UK Social Security and Child Support Commissioners' Decisions

 


R(CS) 3/03


Mr. C. Turnbull CCS/3616/2000

18.6.01

Departure direction – debts incurred before becoming an absent parent – whether loan made by "employer" – meaning of regulation 16(4) of the Child Support Departure Direction and Consequential Amendments Regulations 1996

The absent parent, Mr. M, was a partner in a business ("W & M"), which for a number of years completed 75% of its work for a company "W. P. & Sons Ltd". In July 1996 Mr. M borrowed £10,000 from W. P & Sons Ltd to pay a debt for which both he and Mrs. M were liable. Subsequently, in October 1996, Mr. and Mrs. M separated. In 1997, Mr. M applied for a departure direction in respect of "special expenses" ie sums expended in repaying the loan from W. P. & Sons Ltd, which he contended was a debt qualifying under regulation 16(1) of the Child Support Departure Direction (etc.) Regulations 1996. Regulation 16(2)(k) excludes from regulation 16(1) sums paid by way of repayment of " a loan obtained by the applicant, other than a loan obtained from the qualifying lender or the applicant's current or former employer." The Secretary of State rejected the application on the grounds that the loan had not been made by a "qualifying lender" or by the applicant's "current or former employer". Mr. M appealed. The tribunal dismissed his appeal, finding that although the term "employer" in regulation 16(2)(k) could be interpreted to include a person who engaged another as an independent contractor, in this case it was not Mr. M who had been employed by W. P. & Sons Ltd but the partnership, so that the loan had not been made by Mr. M's employer. Mr. M appealed to the Commissioner, before whom he argued, inter alia, that the loan from W. P. & Sons Ltd was actually made to the partnership W & M, who then paid it onto him, Mr. M, personally. Mr. M had then to repay the loan to W & M and, accordingly, the loan was from his direct employer and thus eligible as a special expense. Furthermore, the Commissioner also considered the application of regulation 16(4) to the facts of the case.

Held, allowing the appeal, but giving a decision to the same effect, that:

the word "employer" in regulation 16(2)(k) of the 1996 regulations bears its normal meaning of a person who employs another under a contract of service and did not cover employment under a contract for services. W. P. & Sons Ltd was therefore not Mr. M's employer (paragraph 8);

Mr. M's contention that the loan to him was from W & M, which was his employer, was incorrect because he could not be employed by the partnership in which he was a partner and because, on the facts, the loan was made by W. P. & Sons Ltd direct to him (paragraph 11);

regulation 16(4) enables a debt incurred entirely (as well as partly) for the purposes of paying off a debt which would have qualified under regulation 16(1) to qualify, but the exclusion in respect of loans in regulation 16(2)(k) applies just as much to that second debt as to the original debt. The fact that the loan from W. P. & Sons Ltd had been used to pay a debt which would have qualified under regulation 16(1) therefore did not assist Mr. M (paragraphs 16 to 20).

The Commissioner found the tribunal's decision erroneous in point of law, set it aside and gave a decision confirming the Secretary of State's refusal to make a departure direction.

DECISION OF THE CHILD SUPPORT COMMISSIONER

1. This is an appeal by the absent parent ("Mr. M"), brought with the leave of a Commissioner, against a decision of the Cardiff Appeal Tribunal made on 16 February 2000. My decision is set out in paragraph 21 below.
2. On 24 November 1997 the Secretary of State received an application by Mr. M for a departure direction in respect of "special expenses" – i.e. sums expended in respect of a debt incurred before he became an absent parent.
3. The outline facts giving rise to that application were as follows:

(1) At all material times Mr. M carried on in partnership with one other person the business of a building contractor under a name which I shall abbreviate as "W & M".

(2) Between about 1990 and 1996 or 1997 about 75% of that firm's work was done for a company which I will call "WP & Sons Ltd."

(3) The absent parent and his then wife ("Mrs. M") were involved in some legal proceedings with their neighbours, as a result of which an order for costs was made against them in favour of their neighbours. Those costs were taxed at £9,715.73, and in May 1996 statutory demands were served on both Mr. and Mrs. M in respect of the taxed costs.

(4) In July 1996 Mr. M. borrowed £10,000 from WP & Sons Ltd. on the terms of a letter dated 12 July 1996 which provided for repayment by 36 equal monthly instalments, which were calculated on the basis of interest on the outstanding balance at 5% per annum. The £10,000 so borrowed was used by Mr. M to pay the taxed costs.

(5) Mr. and Mrs. M separated in October 1996.

4. Regulation 16(2)(k) of the Child Support Departure Direction (etc.) Regulations 1996 ("the 1996 Regulations") provides that there shall not be eligible as special expenses sums paid by way of repayment of:

"a loan obtained by the applicant, other than a loan obtained from a qualifying lender or the applicant's current or former employer."

5. For reasons which are not material to this decision Mr. M's application for a departure direction was not finally determined by the Secretary of State until 31 October  1998. The Secretary of State's decision was to reject the application on the ground that the debt was a loan which had not been made by a "qualifying lender" or by the applicant's "current or former employer."
6. The Claimant appealed. The Tribunal dismissed the appeal, holding (i) that the word "employer" in regulation 16(2)(k) was wide enough to include a person who engaged another as independent contractor under a contract for services (as well as a person who employs another under a contract of service) but (ii) that the application for a departure direction had nevertheless rightly been rejected because it was not Mr. M who had been employed by WP & Sons Ltd. but the partnership, and so the loan had not been made by Mr. M's employer.
7. The Tribunal's reasoning on the first of those points was as follows:

"The word "employer" is not defined in the Departure Directions Regulations. In the Child Support (Collection and Enforcement) Regulations 1992 "employer" is, for the purposes of deduction from earnings orders, defined (see regulation 8) carefully to confine it to an employer-employee relationship under a contract of service. That definition would clearly exclude someone who was employing an independent contractor under a contract for services.

With some hesitation, I deduce from the manner in which "employer" is defined in the 1992 Regulations that where the child support legislation intends "employer" not to include someone who employs an independent contractor under a contract for services, it defines that word so as to exclude such a person or organisation and that, where the word "employer" is used without further elaboration, it includes someone who employs an independent contractor."

8. However, in my judgment the word "employer" in regulation 16(2)(k) of the 1996 Regulations bears its normal meaning of a person who employs another under a contract of service. The distinction between a contract of service and a contract for services is well-recognised, and in my judgment there generally has to be something special in the context to warrant the conclusion that words such as "employer" and "employee" apply to a contract for services. There is nothing special in this context. On the contrary, if a person engaging another under a contract for services were included in "employer" in regulation 16(2)(k), that provision would cover a loan by someone who had at any time engaged the borrower to perform any task, however small, for reward. It seems to me unlikely that the net was intended to be cast that wide. The fact that there is a specific definition in the Collection and Enforcement Regulations seems to me to be entirely neutral.
9. Had I been in Mr. M's favour on the meaning of "employer", however, I would not have agreed with the Tribunal in holding against him on the second point (see paragraph 6 above). A partnership is not for most purposes regarded as a separate legal entity in English law. In my judgment, if "employer" had included a person who engages another under a contract for services, WP & Sons Ltd. would have been Mr. M's employer. The contracts for services were between WP & Sons Ltd. on the one hand and Mr. M and his business partner on the other. The fact that Mr. M and his partner entered into the contracts as partners would not have meant that, for this purpose, the partnership, rather than they themselves, were "employed" under the contracts.
10. In his grounds in support of this appeal (p.68) Mr. M adopted a somewhat different tack, submitting:

"The loan from [WP & Sons Ltd.] was made to W & M of which I am a partner. The loan was then paid to me by W & M and I was to repay W & M for the sum borrowed. I have proof of my re-payment in the company accounts plus proof of the payment made to myself by W & M. By my understanding, this would make the loan from my direct employer and therefore eligible under the Appeal's legislation."

11. However, that analysis would involve accepting that Mr. M's "employer" was the partnership in which he was himself a partner. That would in my judgment have been a legal impossibility, and so cannot have been the true analysis of the situation. Moreover, it is perfectly clear from the letter at p.14 (referred to in paragraph 3(4) above) that the loan by WP & Sons Ltd. was to Mr. M himself. I therefore reject Mr. M's contention.
12. There is another possible argument in Mr. M's favour which I should consider. The argument is as follows:

(a) the loan by WP & Sons Ltd. was used by Mr. M to repay a debt (i.e. the debt to the neighbours for costs) which, had it not been repaid, would have fallen within regulation 16(1) of the 1996 Regulations;

(b) repayment of the loan to WP & Sons Ltd. therefore qualified as a special expense by virtue of regulation 16(4) of the 1996 Regulations.

13. I have come to the conclusion, with some hesitation, that step (b) above is incorrect. To explain my reasoning it is necessary to refer in more detail to the provisions of regulation 16.

Regulation 16(1) provides:

"Subject to paragraphs (2) to (4), repayment of debts incurred –

(a) for the joint benefit of the applicant and the non-applicant parent;

(b) for the benefit of the non-applicant parent where the applicant remained legally liable to repay the whole or part of that debt;

(c) for the benefit of any person who at the time the debt was incurred –

(i) was a child;

(ii) lived with the applicant and the non-applicant parent; and

(iii) of whom the applicant or the non-applicant parent is the parent, or both are the parents; or

(d) for the benefit of any child with respect to whom the current assessment was made,

shall constitute expenses for the purposes of paragraph 2(2) of Schedule 4B to the Act where those debts were incurred before the absent parent became an absent parent in relation to a child with respect to whom the current assessment was made and at a time when the applicant and the non-applicant parent were a married or unmarried couple who were living together."

Paragraph 2(2) of Schedule 4B provides for a departure direction in relation to "special expenses."

14. There is no doubt that in this case the debt to the neighbours, had it not been paid, would have fallen within regulation 16(1). So, if terms for repayment of that debt over a period had been agreed or ordered by the Court, and Mr. M had paid the instalments after the separation, those instalments would have constituted special expenses. Did the fact that he then paid that debt by means of a loan obtained from a lender not within the class excluded from regulation 16(2)(k) mean that that loan could not qualify?
15. Regulation 16(2) sets out a list of various types of debt specifically excluded from regulation 16(1) – i.e. which cannot be special expenses. Regulation 16(3) is not material. Regulation 16(4) provides:

"Where an applicant has incurred a debt partly to repay a debt or debts repayment of which would have fallen within paragraph (1), the repayment of that part of the debt incurred which is referable to the debts repayment of which would have fallen within that paragraph shall constitute expenses for the purposes of paragraph 2(2) of Schedule 4B to the Act."

16. Regulation 16(4) looks at first sight as if it is only dealing with the situation where a debt is incurred partly to repay a debt which would otherwise have qualified. However, on closer examination I do not think that it is limited to that.
17. Where, while the parents were still living together, one of them incurred a debt (debt 2) in order to pay off another debt (debt 1) which would have qualified under regulation 16(1), debt 2 would itself qualify under regulation 16(1), unless it (i.e. debt 2) was excluded by regulation 16(2). There would usually be no need for the absent parent to rely on regulation 16(4). But that would not be so if debt 2 was not incurred until after the parents separated, because regulation 16(1) applies only to debts incurred before the separation, and there is no general provision (unless it be that in regulation 16(4)) relating to debts incurred in order to repay debts which would otherwise have qualified. I think that a major purpose of regulation 16(4) must be to cover that situation. Although the opening words of regulation 16(4) refer specifically to a debt incurred partly to repay a debt which would have qualified, it would be absurd if, where debt 2 is incurred partly to repay debt 1, part of debt 2 qualifies, but where debt 2 is incurred solely to repay debt 1, none of debt 2 qualifies. That absurdity can be avoided by construing regulation 16(4), read as a whole, to apply also in the latter situation. That is in my judgment a possible construction because the later words of regulation 16(4) – "the repayment of that part of the debt incurred which is referable to the debts repayment of which would have fallen within that paragraph shall constitute expenses … " – are perfectly well applicable to a situation where the whole of debt 2 is referable to debt 1.
18. Further, it seems to me that regulation 16(4) is capable of applying just as much to the situation where (as in the present case) debt 2 is incurred before the separation as to the situation where debt 2 is incurred after the separation, even though, for the reason given at the beginning of paragraph 17 above, it would not usually be necessary to rely on it in that situation.
19. Regulation 16(4) contains no express limitation on the type of lender by whom debt 2 can be made. It is arguable that, where regulation 16(4) applies, debt 2 can therefore qualify even if made by a lender not exempted from regulation 16(2)(k). (That argument would, I think, have potentially far-reaching consequences, because many credit card debts, for example, which are excluded under regulation 16(2)(f), may be incurred in order to pay off another debt). In my judgment, however, the argument is not correct. Regulation 16(1) begins with the words "subject to paragraphs (2) to (4)". That is in my judgment a sufficient indication that regulation 16(4) is not to be regarded as a provision enabling debt 2 to qualify free from the restrictions in regulation 16(2), but that on the contrary debt 2 can only qualify under regulation 16(4) to the extent that it is not excluded by regulation 16(2). In other words, regulation 16(4) qualifies regulation 16(1), and is thereby itself subject to the express limitation in regulation 16(1) that the debt, repayment of which is claimed as a special expense, must not be within one of the categories excluded by regulation 16(2).
20. The result is that because in the present case debt 2 (i.e. the loan from WP & Sons Ltd.) was not made by a qualifying lender or by Mr. M's current or former employer, regulation 16(4) cannot help him.
21. My decision is therefore that the Tribunal's decision was erroneous in law for the reason set out in paragraph 8 above. I must therefore set aside that decision. However, for the reasons set out in paragraphs 9 to 20 above the Tribunal reached the right conclusion. In exercise of the power in section 24(3)(a) of the Child Support Act 1991 I give the decision which in my judgment the tribunal should have given, namely to dismiss Mr. M's appeal against the Secretary of State's decision of 31 October 1998 refusing to make a departure direction. In substance Mr. M's appeal has therefore not been successful.

18 June 2001

(signed) Charles Turnbull Commissioner