United Kingdom House of Lords Decisions

LORD BROWNE-WILKINSON

My Lords,

    For the reasons contained in the speech to be given by my noble and learned friend Lord Jauncey of Tullichettle with which I agree I would dismiss the appeal.

LORD JAUNCEY OF TULLICHETTLE

My Lords,

    Prior to 3 February 1993 the appellant received a number of repayable awards from the social fund and was also in receipt of income support benefit. From this benefit the respondent made deductions towards repayment of the awards. On the above date the estate of the appellant was sequestrated. Thereafter she continued as before to receive income support benefit from which deductions were made. The issue in this appeal is whether the respondent was entitled to continue making these deductions after the date of sequestration. The Lord Ordinary held that he was not but the First Division of the Inner House of the Court of Session held that he was.

    The social fund consists of limited sums paid into it from time to time by the respondent in terms of section 167(3) of the Social Security Administration Act 1992 ("the Administration Act") and is intended to be recycled at least in part so that awards may thereafter be repaid for the benefit of others in need. Payments out of the fund are regulated by Part VIII of the Social Security Contributions and Benefits Act 1992 ("the Contributions and Benefits Act"). Section 138(1) of the latter Act provides inter alia:

 "(1) Payments may be made out of the social fund, in accordance with this Part of this Act . . . .

(b) to meet other needs in accordance with directions given or guidance issued by the Secretary of State."

Section 139(1) provides that a social fund officer is to determine whether a payment is to be awarded and if so of what amount. Subsections (3) and (4) are in the following terms:

 "(3) A social fund officer may determine that an award is to be repayable.

 (4) An award that is to be repayable shall be repayable upon such terms and conditions as before the award is paid the Secretary of State notifies to the person by or on behalf of whom the application for it was made."

Section 140(2) requires a social fund officer to determine any question in accordance with any general directions issued by the Secretary of State. In the present case the Secretary of State had issued directions which required the awards to the appellant to be repayable.

    The method of repayment is provided for in section 78 of the Administration Act of which subsections (1) and (2) are in the following terms:

 "(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."

Income support benefit is a prescribed benefit for the purposes of subsection (2) and it was in terms of that provision that the respondent made the deductions which are challenged.

    The appellant argued that the deductions from her income support benefit after sequestration amounted to an attempt to set off a pre-sequestration debt against a post-sequestration obligation, something which was impermissible at common law. The rule as to compensation or set-off in bankruptcy is stated by Goudy on Bankruptcy (4th ed.) pp. 554-555 as follows:

 "The concourse of debit and credit must have existed antecedent to the date of bankruptcy. Thus, against a debt which becomes due to the trustee on a bankrupt estate after the date of the bankruptcy, it is not competent to plead compensation in respect of a claim against the bankrupt which existed prior to that date. This rule is based on sound principles of equity and expediency--one of the main considerations being to prevent persons indebted to the estate purchasing up claims at a low figure and then pleading set-off, to the serious detriment of the general body of creditors."

When that was written, shortly after the passing of the Bankruptcy (Scotland) Act 1913, income accruing to a debtor after the date of sequestration fell under the sequestration with certain exceptions. Section 32(1) of the Bankruptcy (Scotland) Act 1985 now vests in the debtor income received by him after the date of sequestration which is not derived from the estate vested in the trustee. The appellant also referred to further well established principles of the common law, namely (1) that a creditor in an obligation undertaken by a debtor prior to sequestration must, after sequestration, enforce that obligation against the estate vested in the trustee and can only seek a decree of constitution thereanent against the debtor personally, and (2) that a creditor can enforce against the debtor an obligation incurred after sequestration: Fraser v. Robertson (1881) 8 R. 347. The relevance of these principles, which were not in dispute, was, it was submitted, that upon sequestration the respondent could only recover the balance of the social fund awards from the permanent trustee in whom the sequestrated estate was vested whereas his attempt to recover by deduction was tantamount to suing the appellant personally for enforcement of a pre-sequestration obligation, or in any event to doing diligence contrary to section 32(5) of the Bankruptcy (Scotland) Act 1985.

    Both the Lord Ordinary and the First Division considered that the two codes relating to social security on the one hand and bankruptcy on the other could stand together so far as they might be mutually applicable. The respondent accepted that this was the position and indeed conceded that if the appellant's obligation in relation to the social fund was to be treated as a simple pre-sequestration debt independent of the respondent's post- sequestration obligation to pay income support benefit the general rule would apply to prevent the one being set off against the other. However he argued that the position was more complex and did not fall within the ambit of the rule. It was not a case of compensation as understood in the law of Scotland but of the respondent exercising a statutory power of deduction which was quite a different process.

    My Lords, the appellant's entitlement to income support benefit is rendered inalienable by statute from which it follows that the corresponding obligation of the respondent to make payment thereof is not and could not be owed to the permanent trustee. His relationship is solely with the appellant. Not only does section 32(1) of the Bankruptcy (Scotland) Act 1985 vest the benefit when received in the appellant but, more importantly, section 187(1) of the Administration Act provides in relation to income support benefit inter alia that "on the bankruptcy of a beneficiary, such benefit shall not pass to any trustee or other person acting on behalf of his creditors." It was said that this adds little or nothing to the all-embracing provisions of section 32(1) and that in any event it does not override the provisions of section 32(2) whereby so much income received by a debtor as exceeds his needs, as determined by the Sheriff, may require to be paid to the permanent trustee. For this latter proposition the appellant relied on Macdonald's Trustee v. Macdonald, 1938 S.C. 536 in which section 14(1) of the Police Pensions Act 1921, which was in term similar to section 187(1), was held not to override section 98(2) of the Bankruptcy (Scotland) Act 1913 whose provisions in relation to alimentary provisions alone were similar to those of section 32(2). Section 14 of the Police Pensions Act was no doubt designed to ensure that a pension payable under the Act was treated as an alimentary provision and therefore was only available to the trustee in sequestration quoad excessum. But for such a provision the trustee could have been entitled to have paid to him directly a substantial part of the pension: section 98(2) of the Bankruptcy (Scotland) Act 1913. In 1992, however, owing to the change in the law effected by section 32(1) there was no need to make specific provision for the removal from the grasp of the permanent trustee of income received by a debtor by way of earnings, pension or social security benefit. I therefore conclude that the purpose of that part of section 187(1) above set out was to make clear beyond peradventure that the permanent trustee could have no interest in any entitlement of a debtor to receive any of the social security benefits to which it applied. I should add further that while the theoretical possibility of a permanent trustee invoking section 32(2) in relation to a debtor whose sole income consisted of such benefits remains, the probability of any such invocation being successful must at least in the case of those benefits such as income support benefit which are income related be virtually nil. In short it can never have been contemplated in social security legislation that any part of the income-related benefits to which section 187(1) applied would find their way into the hands of the permanent trustee of a bankrupt beneficiary and indeed the trustee has no right to proceed against the respondent for payment of any part of the benefit to which a debtor may be entitled.

    The principle purpose of the rule, as Goudy explains in the passage to which I have referred, is to prevent a creditor obtaining a preferential advantage over other creditors and thereby diminishing the assets which would otherwise be available for equitable distribution. This in turn presupposes that what is being retained by the creditor is something which would otherwise form part of the estate to be ingathered by the permanent trustee. Gloag on Contract, 2nd ed., p. 649 refers to the rule applying "when payment of a debt is demanded by a trustee in bankruptcy . . . " In this case, however, the appellant seeks to invoke the rule not for the benefit of the general body of creditors but for herself. If she is correct in her submission that the respondent was not entitled to continue to make the deductions which he made prior to sequestration the gross benefit to which she is entitled would be payable to her. Sequestration would therefore confer an immediate financial advantage upon her. Even more bizarre would be the situation where overpayments obtained by fraud were being recovered by deduction from benefits. On sequestration the fraudster would immediately receive the gross benefit. It is difficult to believe that Parliament can have intended such a result.

    The only provision in the Bankruptcy (Scotland) Act 1985 which was said to prevent continued deductions under section 78(2) of the Administration Act was section 32(5) which is in the following terms:

 "(5) Diligence in respect of a debt or obligation of which the debtor would be discharged under section 55 of this Act were he discharged under section 54 thereof shall not be competent against income vesting in him under subsection (1) above."

Even assuming that the appellant's obligation to repay the social fund awards would be discharged under section 55 after three years, a point on which I do not find necessary to express a view, there are two reasons why the subsection is inapplicable. In the first place it only applies to income received by the debtor and the deductions were never received. In the second place by no stretch of the imagination could the respondent's exercise of his statutory right be described as diligence for the purposes of the law of Scotland. It is neither arrestment nor poinding, adjudication nor inhibition. If continued deduction by the respondent is to be struck at it can only be as a result of the application of common law to the statutory provisions relating to social security benefits.

    My Lords, to apply the common law rule of concursus debiti et crediti to the right of the respondent to make deductions would be to apply it for a purpose, the personal benefit to the appellant, for which it was never intended. The deductions made by the respondent were not as in the normal case of compensation in bankruptcy a result of the bankruptcy, but were made in pursuance of a statutory scheme which was already in operation at the time of sequestration and with which the permanent trustee can have no concern. Prior to sequestration the appellant had no right to receive by way of income support benefit more than her gross entitlement under deduction of such sum as had been notified to her by the respondent prior to payment of the award by the respondent. This was the result of the statutory scheme and she could not have demanded more. The respondent's continued exercise of a statutory power of deduction after sequestration was unrelated thereto and was not calculated to obtain a benefit for him at the expense of other creditors. The only person who had any realistic interest in the deductions was the appellant from which it follows that the respondent was not seeking to exercise any right against the permanent trustee. In my view the respondent's exercise of his statutory power did not amount to compensation or set-off for the purposes of the application of the rule. It is interesting to note that in the English case Bradley-Hole v. Cusen [1953] 1 Q.B. 300 Jenkins L.J. at pp. 309-310 held that a tenant's statutory right to deduct prior overpayments of rent from a future rent payable by him was not an ordinary case of set-off and could continue to be exercised after the bankruptcy of the landlord.

    My Lords, I conclude by expressing my agreement with the reasoning of their Lordships of the First Division. I would therefore dismiss the appeal and affirm the interlocutor of 25 October 1995.

LORD MUSTILL

My Lords,

    I have read in draft the speech to be given by my noble and learned friend Lord Jauncey of Tullichettle. For the reasons he gives I too would dismiss the appeal.

LORD SLYNN OF HADLEY

My Lords,

    I have read in draft the speech to be given by my noble and learned friend Lord Jauncey of Tullichettle. For the reasons he gives I too would dismiss the appeal.

LORD LLOYD OF BERWICK

My Lords,

    I have had the advantage of reading in draft the speech prepared by my noble and learned friend Lord Jauncey of Tullichettle. For the reasons he gives I too would dismiss this appeal.