Upper Tribunal (Administrative Appeals Chamber)

LB of Waltham Forest v TM [2009] UKUT 96 (AAC) (01 June 2009)
Capital
Notional Capital: other

 
Decision of the Upper Tribunal
(Administrative Appeals Chamber)

As the decision of the Enfield appeal tribunal (held on 24 June 2008 under reference 921/08/00472) involved the making of an error in point of law, it is SET ASIDE under section 12(2)(a) and (b)(i) of the Tribunals, Courts and Enforcement Act 2007 and the case is REMITTED to a differently constituted First-tier Tribunal (Social Entitlement Chamber).

DIRECTIONS:

I have added to the papers the List of Events prepared by Mr Rutledge. The tribunal will find that invaluable in identifying the sequence of events and the related pages in the documents.

The tribunal must conduct a complete rehearing of the issues that are raised by the appeal and, subject to the tribunal's discretion under paragraph 6(9)(a) of Schedule 7 of the Child Support, Pensions and Social Security Act 2000, any other issues that merit consideration. In particular, it must deal with the issue of notional capital and, if it arises, the issue of rental income.

Notional capital

There is no dispute that the claimant transferred £75,000. The following questions arise.

First deprivation: did he transfer ownership of that amount or was it held by the recipients for his benefit? So far, it has been assumed that he did transfer ownership. If that assumption is wrong, he retained an interest in the money and it vested in the trustee on his bankruptcy. If that assumption is correct, the following questions arise.

Second knowledge: did the claimant know of the capital limit? If he did not, the notional capital rule does not apply. If he did, the notional capital rule may apply.

Third purpose: did the claimant transfer the money with the significant operative purpose of securing entitlement to benefit? If he did not, the notional capital rule does not apply. If he did, the notional capital rule applies.

The Secretary of State has awarded the claimant a jobseeker's allowance without treating him as having notional capital. The tribunal may wish to inquire (perhaps through the local authority) why that was so, as the answer may affect its analysis.

Rental income

This issue only arises if the tribunal decides the notional capital issue in the claimant's favour.

If the issue arises, the rent will be income for the period to which it related and must be taken into account as such. Any rent that remained after that period was capital and must be taken into account as such. The claimant has admitted that he received the rent and that he did not make any mortgage payments on the property. The burden is on him to explain what he did with the money he received.

Reasons for Decision

A. Introduction

1. This case concerns the relationship between benefit law and bankruptcy. The Court of Appeal has recently clarified that relationship. A liability to repay as a result of a decision made before bankruptcy is a bankruptcy debt that is discharged by the bankruptcy (R (Balding) v Secretary of State for Work and Pensions [2008] 1 WLR 564), whereas a liability to repay as a result of a decision made after bankruptcy is not a bankruptcy debt even as a contingent liability and is not affected by the bankruptcy (R (Steele) v Birmingham City Council [2006] 1 WLR 2380). The issue that arises before me concerns the relationship between notional capital and bankruptcy.
2. I held an oral hearing of the appeal. Paul Staddon and Desmond Rutledge, both of counsel, appeared for the local authority and the claimant respectively. I am grateful to them for their written arguments and for their discussion at the hearing.

B. Notional capital

3. Section 136 of the Social Security Contributions and Benefits Act 1992 provides, in respect of both housing benefit and council tax benefit:

'(5) Circumstances may be prescribed in which-

(a) a person is treated as possessing capital or income which he does not possess; …'

It is clear, both from its language and its content, that this is a deeming provision. It provides that something that is not the case is to be treated as if it were.

4. Regulation 44 of the Housing Benefit Regulations 2006 provides:

'(1) For the purposes of Part 7 of the Act (income-related benefits) as it applies to housing benefit, the capital of a claimant to be taken into account shall, subject to paragraph (2), be the whole of his capital calculated in accordance with this Part …'

There follows regulation 49, which is made under the authority of section 136(5)(a):

'Notional capital

(1) A claimant shall be treated as possessing capital of which he has deprived himself for the purpose of securing entitlement to housing benefit or increasing the amount of that benefit except to the extent that that capital is reduced in accordance with regulation 50 (diminishing notional capital rule).'

Regulation 39 of the Council Tax Benefit (General) Regulations 1992 is to the same effect.

C. History and background

5. The decisions under appeal to the appeal tribunal were that the claimant had been overpaid housing benefit and paid excess council tax benefit from the effective date of the local authority's awards (27 February 2006). The factual basis of those decisions was that the claimant had had notional capital in excess of the threshold for entitlement to benefit. The notional capital consisted of payments totalling £75,000 to three family members. The claimant said that these were repayments of loans, which had been made either as a dowry or for business purposes.
6. The £75,000 appears to have come largely from the proceeds of sale of a property. The payments were made in late November 2005. On 3 February 2006, a bankruptcy order was made against the claimant on his own petition. On 21 February 2006, he made claims for housing benefit and council tax benefit, which were awarded with effect from 27 February 2006. The bankruptcy was discharged on 3 February 2007, but the claimant remained subject to a bankruptcy restrictions order for eight years under section 281A of, and Schedule 4A to, the 1986 Act.
7. The tribunal found that the payments of £75,000 'were notional capital to which he was entitled up to his bankruptcy. However, at the date of his bankruptcy, the Official Receiver became entitled to those sums by virtue of his right to claim repayment and he sought repayment from the supposed lenders. The Tribunal found that the right to this notional capital also passed to the Official Receiver and could not be taken into account' in deciding the claimant's entitlement to benefit.
8. The tribunal's assessment of the claimant's evidence was that it was honest, credible and consistent with the documentary evidence, although the claimant was not an accurate historian. I do not understand how that qualification is consistent with what went before. Nor do I understand why the tribunal found that the conditions for notional capital were satisfied despite the claimant's honesty.
9. Those uncertainties apart, the tribunal made at least three mistakes in law.

D. Mistake 1 – knowledge of the capital limit

10. A claimant who transfers property without knowing of the capital limit for benefit cannot, in so doing, be motivated to secure entitlement to benefit: R(SB) 12/91. In some cases, the circumstances may speak for themselves of that knowledge. Not so in this case. As far as I know, there was no evidence that the claimant had previously claimed an income-related benefit, had made any inquiry about, or investigated, the conditions of entitlement, or had any dealings with benefits. In the circumstances, the tribunal should have made a specific finding whether the claimant knew of the capital limit and explained why it did so. Its failure to do either was an error of law.

E. Mistake 2 – significant operative purpose

11. The test of whether the claimant made the payments 'for the purpose of securing entitlement to housing benefit' is whether that formed a significant operative purpose of the transaction: R(SB) 40/85. The tribunal made no finding on this issue. In some cases, the circumstances may speak for themselves of the claimant's motive and purpose. Not so in this case. His financial predicament and possible insolvency may alone have led him to make the payments. Another possibility, if his evidence at page 354 is accepted, is that it was family pressure that caused him to make the payments. In the circumstances, the tribunal should have made a specific finding whether securing entitlement to benefit was a significant operative purpose of the payments and explained why it did so. Its failure to do either was an error of law.

F. Mistake 3 – the effect of bankruptcy

12. As a result of concessions, Mr Staddon and Mr Rutledge had, by the end of the hearing, agreed on the correct legal analysis of this issue.
13. Section 306 of the Insolvency Act 1986 provides that a bankrupt's estate vests in the trustee. In the case of the official receiver, it vests when the receiver becomes the trustee. In this case, as there was a decision not to summon a creditors' meeting, the official receiver became the trustee on the date when notice of this was given: section 293. Notice was given on 27 February 2006, the same day as the effective date of the local authority's awards of benefit.
14. The issue then arises whether notional capital is part of bankrupt claimant's estate. The content of a bankrupt's estate is defined by section 283:

'(1) Subject as follows, a bankrupt's estate for the purposes of any of this Group of Parts comprises-

(a) all property belonging to or vested in the bankrupt at the commencement of the bankruptcy, and

(b) any property which by virtue of any of the following provisions of this Part is comprised in that estate or is treated as falling the preceding paragraph.'

'Property' is defined by section 436:

'"property" includes money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent, arising out, of or incidental to, property'.

Section 283(4) is also relevant:

'(4) References in any of this Group of Parts to property, in relation to a bankrupt, include references to any power exercisable by him over or in respect of property except in so far as the power is exercisable over or in respect of property not for the time being comprised in the bankrupt's estate and—

(a) is so exercisable at a time after either the official receiver has had his release in respect of that estate under section 299(2) in Chapter III or a meeting summoned by the trustee of that estate under section 331 in Chapter IV has been held, or

(b) cannot be so exercised for the benefit of the bankrupt;

and a power exercisable over or in respect of property is deemed for the purposes of any of this Group of Parts to vest in the person entitled to exercise it at the time of the transaction or event by virtue of which it is exercisable by that person (whether or not it becomes so exercisable at that time).'

15. A claimant who admits having had, or has been found to have, possessed capital has the burden of explaining what has been done with it. If that burden is not discharged, the tribunal must find that the claimant retains the capital, albeit perhaps that its location is not known: R(SB) 38/85 at paragraph 18. If a claimant retains capital, the notional capital rule cannot apply: paragraph 20 of that decision. It is only when a claimant has disposed of capital that the notional capital rule applies. And when it applies, it does so only for the purposes of entitlement to benefit. The claimant, by definition, does not possess the capital. It is irrelevant for the purposes of regulation 49 whether or not the claimant has any possible claim to recover the capital from the payee. In terms of legal analysis, the claimant is under a liability that the capital will be taken into account under the regulation.
16. Applying that analysis to this case, the claimant divested himself of £75,000. He ceased to own that property or to have any right or interest in or over it from that moment. In its place, there arose a potential liability that, were he to claim an income-related benefit, he would be treated as still possessing the amount that he had transferred. That liability is not part of the bankrupt's estate as defined in the 1986 Act.
17. It may just be possible to imagine circumstances in which a transfer of property would come within the notional capital provisions but be liable to be set aside by, or on application by, the claimant. If so, the claimant might have some right or interest that could vest in the trustee in bankruptcy. This, however, is not such a case.
18. A trustee may be able to recover property that was transferred by the bankrupt to a creditor in preference over others. Section 340 provides:

'(1) Subject as follows in this and the next two sections, where an individual is adjudged bankrupt and he has at a relevant time (defined in section 341) given a preference to any person, the trustee of the bankrupt's estate may apply to the court for an order under this section.'

Under a court order, the property recovered may be vested in the trustee as part of the bankrupt's estate: see section 342. It is inherent in these provisions, that property transferred in preference does not form part of the estate unless and until a court so orders.

19. In this case, the trustee gave notice to the payees that the payments were considered to be preferences under this section. However, no steps were taken to recover the payments. It follows that the amount of the payments did not form part of the bankrupt's estate.
20. The tribunal was, therefore, wrong to decide that the notional capital vested in the trustee. Neither Mr Staddon nor Mr Rutledge could explain quite how the tribunal made the mistake that it did. One suggestion was that the tribunal had confused the old law under the Bankruptcy Act 1914 with the law under the 1986 Act. Another was that the tribunal had mingled the concepts of notional capital and preference. Whatever the precise source of confusion, the tribunal's reasoning was inaccurate in law.

G. Rental income and capital

21. The claimant retained ownership of a property in Chingford Road until it was repossessed by the mortgagee on 31 January 2007. He continued to receive the rent of £265 a week, but made no mortgage payments. The bank statements in the papers do not show any deposits that can be related to the rent received. The proper treatment of those payments was discussed at the hearing. I do not need to analyse how the tribunal dealt with this issue. Any mistake that it made will be subsumed by the rehearing to the extent that the payments are relevant. On basic principle, the payments of rent were income when received by the claimant and, if retained, became capital. They could have vested in the trustee as after-acquired property under section 307, or under an income payments order under section 310, or pursuant to an income payments agreement under section 310A. However, none of those sections was operated in respect of the payments.
22. Accordingly, the payments were income for the duration of the period to which they related and then became capital: R(IS) 3/93 and CIS/3101/2007. As both income and capital, the rent was the claimant's personal property and not part of the bankrupt's estate.
23. The claimant accepts that he received the rent. It is for him to explain what he did with it.

H. Disposal

24. As the tribunal went wrong in law, I set aside its decision. As there are issues of fact that require investigation, I consider that the appropriate disposal is to remit the case to the First-tier Tribunal for reconsideration rather than to investigate the facts further myself.

Signed on original on 1 June 2009

Edward Jacobs Upper Tribunal Judge