Northern Ireland - Social Security and Child Support Commissioners' Decisions

[2007] NISSCSC CSC3_05_06 (31 January 2007)

Decision No: CSC3/05-06

THE CHILD SUPPORT (NORTHERN IRELAND) ORDERS 1991 AND 1995
Appeal to a Child Support Commissioner on a question of law from a Tribunal's decision dated 17 January 2005
DECISION OF A CHILD SUPPORT COMMISSIONER
1. This is an appeal, leave having been granted by the legally qualified panel member, by the father and non-resident parent against a decision dated 17 January 2005 of an appeal tribunal sitting at Belfast. That tribunal had allowed the appeal by the mother and parent with care against a decision dated 27 March 2001 by the Child Support Agency refusing to make a departure direction on the grounds put forward by the mother. There had been an earlier appeal before the Chief Commissioner when all parties were agreed that the decision of the original tribunal was in error of law and the matter was remitted for rehearing by the instant tribunal (decision CSC5/03-04 of the Chief Commissioner refers). The instant tribunal allowed the mother's appeal and gave a departure direction on one of the grounds upon which it had been sought by the mother. This ground was under regulation 25 of the Child Support Departure Direction and Consequential Amendments Regulations (Northern Ireland) 1996. It was that the current assessment of child support was based upon a level of income of the father which was substantially lower than the level required to support his lifestyle. The tribunal declined to make a departure direction on the other grounds sought by the mother. These grounds have formed no part of the appeal to me and I say nothing about them here.
2. The level of income upon which the assessment was based in this case was £85.08 per week. At the tribunal hearing the father was represented by Mr Creighton, Solicitor of Creighton and Company, Solicitors who continues to represent him before me. The mother was represented by Ms McCormack of the Law Centre (NI). Before me she is represented by Mrs Carty of that organisation. The Child Support Agency initially was represented by Mr Gough and later by Mr Crilly of Decision Making Services Branch of the Department for Social Development. Mr A…, Accountant (who appears to have been the father's accountant at one time) gave evidence at the tribunal hearing and has done so before me. At the tribunal hearing (which the father did not attend) Mr Creighton conceded, in my view quite properly, that his client's lifestyle was inconsistent with the income on which the assessment was based but contended that it was funded by an overdraft or loan. The tribunal concluded that it was not so funded and the father appealed initially by lodgment of a letter received on 5 December 2005 and completed by lodgment of an OSSC1 form received in the Commissioners' Office on 7 February 2006. I held a hearing of the appeal which the mother and her representative attended; Mr Creighton and Mr A… attended. Mr Crilly attended but the father did not attend.
3. The father did not attend the tribunal hearing. At that hearing Mr Creighton submitted that the father's lifestyle was inconsistent with his assessed income but funded by an overdraft or loan and that the father was on a capital led spending spree. He alluded to amounts of stock going up and down (the father's business being that of car dealer) and indicated that was "all on lifestyle". Mr A… stated that the father only had one bank account. He said all lodgments were for sales of cars and that the father obtained bank drafts to buy cars and that the net profits were considerably less than the father was spending. The tribunal had before it (inter alia) various bank statements from September 1998 to August 2001. It also had income tax computations for 1992, 1993, 1994, letters from the Inland Revenue, accounts for years ended 31 July 1997, 31 July 1998, 31 July 1999 and 2000.
4. Having perused the evidence the tribunal reasoned as follows on the matter of lifestyle being funded by capital:

"… The Absent Parent's representative conceded that this was the case but that his lifestyle was funded by an overdraft or loan. He argued that the Absent Parent was on a "capital led spending spree". Reg 25(2) of the Departure Regulations provides that a Departure Direction will not apply where the lifestyle of the non-applicant is funded out of capital. It is settled law, of course, that an overdraft is a loan and that a loan is capital. If it were the case that the Absent Parent was funding his lifestyle on the basis of a loan then the application would fail on this ground. We do not accept that this is the case. An examination of the loan during the year to March 01 indicates numerous fluctuations in the amount overdrawn ranging from approximately £48,000 in credit to £153,000 overdrawn. However the overall picture is clearly of an account which generally hovers around the sum of £100,000 overdrawn. He is clearly capable of controlling the overdraft. It does not increase on a year to year basis as one might expect if the argument put forward by the Absent Parent's legal representative were to be accepted.

The question, therefore, for the Tribunal is whether the Absent Parent's maintenance liability under the current assessment is based on a level of income which is substantially lower than the level of income required to support his overall lifestyle. We must first examine the Absent Parent's lifestyle and consider whether he could find [sic] that lifestyle from his declared income. The net income for the purposes of the assessment has been calculated at £85.08.per week.

He pays £115 per week into a personal pension (50% of which - £57.69 – is disregarded when calculating his net income) leaving a disposable income of £27.39 per week for day to day living expenses.

The Tribunal must now examine the Absent Parent's lifestyle. It is not disputed that he makes the following payments on a weekly basis.

1)	Standard Life Policy	39.67
2)	[Wife]	170.10
3)	E Z…	250.10
4)	Allied Dunbar	38.24
5)	Court Order Maintenance	60.10
6)	Rates	11.54
7)	Ground Rent	1.92
8)	Pension (50%)	57.69
9)	Sky Television	6.92

With regard to item 1 we are satisfied that it relates to a savings policy in the Absent Parent's name. Item 2 is described by the Absent parent as "… running the house expenses" paid to his wife. We accept this. The Absent Parent has indicated that item 3 relates to repayments to Ms Z… in relation to a business venture in the past. Item 4 is a payment in relation to a Life Assurance Policy paid house insurance. Item 5 is maintenance payable over and above Child Support maintenance. Items 6-9 are self-explanatory.

We are satisfied that the Absent Parent is capable of making these payments on a regular basis. It is a clear indication that his lifestyle is inconsistent with his declared income. Having examined the variability of the Absent Parent's bank account and having had the benefit of the financially qualified member's expertise we are satisfied that the Absent Parent's lifestyle is not being financed from his overdraft facilities and can therefore be attributed to his income.…"

5. The grounds of appeal to me were initially threefold but in his skeleton argument Mr Creighton, again in my view correctly, withdrew two of those grounds leaving the only ground that the tribunal was not entitled to its conclusion that the father's lifestyle was not funded out of capital. Regulation 25(2)(a) and (b) of the Child Support Departure Direction and Consequential Amendments Regulations (Northern Ireland) 1996 is the relevant provision. It provides that the lifestyle inconsistent ground:

"shall not apply where the Department is satisfied that the life-style of the non-applicant is paid for –

(a) out of capital belonging to him; or

(b) by his partner, unless the non-applicant is able to influence or control the amount of income received by that partner."

In Mr Creighton's submission (in support of which Mr Allen made reference to the accounts of the business) the lifestyle was supported by borrowings from capital. Any monies over and above the profit of the business had to be supported from capital. Overdraft was not the only factor. The lifestyle could also be funded by curtailing purchases, selling stock and chasing debtors. He placed some reliance on decision CCS/0821/2003 paragraphs 7 and 8 where Mr Commissioner Jacobs states:

"7. At the time of the application, the absent parent was working as a sole trader. (He later converted his business to a company). The statement of the reasons for the tribunal's decision records that it was 'satisfied that the lifestyle was not funded from capital – the allegation that the utilisation of company funds was analogous to this was not accepted given the particular position of the company in that clearly the lifestyle was, in fact, funded by the future expectations of the company, i.e. increasingly buoyant.'

8. I do not follow that reasoning. As a sole trader, there was no distinction between the absent parent's personal income and capital and that which he employed in his business. It may be that I have misunderstood the tribunal's reasoning, but it seems to me that it decided that the absent parent was funding his life-style by drawing on the capital of his business in anticipation of future profits. That is drawing on capital. At least, the tribunal's reasoning is unclear."

6. Mr Crilly opposed the appeal. He submitted that the tribunal was entitled to its conclusion that, had the lifestyle been paid for by borrowing, the overdraft would have increased year on year which it had not done. He submitted further that the father could not be said to be drawing on the capital of the business. He was a car dealer and the sale of cars was the sale of stock. Selling cars was not living off capital or borrowing rather he was supporting himself by selling his stock in trade and the money generated thereby represented the proceeds and/or profits of his business. While the accounts might be a useful indicator of how lifestyle was funded, the most useful indicator was, in Mr Crilly's submission, the bank statements showing that the overdraft was controlled. He distinguished CCS/821/2003 in that in that case the non-applicant parent was borrowing against the expectation of future profit whereas in this case the business was making money which allowed the father to withdraw sums to pay for his outgoings. The tribunal had a financially qualified member who considered the evidence. The tribunal was entitled to its conclusion.
7. Mrs Carty referred to the burden of proof being on the father to show that regulation 25(2)(a) applied. She referred to difficulties in cases of this nature. She distinguished CCS/821/2003 on the basis that in that case the non-applicant's evidence had been given candidly (para 17 thereof). She alluded to the difficulties in this case and to a lack of co-operation and candour by the non-applicant parent. She submitted that, where a non-applicant parent sought to rely on the regulation 25(2) exceptions that non-applicant parent must act in good faith and be seen to do so. The tribunal in this case consisted of a lawyer and a financially qualified member. They considered the evidence and were not convinced that it adequately explained the inconsistent lifestyle. The tribunal was entitled to its conclusion.
8. Mr Creighton refuted any suggestion that his client had been unco-operative and said that since he became involved his client had provided everything asked for.
9. I am of the view that the tribunal should have dealt rather more fully with the issue raised (albeit in somewhat tentative terms by Mr A…) that the lifestyle was being funded by other forms of capital than the overdraft. This issue was also raised at hearing by Mr Gough for the Department and the tribunal should have dealt with it. It failed to do so and I set the decision aside for that reason.
10. I consider it expedient to give the decision which the tribunal should have given. This matter has been going on for some five years, the welfare of children is involved and there is ample evidence before me to enable me to properly make a decision. I therefore proceed to do so.
11. There is no issue in this case as to the partner having any relevant capital. Regulation 25(2)(a) is the relevant provision. Various authorities have assisted with the meaning of "capital" and "paid for" in this provision. It is clear from regulation 25 and there is authority (CCS/1944/05) indicating that the evidential burden of proving that an inconsistent lifestyle is funded by capital is on the non-applicant (in this case the father) seeking to escape a departure direction on this ground. There is also authority (R(CS)6/02) that the non-applicant can rely on regulation 25(2) only where the non-applicant shows that the whole of the additional income needed to support the lifestyle comes from out of the sources listed. I am in agreement with R(CS)6/02 paragraph 15 in its analysis of how regulation 25(2) is to be interpreted and applied. In that paragraph Mr Commissioner Turnbull states:

"15. However, the correct analysis is in my judgment as follows:

(1) The first step is to decide whether the case is taken outside Reg. 25(1) by Reg. 25(2) – i.e. whether "the life-style of the non-applicant is paid for …. by his partner". In my judgment that condition will be satisfied if, but only if, the partner pays the entirety of the difference between (a) the net income of the non-applicant used in the current assessment and (b) the level of income required to support his overall life-style. (It is not, in my judgment, necessary that the partner pays the entirety of (b)).

(2) If the answer to (1) is 'yes', no departure direction can be made under Reg. 25.

(3) If the answer to (1) is 'no', a departure direction can be made if it would be just and equitable in all the circumstances to do so: S.28F(1)(b) of the Child Support Act 1991.

(4) If a departure direction is made, it need not (contrary to what appears to be the Secretary of State's submission) increase the non-applicant's net income to the amount required to support his overall lifestyle (regardless of the amount of that net income which is paid by his partner). That is because Reg. 40(5) expressly provides that the net income is to be increased by "the whole or part of" the difference between the two levels of income. Further, in deciding by how much to increase the non-applicant's net income the part of the difference in the two levels of income which is paid for by the non-applicant's partner is plainly a highly material factor; but there is no absolute prohibition against that part being included in the departure direction increase. A decision to include the part paid for by the non-applicant's partner in the departure direction increase, would, however, in my view, given the existence of Reg. 25(2), have to be justified by some special factor."

I adopt that analysis and consider it applies equally to consideration of regulation 25(2)(a). It is, in my view, quite clear from regulation 25(2) that the non-applicant parent can have the benefit of regulation 25(2) only where the lifestyle is paid for in its entirety from capital or by a partner. To conclude otherwise would lead to the ludicrous situation whereby a small fraction paid for within regulation 25(2) could exclude the application of regulation 25(1) and could render regulation 40(5) somewhat otiose in relation to such cases.

12. As to the interpretation of "capital" in regulation 25(2)(a), both Mr Creighton and Mr Crilly were of the view that an overdraft was a loan and a loan was capital. Mrs Carty submitted that an overdraft was not a loan, it was a facility. There is no need for me to enter into an examination of Mrs Carty's argument in light of the conclusion set out in the succeeding paragraphs. I likewise make no comment on the comments by Mrs Carty on the co-operation and credibility of the father. The conclusions which I have reached are not influenced by those comments.
13. Having perused the bank statements I conclude that the overdraft was not funding the lifestyle. The father's bank position varied from being in credit by some £72,000 (in July 2001) to being overdrawn by some £84,000 in August 2001 but there was no indication of a month on month or even year on year growth in the overdraft such as would have been expected had the overdraft funded his lifestyle. In 1998 the overdraft was around £80,000. It was so again in August 2000. The lifestyle was costing some £636.28 per week. The father made payments totalling that amount on a weekly basis. As his income is stated to be small, if he was financing this amount of payments or overdraft the overdraft would be expected to rise by some £2,000 per month. It has not done so. The bank account shows certain of the payments which the father makes on a weekly or monthly basis but the overdraft does not steadily rise as would have been expected to reflect a discrepancy of some £26,000 per year. I conclude that the lifestyle was not being paid for by the overdraft.
14. Mr A… submitted that the father's stock may be coming down and that may affect the overdraft. He said that items for "NIIB" would be leasing costs. Mr A… had mentioned at earlier hearings that the father had an arrangement with C… H… cars that he had first option to purchase second-hand cars from them and would be given a car on one month's approval to sell it. Is the evidence such as to show that the father was reducing his stock? If he was did this mean he was funding his lifestyle from capital? There are no accounts beyond 2000 and the balance sheet at 31 July 2000 shows a rise in stock over the previous year. It also shows a decrease in the trade debtors and a rise in trade creditors. This last equates relatively closely to the increase in the stock. Even if C… H… was a creditor it would not seem there was any substantial reduction in stock. The bank accounts in any event indicate substantially higher sums being withdrawn. These may or may not be for stock purchases – they are not otherwise explained, many are marked as referable to car purchases and at least one is to C… H…. There seems to be little or no evidence to substantiate that the lifestyle was being funded by a reduction in stock.
15. It is correct that the capital account showed increasing capital deficit. The capital figure is made up by adding together the current assets and taking from them the current liabilities. On the balance sheets before the tribunal there are large sums which are not explained. Trade debtors are shown as decreasing while trade creditors are increasing and stock held is also increasing. The capital account shows an increase in capital deficit from 31 July 1999 to 31 July 2000 of some £12,000 and there was a similar increase in 1999 and 1998. However this does not account for the sum of approximately £32,000 per annum required to fund the father's lifestyle. There is a discrepancy year on year of some £20,000. The overdraft was not increasing year on year so it was not covering the lifestyle. By his own evidence the father was making payments totalling £636.28 per week on a regular basis. Those payments are not covered by the overdraft nor wholly covered by capital being drawn from the business. It is correct that the accounts show a reduction in the trade debtors and an increase in trade creditors. However, as I mentioned above there has been an increase in stock and an overall reduction in other capital negative items (for reasons which are unclear to me these have been blanked out). The overall effect is that the capital position is worsening by only a fraction of the figure required to fund the lifestyle. The capital position worsened by some £20,000 in the years 1998 to 1999 but only by some £12,000 in the year 1999 to 2000 despite the lifestyle requiring some £32,000 per annum to maintain it. On the evidence capital could not have funded the lifestyle in total though it appears to have funded a portion of it. There is also, in my view, merit in Mr Crilly's submission, echoed by Mrs Carty, that when a sole trader sells his stock and uses some or all of the proceeds to live this is not necessarily living off the capital. It is living off the business which is that of car dealing. This may or may not involve living off capital and the extent may vary.
16. My decision is that the father's lifestyle was inconsistent with the income upon which the assessment was based. The income required to support that lifestyle was £636.28 per week. I consider that this lifestyle is not totally paid for out of capital so that regulation 25(1) applies and regulation 25(2)(a) does not. It would, in my opinion, in all the circumstances of this case be just and equitable to give a departure direction bearing in mind the financial circumstances of the father and of the mother and the welfare of any children likely to be affected by the direction as per Article 28F of the Child Support (Northern Ireland) Order 1991. I have taken into account the general principles set out in Article 28E(2) of that Order and have not taken into account the matters set out in Article 28E(4) thereof. I have taken into account the factors set out in regulation 30(1) of the Regulations and have not taken into account the factors set out at regulation 30(2) thereof.
17. I apply regulation 40(5) of the Regulations. I give a departure direction pursuant to that provision that the net income of the father be increased by £322 per week (being approximately 7/12 of the difference between the assessed income of £85.08 per week and £636.28 the amount required to fund his lifestyle). This makes an allowance for part of the lifestyle being funded by capital. The effective date of the direction is 30 January 2001.
18. The father wins his appeal but only to the extent shown above.

(signed) M F Brown

Commissioner

31 January 2007