the arrears in full. This is not something that is advanced by reference to the particular facts but is advanced as matter of general principle, the point being that but for the IVA, the Applicant could have enforced or collected all the outstanding arrears or have attempted to do so irrespective of whether Mr Whyman is declared bankrupt.
22. In support of its case in relation to this issue the Applicant relies on Re A Debtor (No 488 IO of 1996) (ante). In that case the debtor had been ordered to pay his wife a sum by way of ancillary relief in matrimonial proceedings. The debtor then made a proposal for an IVA. The proposal was duly approved by the creditors at a creditors meeting of which the wife had notice but did not attend. Under the terms of the IVA the wife in common with all other creditors was to receive a part payment in full and final settlement. The wife applied under IA s.262 for an Order revoking approval. The application succeeded by reference to the fact that the wife had a right not enjoyed by other creditors namely the freedom to assert her claim following the husband's bankruptcy notwithstanding the husband's discharge which right would be overreached if she was compelled to accept a dividend under the IVA in full and final settlement of her entitlement. It was held that the wife had been unfairly prejudiced to the extent that her special position had not been recognised – see the judgment of Sir John Vinelott at 586F-I.
23. In this case, as in Re A Debtor (ante), the arrears are not provable in any bankruptcy, the arrears are not released following the release of Mr Whyman from any bankruptcy and the IVA treats the arrears in the same way as Mr Whyman's other debts by providing for a part payment in full and final settlement. In my judgment on these facts the Applicant has been unfairly prejudiced by the approval of Mr Whyman's IVA because it has been deprived of its right and thus the opportunity to enforce and collect the arrears irrespective of whether Mr Whyman is made bankrupt.
24. In resisting this conclusion Mrs Walmisley submitted (see paragraph 18 of her skeleton) that it must be shown that it is the particular terms of the IVA rather than the system that results in unfair prejudice. Assuming the premise of the submission to be correct, in my judgment the Applicant has done precisely what it is that Mrs Walmisley says is required. The unfair prejudice results from the terms of this particular IVA (the requirement to accept a dividend in full and final settlement) in circumstances where no such requirement could arise that gives rise to the unfair prejudice.
25. Mrs Walmisley submits that the arrears may be over stated and that the result of a review may be that the IVA will fully or substantially compensate the Applicant in those circumstances. On the face of it this point is without substance because the dividend will remain a dividend albeit possibly a higher one and/or referable to a lesser debt. However the point Mrs Walmisley advanced in her oral submissions is that in practical terms there is no evidence that the Applicant would be able to collect or enforce for more than will in the end be recovered under the IVA. I do not accept that as a valid point. The real point is that if the IVA is allowed to take effect, the Applicant will have been deprived of the opportunity of seeking to enforce or collect the whole of the arrears. That is where the unfair prejudice arises. To the extent that the sum outstanding exceeds the amount of relevant benefits received by the PWC in this case that is a prejudice in respect of which the real loser is the PWC and the child or children for whose ultimate benefit the child maintenance calculation had been made.

Disposal

26. The Applications

The application under IA s. 263 is dismissed for the reasons set out in relation to Issue 1 above. The application by the Claimant under IA s.262 succeeds. I will order the revocation of the approval of the proposal given at the creditors meeting held on 11^th March 2009.

27. Costs

I was told that it had been agreed between the parties that in the event that the Applicant lost it would submit to an order that it pay the Second Respondent's costs and that in the event that the Applicant was successful, it would not seek its costs because it regarded these proceedings as a test case. I was told that the Second Respondent is publically funded in respect of his own costs. Given the outcome, my provisional view is that the appropriate order is that there should be no order as to costs save that there should be a public funding assessment of the Second Respondent's costs. Assuming this provisional view is accepted, the parties are directed to submit a draft Order which reflects it as well as the substantive order that I have indicated that I will make at the same time as the lists of typographical and other obvious errors are submitted. In the event that either party has further submissions to make concerning costs they are directed to submit and serve them in writing (a) as to the Applicant within 2 working days of the receipt of this judgment in draft, (b) as to the Second Respondent within 1 working day thereafter and (c) as to any reply by the Applicant within 1 working day thereafter.

28. Permission to Appeal

At the conclusion of submissions, the Applicant indicated that it sought permission to appeal in the event that it was not successful and likewise the Second Respondent sought permission to appeal in the event that he was unsuccessful. Neither wished to incur the cost of making an application after the terms of this judgment became known. I refuse permission to each party to appeal. Whilst I accept that Issue 1 raises a novel point in the sense that it has not been before a court before, that does not of itself make the points the Applicant wishes to rely on or the conclusion that it desires to be reached realistically arguable. In my judgment, for the reasons I have given, it is not realistically arguable that the Applicant is not to be treated as a creditor for IVA purposes. By the same token it is not realistically arguable that the Applicant has not been unfairly prejudiced by losing the ability to enforce or collect the arrears that have accumulated. In those circumstances both applications for permission to appeal are refused.

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