R(IS) 2/03

Mr. P. L. Howell QC	CIS/1337/2001
28.6.02
Income –– payments under pension annuity policy applied to benefit of claimant’s creditors by virtue of Insolvency Act 1986 – whether such payments notional income
The claimant had been in business as a self-employed person for many years. Having experienced financial difficulties, by January 2000 his property had become subject to the provisions of the Insolvency Act 1986 and, on 26 January 2000, he made a claim for income support. Applying regulation 42 of the Income Support (General) Regulations 1987, the decision maker treated as “notional income” periodical payments made from a pension annuity policy which the claimant had previously taken out, but which, by virtue of the claimant’s affairs falling under the Insolvency Act 1986, were compulsorily applied in their entirety to the benefit of the claimant’s creditors. The claimant appealed to the tribunal. The tribunal dismissed the claimant’s appeal and found that he had no entitlement to income support. The claimant appealed to the Commissioner.
Held, allowing the appeal, that:
1.	the general principle that in an insolvency commencing before the coming into force of section 11(1) of the Welfare Reform and Pensions Act 1999 such payments belong beneficially to the creditors (Re Landau [1998] Ch. 223, Krasner v Dennison [2001] Ch. 76) overrides the decision in CIS/212/1989 that they are the insolvent’s income for income support purposes - R(IS) 4/02 approved (paragraphs 4 and 5);
2.	the payments were not notional income of the claimant under regulation 42 as payments made to a third party “in respect of” the claimant, since in this context that expression is limited to payments for the alimentation or support of the claimant; R(IS) 4/01 followed (paragraphs 9 and 10);
3.	accordingly, a decision should be substituted that the pension annuity payments did not constitute income of the claimant (actual or “notional”) for income support purposes, and did not fall to be deducted in calculating the minimum income guarantee on his state retirement pension.

DECISION OF THE SOCIAL SECURITY COMMISSIONER

1.		The decision of the Bristol tribunal sitting on 19 October 2000 was in my judgment wrong in law in the way it dealt with the pension annuity payments compulsorily applied for the benefit of the claimant’s creditors under the Insolvency Act 1986, and the claimant’s appeal against the decision is therefore allowed. I set it aside and in exercise of the power in section 14(8)(a) Social Security Act 1998 substitute the decision I am satisfied the tribunal should have given had it properly directed itself, which is that such payments do not constitute income of the claimant (actual or “notional”) for income support purposes, and do not fall to be deducted in calculating the minimum income guarantee on his state retirement pension. 
2.		I held an oral hearing of this appeal, which had been directed by another Commissioner in view of an apparent divergence of legal authority in this area. The claimant appeared and conducted his case in person and Huw James, solicitor, appeared for the Secretary of State. 
3.		The claimant is aged 71 and now retired. He was formerly an electrical contractor, having carried on business as a self-employed person for many years on his own or in partnership. Like many such businesses he was faced with increased certification and other costs in recent years and found himself in financial difficulty such that he was unable to carry on.  He entered into what is variously described in the evidence before the tribunal as a “voluntary liquidation” or a “bankruptcy”, though he told me it was an individual voluntary arrangement under the Insolvency Act 1986. That is at variance with the categoric statement of the licensed insolvency practitioner in his letter of 31 January 2000 at pages 45-46 of the appeal file that he had been appointed the claimant’s trustee in bankruptcy, but the difference does not matter for this purpose. What is certain, and not in dispute, is that by the time of the claim for income support he made on 26 January 2000 which led to the appeal to the tribunal, the claimant’s property had become subject to the provisions of the Insolvency Act requiring it to be applied for the benefit of his creditors, and had ceased to belong beneficially to him. 
4.		It is also common ground before me that included among the “property” which became subject to those provisions (and still remains so subject, because they have not ceased to operate) was the benefit during the claimant’s lifetime of the self employed pension annuity policy he had taken out with the Prudential Assurance Company to provide for his own old age. Consequently the periodical payments being made under that policy at all material times since 26 January 2000 have all been taken for the benefit of his creditors. Although made under a policy which of course still bears his name, they do not belong to him or form part of his income under the general law, and are not available to him to pay for his own or his wife’s living expenses. The claimant told me that this effect of the insolvency law had come as a very great shock to them, since when the insolvency arrangement was entered into they had assumed (on advice) that the position would be otherwise, and without it they would have been able to manage for themselves without claiming income support. Although the position has been alleviated by a change in the law for later insolvencies, both he and the Secretary of State agree that the loss of all beneficial interest in the payments under the policy (under the principle of the decision in Re Landau [1998] Ch 223, affirmed in Krasner v Dennison [2001] Ch 76) does continue to apply in his case, because the alleviating provision in section 11(1) Welfare Reform and Pensions Act 1999 affects only insolvencies commencing after it was brought into force, and his was before.
5.	 	That principle of the general law in my judgment clearly overrides so far as this case is concerned the decision of the Commissioner in case CIS/212/89 referred to in the papers, where it was held that trading income earned by an undischarged bankrupt and paid mandatorily to her trustee in bankruptcy for the benefit of her creditors counted as her income, on general principles and for income support, because the effect was to reduce her overall liabilities. Insofar as it is necessary for me to express a view on the principle in that case which was relied on in the Secretary of State’s written submissions, I would have to say that for my part I doubt if it was correctly decided. I agree with the more recent decision of the Commissioner in CIS/381/01 [now reported as R(IS) 4/02] that despite the respect due to any decision of its author, CIS/212/89 ought no longer to be followed. 
6.	 	The case before me however essentially depends not on that issue, but on the separate one of whether, given that the payments under the policy are not the claimant’s actual income or treated as his in law under any general principle, they are nevertheless to be so treated, artificially and contrary to the fact, for income support purposes by operation of the “notional income” provisions of the Income Support (General) Regulations 1987 SI No 1967. That was the basis of the Secretary of State’s refusing the claimant his minimum income guarantee (page 1B), and of the tribunal’s decision of 19 October 2000 that the result was to push his “income” above the income support level so there was no entitlement to benefit: see its statement of reasons at pages 91-92. 
7.	 	The regulation said to produce this result is regulation 42 (“Notional income”) which so far as material provided at the relevant date for this claim as follows:
“42 -- … (4)  Any payment of income, other than a payment specified in paragraph (4ZA), made - 
(a)	to a third party in respect of a single claimant or in respect of a member of the family … shall be treated –
(i)	in a case where that payment is derived from a payment of any benefit under the benefits Acts, a war disablement pension, war widow’s pension or a pension payable to a person as a widow under [specified legislation] … as possessed by that single claimant, if it is paid to him, or by that member, if it is paid to any member of that family;
(ia)	in a case where that payment is a payment of an occupational pension or is a pension or other periodical payment made under a personal pension scheme, as possessed by that single claimant or, as the case may be, by that member;
(ii)	in any other case, as possessed by that single claimant or that member to the extent that it is used for the food, ordinary clothing or footwear, household fuel, rent or rates … of that single claimant or, as the case may be, any member of that family …;
(b)	to a single claimant or a member of the family in respect of a third party (but not in respect of another member of that family) shall be treated as possessed by that single claimant or, as the case may be, that member of the family to the extent that it is kept or used by him or used by or on behalf of any member of the family; …
(4ZA) Paragraph (4) shall not apply in respect of a payment of income made – 
…
(d) under an occupational pension scheme or in respect of a pension or other periodical payment made under a personal pension scheme where – 
(i)	a bankruptcy order has been made in respect of the person in respect of whom the payment has been made …;
(ii)	the payment is made to the trustee in bankruptcy or any other person acting on behalf of the creditors; and
(iii)	the person referred to in (i) and any member of his family does not possess, or is not treated as possessing, any other income apart from that payment.”
8.	 	Paragraphs (4)(a)(ia) and (4ZA)(d) set out above were inserted into the regulation by amending instrument (1999 SI No 2640) with effect from 15 November 1999, that is just four days after the Welfare Reform and Pensions Act 1999 was passed, and were related to the provisions of that Act which (as well as section 11 which had the effect of bringing an occupational or private pension back into an insolvent person’s actual income on future insolvencies, by excluding it from the estate administered for creditors) included new legislation for pension splitting on divorce: see R(IS) 4/01 paragraph 28.
9.	 	In that case, the Commissioner considered the effect of phrase “in respect of” in the opening part of paragraph 42(4)(a), which governs the whole of the rest of that provision: unless a payment meets the condition in that phrase, there can be no question of it being turned into “notional income” by the paragraph so as to count against the claimant’s income support calculation.  He held that to fall within the phrase it was not sufficient for a pension payment within sub-paragraph (4)(a)(ia) (it is common ground that the payments in the present case fell within that description) to be made to a third party such as a trustee in bankruptcy merely by reference to the name of the claimant, when it was in fact for the benefit of other people. The true intendment of regulation 42(4) in its legislative context required a narrower meaning to be given to the phrase “in respect of”. As he said in R(IS) 4/01 paragraph 30:
“The characteristic common to all three categories of payment [in sub-paragraph (a)] is that the payment is either derived from an alimentary source or, where it is not derived from such a source, is used for the purpose of alimenting the claimant.  Bearing in mind that the whole purpose of income support is the alimentation of claimants who have no or inadequate sources of aliment it seems to me that payments made “in respect of” a claimant are limited to those payments which are made for the alimentation of the claimant and which reduce or obviate the need for him to be alimented by the income support scheme.”
10.	 	There is very little I can usefully add to that except that I completely agree with it. It provides the conclusive answer to why it was wrong for the claimant in this case to have been treated as if the payments made under the policy bearing his name but entirely for the benefit of his creditors were nevertheless “income” available to him and thus to be deducted in assessing what he needed each week to pay for ordinary necessities for himself and his wife: their “alimentation”, or in English law terms basic maintenance or subsistence, which as the Commissioner observes is what income support is all about. 
11.	 	There is no material distinction between that case and the present one. Paragraph (4ZA) on which reliance was placed in the Secretary of State’s submissions is only a relieving provision to take cases out of paragraph (4), not put additional ones into it. Whatever the thinking behind the addition of sub-paragraph (d) in 1999 may have been (and nobody at the hearing before me was able to suggest a rationale for (d)(iii)), the fact that it was so added cannot in my judgment be used, effectively in reverse as the argument based on its mention of pension payments has to do, to read more back into the words “in respect of” in paragraph (4) than on their true construction is already there. 
12.	 	The claimant’s appeal is allowed and my decision substituted accordingly.

Date: 28 June 2002						(signed) P. L. Howell
									Commissioner