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Home > Judgments > 2010 archive

CMEC v Beesley [2010] EWCA Civ 1344

Court of Appeal held that the Child Maintenance and Enforcement Commission, is not a creditor capable of being bound by the individual voluntary arrangement of a non-resident parent who has failed to pay child support.

The appeal arose from the declaration by His Honour Judge Pelling QC, sitting as a High Court Judge, that the Child Maintenance and Enforcement Commission ("CMEC") is a creditor capable of being bound by an Individual Voluntary Arrangement ("IVA") and that the IVA of Mr. Whyman unfairly prejudiced CMEC within the meaning of the Insolvency Act 1986 ("IA") section 262(1).  Mr. Whyman also cross-appealed part of the order.

Mr. Whyman is the non-resident parent of a child and he put forward a proposal for an IVA, which was approved by the creditors.  Mr. Whyman was £25,610.90 in arrears with child support.  His Statement of Affairs included those arrears and represented 94% of his liabilities.  CMEC did not attend the creditors meeting because it took the view that it was not a creditor capable of voting on, or being bound by, an IVA.  The proposal that was accepted was that Mr Whyman's creditors would receive a total of £0.27p in the pound over a period of 5 years in full and final settlement of his liabilities. The first respondent, Mr. Beesley, is the supervisor of Mr Whyman's IVA.

The Judge rejected CMEC's case that, where there are arrears of child support, CMEC is not a creditor entitled to participate in and be bound by an IVA. The Judge stated that it was open to the legislature to exclude arrears due to CMEC from the IVA regime, other than for the purpose of including them within the debtor's statement of affairs, but it chose not to do so.  The Judge held that child support arrears are a bankruptcy debt.  The Judge also rejected CMEC's submission that his analysis would be inconsistent with the inability of CMEC to accept a lesser sum than that which has been calculated unless the calculation has first been revised, superseded or appealed.

The Court of Appeal held that the Judge was wrong to conclude that CMEC is a creditor entitled to participate in and be bound by Mr. Whyman's IVA.  While it was perfectly clear that Mr. Whyman's child support liability is a "bankruptcy debt" within IA s. 382, the expression has a very wide meaning and therefore it was clear in view of that wide definition that for the purposes of bankruptcy, CMEC is a creditor in respect of arrears of child support.  However, it was equally clear that the legislative policy is to exclude liability to pay child support from the consequences of bankruptcy and debt relief orders and that the liability to pay child support, and any arrears of child support, are not released by discharge from bankruptcy. The purpose of the legislation was to ensure that arrears should be recoverable in full from assets which do not form part of the bankrupt's estate, for example, future income and after acquired assets.

Summary by Richard Tambling,  barrister, 1 Garden Court

____________________________

Neutral Citation Number: [2010] EWCA Civ 1344
Case No: A3/2010/0769
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
MANCHESTER DISTRICT REGISTRY

Royal Courts of Justice
Strand, London, WC2A 2LL
Date: 24/11/2010

Before :
LORD JUSTICE WARD
LORD JUSTICE ETHERTON
and
LORD JUSTICE TOMLINSON
- - - - - - - - - - - - -
Between :

CHILD MAINTENANCE AND ENFORCEMENT COMMISSION Appellant

and 

(1) MARK BEESLEY
(2) DARREN RICHARD WHYMAN 
Respondents
- - - - - - - - - - - - -
- - - - - - - - - - - - -

Nicolas Caddick (instructed by Department for Work and Pensions) for the Appellant

David Casement Q.C. and Lisa Walmisley (instructed by Beesley & Co Solicitors) for the Respondents

Hearing dates : 27th October 2010
- - - - - - - - - - - - -
Judgment
 
Lord Justice Etherton :
Introduction
1. This appeal concerns an important issue as to whether the appellant, the Child Maintenance and Enforcement Commission ("the Commission"), is a creditor capable of being bound by the individual voluntary arrangement ("IVA") of a non-resident parent who has failed to pay periodical child support maintenance ("child support") pursuant to the Child Support Act 1991 ("the CSA").

2. The appeal is from an order dated 11 March 2010 of His Honour Judge Pelling QC, sitting as a High Court Judge,  by which he declared that the Commission is a creditor capable of being bound by an IVA within the meaning of section 260(2)(b) of the Insolvency Act 1986 ("IA").  By paragraph 1 of the same order, the Judge set aside the IVA of the Second Respondent, Darren Whyman, on the ground that it unfairly prejudiced the Commission within the meaning of IA section 262(1). There is a cross-appeal by Mr Whyman against that part of the order.

Background
3. The Commission, operating as the Child Support Agency, exercises the functions of the Secretary of State for Work and Pensions under the CSA.

4. Mr Whyman is the non-resident parent of a child ("NRP").   In February 2009 he put forward a proposal jointly with his wife for an IVA, which was approved by their creditors on 11 March 2009.  At that date Mr Whyman was £25,610.90 in arrears with child support. His Statement of Affairs included those arrears.  They represented some 94 per cent of his liabilities. The only creditor which voted at the meeting was British Waterways, which was owed £381 and which voted by proxy. The Commission did not attend the meeting because it took the view that it was not a creditor capable of voting on, or being bound by, an IVA.  The proposal that was accepted was that Mr Whyman's creditors would receive a total of £0.27p in the pound over a period of 5 years in full and final settlement of his liabilities. The First Respondent, Mark Beesley, is the supervisor of Mr Whyman's IVA.

5. The Commission issued an application on 7 April 2009 pursuant to IA section 263(3) for an order that the First Respondent had incorrectly decided that the Commission was entitled to vote at the meeting on 11 March 2009, or alternatively an order pursuant to IA section 262 revoking the IVA on the ground that it was unfairly prejudicial to the interests of the Commission.

The legal setting
IVA
6. The statutory provisions concerning IVAs are contained in IA Part VIII.  They are supplemented by the provisions in Part 5 of the Insolvency Rules 1986 ("IRR").  So far as relevant to the present case, and rather simplified, they currently provide as follows.

7. The debtor submits to the nominee, a qualified insolvency practitioner, a document setting out the terms of the voluntary arrangement which the debtor is proposing, and a statement of his affairs containing prescribed particulars of his creditors and of his debts and other liabilities and assets:  IA s. 256A(2). The nominee, having received those documents, submits a report to the debtor's creditors, stating (a) whether, in his opinion, (i) the voluntary arrangement which the debtor is proposing has a reasonable prospect of being approved and implemented; and (ii) a meeting of the debtor's creditors should be summoned to consider the debtor's proposal; and (b) if in his opinion such a meeting should be summoned, the date on which, and time and place at which, he proposes the meeting should be held:  IA s. 256A(3).  The nominee then summons the meeting for that time and place: IA s. 257(1).  The persons summoned to the meeting are every creditor of the debtor of whose claim and address the person summoning the meeting is aware:  IA s. 257(2).

8. The creditors' meeting decides whether or not to approve the proposed IVA, with or without modificiations: IA s. 258(1)(2). The meeting cannot approve modifications without the consent of the debtor, and there are certain modifications which are prohibited by statute:  IA s. 258(2)(4)(5).  Every creditor who has notice of the creditors' meeting is entitled to vote at the meeting: IRR 5.21(1).  Votes are calculated by reference to the amount of the debt owed to each creditor: IRR 5.21(2). A creditor may vote in respect of a debt for an unliquidated amount or any debt whose value is not ascertained, and, for the purpose of voting, any such debt is valued at £1 unless the chairman of the meeting agrees to put a higher value on it:  IRR 5.21(3). A resolution to approve the proposal for an IVA or a modification of it requires a majority of three-quarters or more (in value) of those present and voting in person or by proxy:  IRR 5.23(2).   

9. If the meeting approves the proposed IVA, it binds every person who was entitled to vote at the meeting.  IA s. 260 says:

"260 Effect of approval
260(1) This section has effect where the meeting summoned under section 257 approves the proposed voluntary arrangement (with or without modifications).

260(2) The approved arrangement –

(a) takes effect as if made by the debtor at the meeting, and
(b) binds every person who in accordance with the rules –

(i) was entitled to vote at the meeting (whether or not he was present or represented at it), or
(ii) would have been so entitled if he had had notice of it.

as if he were a party to the arrangement"

10. The person for the time being carrying out the functions of the nominee in relation to the IVA is known as the supervisor: IA s. 263(2).

11. If the debtor, any of the debtor's creditors or any other person is dissatisfied by any act, omission or decision of the supervisor, they may apply to the court; and on such an application, the court may (a) confirm, reverse or modify any act or decision of the supervisor, (b) give him or her directions, or (c) make such other order as it thinks fit: IA s.263(3).

12. A creditor who was entitled to vote at the creditors' meeting summoned under IA section 257, or who would have been entitled if they had had notice of it, may apply to the court on the ground that the IVA approved by the meeting unfairly prejudices their interests: IA s. 262(1) and (2).  On such an application, the court, if satisfied of such unfair prejudice, may revoke or suspend any approval given by the meeting or give a direction for the summoning of a further meeting of the debtor's creditors to consider any revised proposal.

13. There is no general legislative definition of "creditor" for the purposes of the IVA provisions in IA Part VIII.  There is, however, a partial definition in IA section 257(3) in Part VIII, which defines the creditors of a debtor who is an undischarged bankrupt, as follows:  

" 257(3) For this purpose the creditors of a debtor who is an undischarged bankrupt include—
(a)  every person who is a creditor of the bankrupt in respect of a bankruptcy debt, and
(b)  every person who would be such a creditor if the bankruptcy had commenced on the day on which notice of the meeting is given." 

14. "Bankruptcy debt" is defined in IA section 382, as follows (so far as relevant):

"382 "Bankruptcy debt", etc
(1) "Bankruptcy debt" in relation to a bankrupt, means ... any of the following—

(a)  any debt or liability to which he is subject at the commencement of the bankruptcy,

(b)  any debt or liability to which he may become subject after the commencement of the bankruptcy (including after his discharge from bankruptcy) by reason of any obligation incurred before the commencement of the bankruptcy,

(c) ....

(2) ....

(3) For the purposes of references in this Group of Parts to a debt or liability, it is immaterial whether the debt or liability is present or future, whether it is certain or contingent or whether its amount is fixed or liquidated, or is capable of being ascertained by fixed rules or as a matter of opinion; and references in this Group of Parts to owing a debt are to be read accordingly.

(4) In this Group of Parts, except in so far as the context otherwise requires, "liability" means (subject to subsection (3) above) a liability to pay money or money's worth, including any liability under an enactment, any liability for breach of trust, any liability in contract, tort or bailment and any liability arising out of an obligation to make restitution."

15. "Creditor" is defined in IA section 383(1) to mean, in relation to a bankrupt, "a person to whom any of the bankruptcy debts is owed", and, in relation to an individual to whom a bankruptcy petition relates, "a person who would be a creditor in the bankruptcy if a bankruptcy order were made on that petition".

16. It is important to note that, notwithstanding those wide statutory definitions of "bankruptcy debt" and, for the purposes of bankruptcy, "creditor", not every bankruptcy debt is provable in the bankruptcy. IRR 12.3(1) states the general rule that all claims by creditors are provable as debts against the bankrupt, whether they are present or future, certain or contingent, ascertained or sounding only in damages. IRR 12.3(2) then provides that certain debts and liabilities are not provable, namely any fine for an offence, any obligation (other than an obligation to pay a lump sum or to pay costs) arising under an order made in family proceedings, "any obligation arising under a maintenance assessment made under the Child Support Act 1991", and an obligation under a confiscation order made under various criminal statutes.

17. For good measure, IA section 281(5) expressly provides, by way of qualification of the general rule that discharge from bankruptcy releases the bankrupt from all bankruptcy debts (IA s.281 (1)), that discharge from bankruptcy does not, except to such extent and on such conditions as the court may direct, release the bankrupt from any bankruptcy debt which "(b) arises .... under a maintenance calculation made under the Child Support Act 1991."

18. The legislative scheme for a debt relief order shows a similar approach to child support. Debt relief orders were introduced with effect from 2009 as a new low cost procedure to enable small debtors to clear their debts.  The relevant provisions were inserted by the Tribunals, Courts and Enforcement Act 2007 as a new IA Part 7A (sections 251A-251X). In very general and simplified terms, the statutory scheme is as follows.  Section 251A provides that an individual who is unable to pay his debts may apply for a debt relief order to be made in respect of his qualifying debts.  The application is made to the official receiver: IA s.251B(1). On the effective date for a debt relief order, a one year moratorium commences in relation to each qualifying debt specified in the order, and the creditor has no remedy in respect of the debt:  IA ss.251G(1)(2), 251H(1).  At the end of that period, the debtor is discharged from all the qualifying debts specified in the order: 251I(1).  IA section 251A(2) provides that a qualifying debt does not include "an excluded debt" .  IRR 5A.2 defines "excluded debts".   The definition includes, among others, those same debts and liabilities as are excluded from "provable debts" for the purposes of bankruptcy in IRR 12.3(2), including any obligation arising under a maintenance assessment under the CSA.  

The CSA
19. There are currently two different child support schemes in place under the CSA. As a general rule (with some exceptions), the original scheme introduced by the CSA ("the old scheme") applies to applications for a maintenance assessment with an effective date before 3 March 2003.  The current scheme, which was subsequently introduced when the Child Support, Pensions and Social Security Act 2000 came into force, generally applies to all cases with an effective date commencing on or after 3 March 2003. In Mr Whyman's case, the old scheme applies.  Accordingly, references in this judgment to the child support legislation are to the legislation that remains in force in respect of old scheme cases.  It has not been suggested that the outcome of this appeal would be different under the current scheme.

20. Section 1 of the CSA sets out the basic duty of a NRP to maintain his or her child.  It provides as follows, so far as relevant:

"1.The duty to maintain
(1) For the purposes of this Act, each parent of a qualifying child is responsible for maintaining him.

(2) For the purposes of this Act, a non-resident parent shall be taken to have met his responsibility to maintain any qualifying child of his by making periodical payments of maintenance with respect to the child of such amount, and at such intervals, as may be determined in accordance with the provisions of this Act.

(3) Where a maintenance assessment made under this Act requires the making of periodical payments, it shall be the duty of the non-resident parent with respect to whom the assessment calculation was made to make those payments. 

 ......... "

21. Under CSA section 4(1), a parent with care of a qualifying child (a "PWC") or a NRP may apply to the Commission for an assessment to be made to determine the amount of child support payable by the NRP.  The amount of child support is then assessed by the Commission in accordance with CSA section 11 and (in Mr Whyman's case) Schedule 1. The assessment carried out by the Commission can be revised, superseded or appealed: CSA  ss.16, 17 and 20.  Errors can be corrected: CSA s.28ZD. There is provision for departing from the usual rules by which the assessment is carried out but only if an application for a departure direction is made before the assessment is carried out: CSA ss.28A – 28F.

22. CSA section 4(2) and (3) provide, so far as relevant, as follows, for the collection and enforcement of child support, on the application of the PWC or the NRP:

"(2) Where a maintenance assessment has been made in response to an application under this section the Commission may, if the person with care or non-resident parent with respect to whom the assessment was made applies to it under this subsection, arrange for—

(a)  the collection of the child support maintenance payable in accordance with the assessment;

(b)  the enforcement of the obligation assessed to pay child support maintenance in accordance with the assessment.

(3) Where an application under subsection (2) for the enforcement of the obligation mentioned in subsection (2)(b) authorises the Commission to take steps to enforce that obligation whenever it considers it necessary to do so, the Commission may act accordingly."

23. CSA section 4(5) provides that a person who has applied to the Commission under section 4 may at any time request the Commission to cease acting under the section; and section 4(6) provides that it shall be the duty of the Commission to comply with any such request.

24. Section 29 provides for regulations to be made by the Secretary of State concerning the collection and enforcement of child support in those cases where the Commission has agreed to act under CSA section 4(2).  Those regulations may provide for payments to be made to the PWC or to or through the Commission or through some other person: CSA s.29(3).  The regulations made under that provision are the Child Support (Collection and Enforcement) Regulations 1992 (SI 1992/1989).  They require the Commission to send to the liable person a notice stating the amount of child support payable, to whom it is to be paid, and the method of payment.

25. Where a NRP is liable to pay child support, the Commission has a number of methods of collection and enforcement, which are specified in CSA section 31 to 40B.  They include a deduction from earnings order, an order for deductions from an account with a deposit-taker, and applying to a magistrates' court for a liability order, which takes effect as a county court judgment.

26. Prior to its repeal on 1 June 2009, CSA section 6 contained special provisions which applied in a case where the PWC was in receipt of income support, an income-based jobseeker's allowance or some other prescribed benefit.  In such a case, the Commission could treat the PWC as having applied for a maintenance assessement, and take action to recover the child support from the NRP:  CSA s.6(2).  The Commission could not so act, however, if the PWC asked it not to do so: CSA s. 6(5).

27. CSA section 41 provides that, where the Commission is authorised to recover arrears of child support, it may, in such circumstances as may be prescribed, and to such extent as may be prescribed, retain the arrears if it is satisfied that the amount of any benefit paid to or in respect of the PWC would have been less had the NRP paid the child support in question.

28. CSA section 46A provides that, subject to any provisions made by or under Chapter 2 Part 1 of the Tribunals, Courts and Enforcement Act 2007, any decision of the Commission made in accordance with the provisions of the CSA shall be final. 

29. The provisions of the CSA and the regulations made pursuant to it are a comprehensive code for the recovery of child support, under which a PWC was deliberately given no right to recover or enforce a claim for child support against a NRP; any such right which formerly existed is now vested in the Commission :  R (Kehoe) v Secretary of State for Work and Pensions [2005] UKHL 48, [2006] 1 AC 42; Department of Social Security v Butler [1995] 1 WLR 1528.  The issue in Butler was whether the court could grant a Mareva injunction against a NRP who had failed to make payments assessed under the CSA. The application for the injunction was dismissed.  Evans LJ said, at pages 1531H-1532B:

" (1) The Act of 1991 together with regulations made under it provide a detailed and apparently comprehensive code for the collection of payments due under maintenance assessments and the enforcement of liability orders made on the application of the Secretary of State. (2) The only method provided for enforced collection before a liability order is made is a deduction from earnings order made by the Secretary of State himself under section 31. (3) Although section 1(3) provides for a duty which arises when the maintenance assessment is made, this duty is not expressed as a civil debt. Mr. Crampin accepts that the duty could not be directly enforced by action in any civil court, or by any means other than as provided in the Act. (4) There is no provision for precautionary or Mareva — style relief. "

30. Morritt LJ said, at pages 1540D to 1540H:

"As I have indicated the Secretary of State claims in respect of the statutory right correlative with the obligation expressed in section 1(3) of the Act of 1991. But that obligation and right is not a civil debt in any ordinary sense. First, the obligation may only be enforced by the Secretary of State and not by any other person who may be stated to be the payee in the maintenance assessment. Secondly, the Secretary of State's powers of enforcement do not enable him to sue for the arrears in the ordinary way. In the first instance his choice lies between a deduction of earnings order directed to the employer or an application to justices for a liability order. In my judgment, neither of those rights is such as would entitle this court, consistently with the decision in The Veracruz I [1992] 1 Lloyd's Rep. 353 to grant Mareva relief.

The Child Support Act 1991 introduced a wholly new framework for the assessment and collection of the sums required for the maintenance of children by their parents. There is no provision for the enforcement of any maintenance assessment except by the Secretary of State and his methods of enforcement are limited in the way I have mentioned. It seems to me that it would be inconsistent with the Act as a whole in general and with section 33 in particular if the Secretary of State were to be at liberty to apply for Mareva injunctions in the High Court. If the conditions in section 33(1) are satisfied then Parliament has clearly laid down that the Secretary of State should proceed first in the magistrates' court and then in the county court. If those conditions are not satisfied then Parliament has clearly ordained that the Secretary of State should not be entitled to enforce the maintenance assessment by court process at all."

31. Simon Brown LJ agreed.  He said, at page 1541E-G:

"For my part I believe that the argument fails at both stages albeit for what in the last analysis may be thought essentially the selfsame reason. Put shortly my conclusions are, first, that Mareva relief is only obtainable where there is already available to the applicant a cause of action properly so called, viz. a right to litigate or arbitrate an existing monetary claim, and, secondly, that the Act of 1991 affords to the Secretary of State no such cause of action, and indeed no rights at all save only those expressly conferred upon him by section 4(2) to arrange in certain circumstances either for the "collection" of maintenance payable under an assessment or for the "enforcement" of the obligation to pay such maintenance, in each instance as thereafter expressly provided for in sections 29 et seq. of the Act of 1991. "

32. Those passages were cited with approval by Lord Bingham in Kehoe at [5]. He offered the following rationale for Parliament's decision to vest the right of recovery and enforcement in the Secretary of State:

"[6] That a caring parent in the position of Mrs Kehoe was given no right of recovering or enforcing a claim to a child maintenance against an absent or non-resident parent was not a lacuna or inadvertent omission in the 1991 Act:  it was the essence of the new scheme, a deliberate legislative departure from the regime which had previously obtained.  The merits of that scheme are not for the House in its judicial capacity to evaluate.  But plainly the scheme did not lack a coherent rationale.  The state has an interest, most directly in cases where public funds are disbursed, but also more generally that children should be adequately supported.  It might well be thought that a single professional agency, with the resources of the state behind it and an array of powers at its command, would be more consistent in assessing and more effective and economical in enforcing payment than individual parents acting in a random and uncoordinated way.  It might also be thought that the interposition of an independent, neutral, official body would reduce the acrimony which had all too frequently characterised applications for child maintenance by caring against absent or non-resident parents in the past which, however understandable in the aftermath of a fractured relationship, rarely enured to the benefit of the children.  For better or worse, the process was deliberately changed.

[7] The 1991 Act cannot in my opinion be interpreted as conferring any right on a parent in the position of Mrs Kehoe. She is of course the person to whom child maintenance will be paid, directly or indirectly and subject to any deduction of benefit, as the person who incurs the expense of bringing up the children.  But the right which she had enjoyed under the former legislation was removed, and the right to recover the maintenance has been vested in the CSA."

33. It was common ground between the parties that, in the light of the provisions of the CSA and those authorities, the Commission has no power to compromise the liability of a NRP to pay arrears of child support in the sense of agreeing to accept less than what has accrued due following a maintenance calculation.

34. That position will change when sections 32 and 33 of the Child Maintenance and Other Payments Act 2008 ("CMPA 2008") come into force.  Section 32 provides that the following section (so far as relevant to this appeal) shall be inserted after CSA section 41C:

"41D  Power to accept part payment of arrears in full and final satisfaction
(1) The Commission may, in relation to any arrears of child support maintenance, accept payment of part in satisfaction of liability for the whole.

(2) The Secretary of State must by regulations make provision with respect to the exercise of the power under subsection (1).

(3) The regulations must provide that unless one of the conditions in subsection (4) is satisfied the Commission may not exercise the power under subsection (1) without the appropriate consent.

(4) The conditions are—

(a)  that the Commission would be entitled to retain the whole of the arrears under section 41(2) if it recovered them;

(b)  that the Commission would be entitled to retain part of the arrears under section 41(2) if it recovered them, and the part of the arrears that the Commission would not be entitled to retain is equal to or less than the payment accepted under subsection (1).

(5) Unless the maintenance calculation was made under section 7, the appropriate consent is the written consent of the person with care with respect to whom the maintenance calculation was made.

(6) ....

(7) ...."

35. Section 33 provides that there shall be inserted after CSA section 41D a new section 41E authorising the Commission to extinguish liability in respect of child support if it appears to it that the circumstances of the case are of a description specified in regulations made by the Secretary of State, and it would be unfair or otherwise inappropriate to enforce liability in respect of the arrears.  No regulations have yet been made under the new sections 41D and 41E of the CSA.

The judgment
36. The Judge rejected the Commission's case that, where there are arrears of child support, the Commission is not a creditor entitled to participate in, and which will be bound by, an IVA of the NRP. He gave the following reasons.  First, it was open to the legislature to exclude arrears due to the Commission from the IVA regime, other than for the purpose of including them within the debtor's statement of affairs, but it chose not to do so.  Secondly, while IA section 257(3) is of no direct application to the present case, because Mr Whyman was not an undischarged bankrupt at any material time, there is no reason to suppose that creditors of a debtor who is not an undischarged bankrupt at the material time would be defined more narrowly than is the case in relation to a debtor who is an undischarged bankrupt at that time.  Indeed, reading IA sections 257(2) and 257(3) together suggests that the opposite was the case. The Judge said ([13]):

"It would be bizarre for it to be concluded that the applicant was not a creditor for the purposes of IA s.257(2) in relation to a debtor who was not an undischarged bankrupt but was in relation to a debtor who was an undischarged bankrupt".

37. As to the last point, the Judge held, and indeed it was not disputed before him, that child support arrears are a "bankruptcy debt" within the meaning of IA s.257(3)(a) and IA section 382, bearing in mind, in particular, that IA section 382(4) expressly provides that "liability" includes any liability under an enactment, and bearing in mind also the provisions of IA section 281(5)(b) (express exclusion of child support from release of bankruptcy debts on  discharge from bankruptcy). 

38. The Judge said that the conclusion he had reached on the point was consistent with the judgment of Rimer J in Re Bradley-Hole (A Bankrupt) [1995] 1 WLR 1097, the judgment of Chadwick J in Russell –v- Russell [1999] 2 FCR 137, and the judgment of Sir John Vinelott in Re a Debtor (No. 488 IO of 1996), JP –v- A Debtor [1999] 2 BCLC 571.

39. The Judge rejected the Commission's submission that his analysis would be inconsistent with the inability of the Commission to accept a lesser sum than that which has been calculated unless the calculation has first been revised, superseded or appealed.  As to that point, the Judge said at paragraph [18] as follows:

"[18] .... First, the argument assumes that all IVAs will have the effect of requiring the Applicant to accept a lesser sum. That is not necessarily the case. More importantly however, merely because the Applicant is not entitled to vote at a creditors meeting in support of a proposed IVA that will have the effect of it agreeing to accept a lesser sum in full and final settlement of child maintenance arrears does not lead to the conclusions that it is not a creditor and is not entitled to attend and vote or vote by proxy at such a meeting. Whether the Applicant is to be treated as a creditor for present purposes depends upon the terms of the statutory provisions to which I have referred above. If as I conclude is the case, the Applicant is a creditor for present purposes it can attend the meeting either by a representative or by proxy and vote against the proposal. In that event either the proposal will fail or alternatively it will be passed but in that event the outcome will be imposed on the Applicant as a matter of law. Neither event involves the Applicant accepting a lesser sum in settlement of accrued child maintenance arrears. "

40. The Judge then ruled in favour of the Commission on its application under IA section 262(1) that the interests of the Commission were unfairly prejudiced by Mr Whyman's IVA. The Judge accepted the Commission's argument that it had been unfairly prejudiced because it had lost the rights that it would otherwise have had to collect or enforce the arrears of child support in full. The point was advanced by the Commission as a matter of general principle, and was opposed by Mr Whyman on the ground that it must be shown that the particular terms of the actual IVA resulted in unfair prejudice, and that had not been demonstrated on the facts of this particular case. The Judge held that the Commission's objection to Mr Whyman's IVA was supported by the decision of Sir John Vinelott in Re a Debtor (No. 488 IO of 1996) as a matter of principle, and that, in any event, it was clear on the facts of the present case that the Commission had been unfairly prejudiced. The Judge said at paragraphs[24] and [25], so far as relevant,

"24. In resisting this conclusion Mrs Walmisley [counsel for Mr Whyman] submitted (see paragraph 18 of her skeleton) that it must be shown that it is the particular terms of the IVA rather than the system that results in unfair prejudice. Assuming the premise of the submission to be correct, in my judgment the Applicant has done precisely what it is that Mrs Walmisley says is required. The unfair prejudice results from the terms of this particular IVA (the requirement to accept a dividend in full and final settlement) in circumstances where no such requirement could arise that gives rise to the unfair prejudice."

"25. ....The real point is that if the IVA is allowed to take effect, the Applicant will have been deprived of the opportunity of seeking to enforce or collect the whole of the arrears.  That is where the unfair prejudice arises. To the extent that the sum outstanding exceeds the amount of relevant benefits received by the PWC in this case that is a prejudice in respect of which the real loser is the PWC and the child or children for whose ultimate benefit the child maintenance calculation had been made." 

The appeal
41. Mr Nicholas Caddick, counsel for the Commission, submitted that, for the purposes of IA Part VIII the Commission is not "a creditor" in respect of arrears of child support since, under current legislation, it is only entitled to collect and enforce payment of child support if the PWC or NRP has applied to it to do so.  His argument was that, if no such application has been made, the Commission would have no powers of collection and enforcement, and may not even know of the existence of arrears, and so could not properly be described as a creditor.  He acknowledged that, on the basis of Kehoe, it is difficult to see how the creditor could be the PWC.  Accordingly, he said that, in a case where no application has been made to the Commission to collect or enforce the obligation to pay child support, there is no "creditor" at all in respect of the liability and the child support arrears would stand outside any IVA. He submitted that, if the liability is outside the IVA in such a case, it is difficult to see why it should fall within the IVA where an application for collection or enforcement has been made to the Commission.

42. Mr Caddick also relied on the limited powers of the Commission in respect of the collection and enforcement of the obligation to pay child support, emphasising that under the CSA the Commission has no right to agree to accept a lesser sum than that which has been assessed, unless the Commission's assessment of the child support is revised, superseded or appealed:  see Butler. He submitted that, if the Commission is not entitled to agree to accept a lesser sum in full and final settlement of a NRP's liability, it cannot have been intended that the Commission is a creditor entitled to vote on and be bound by an IVA.  He submitted that conclusion is reinforced by CMPA 2008 sections 32 and 33 and the new sections 41D and 41E to be inserted into the CSA.

43. Mr Caddick said that his submissions give effect to the manifest policy of the legislature in excluding child support arrears from provable debts for the purposes of bankruptcy and from the ambit of debt relief orders.

44. Mr Caddick further submitted that his submissions and analysis are consistent with the importance of child maintenance and welfare, which should take priority over the debtor's ability to compound and rid himself of debts by means of an IVA.  He referred, in this context, to the following comment of Baroness Hale in Smith –v- Smith [2006] UKHL 35, [2006] 1 WLR 2024, at [78] on the Child Support (Maintenance Assessments and Special Cases) Regulations 1992:

"[78].... When two interpretations of these regulations are possible, the interpretation chosen should be that which better complies with the commitment to the welfare of children which this country has made by ratifying the United Nations Convention of the Rights of the Child."

The Respondent's notice and cross-appeal
45. A Respondent's Notice was served, on behalf of Mr Whyman, giving additional grounds for upholding the Judge's declaration as to the Commission's status as a creditor, and also advancing a cross appeal.

46. Mr Whyman's additional grounds for upholding the declaration in the Judge's order are that, given that there must be a creditor in respect of a bankruptcy debt, the only plausible candidate is the Commission; the fact that the Commission has the means of enforcement manifests the legislative intention that the Commission is the creditor in respect of child support; the Commission should be considered a creditor for the purpose of voting in an IVA even if the arrears of child support survive discharge from bankruptcy because, unless the Commission is able to participate in an IVA, it would only be entitled to enforce against post bankruptcy assets, which may lead to a lesser recovery than would be the case if the Commission participated in and was bound by an IVA; and, finally, the amendments to be introduced into the CSA by CMPA 2008 confirm the legislative intention that the Commission is the creditor for child support: if the Commission could not participate in an IVA, the power under those amendments for the Commission to write off and accept part payment of arrears in full and final settlement would be severely limited.

47. In the course of his oral submissions, Mr David Casement QC, for Mr Whyman, submitted that, in policy terms, it would be preferable for the Commission to be a creditor capable of being bound by an IVA, and for the merits of the IVA in any particular case to be capable of challenge by the Commission as being unfairly prejudical to its interests on the particular facts.

48. The essence of Mr Whyman's cross-appeal is that, in finding that the Commission was unfairly prejudiced by Mr Whyman's IVA, the Judge was wrong to conclude as a matter of general principle that it is sufficient that the Commission would be deprived of the opportunity to claim the whole of the arrears.  Mr Whyman submits that unfair prejudice is a fact sensitive issue, and that the Judge could not properly have concluded that Mr Whyman's IVA is unfairly prejudicial to the Commission unless the Judge was satisfied as a matter of fact that there is a substantial chance of greater recovery if there is no IVA binding the Commission.

49. It is further submitted by Mr Whyman that, if the Commission is successful in its appeal, so that it is not a creditor for the purpose of being bound by Mr Whyman's IVA, the Commission had no standing to make the application to set aside the IVA.

Analysis
50. The Judge was wrong, in my judgment, to conclude that the Commission is a creditor entitled to participate in, and that it is bound by, Mr Whyman's IVA.

51. On the one hand, I accept that it is perfectly clear that Mr Whyman's child support liability is a "bankruptcy debt" within IA section 382. That expression has a very wide meaning.  It is expressly defined to include a liability arising under an enactment (IA s.382(4)), and whether that liability be certain or contingent or is capable of being ascertained by fixed rules or as a matter of opinion (IA s. 382(3)).     

52. I also accept that it is clear in view of that wide definition and the definition of "creditor" in IA section 383(1) that, for the purposes of bankruptcy, the Commission is a creditor in respect of arrears of child support, whether or not there has been any application to the Commission by the PWC or the NRP for collection or enforcement. As it happens, in Mr Whyman's case, there was an application to the Commission for collection and payment, and a direction that the payment was to be through the Commission.  There can therefore be no doubt in the present case that the Commission would be a creditor for the purposes of any bankruptcy of Mr Whyman.

53. On the other hand, it is equally clear that the legislative policy is to exclude liability to pay child support from the consequences of bankruptcy and debt relief orders. Arrears of child support are not a provable debt in bankruptcy (IRR 12.3(2)(a)) and they are an "excluded debt" for the purposes of debt relief orders (IA s. 251A(2) and IRR 5A.2(a)). The liability to pay child support, and any arrears of child support, are not released by discharge from bankruptcy or the expiry of the moratorium under a debt relief order (IA s. 281(5)(b), IA s. 251I(1)). The discernible policy is that child support (like some other specified categories of debt) should not be compulsorily abated together with the debts of other creditors, but should be recoverable in full from assets which do not form part of the bankrupt's estate, such as future income and after acquired assets.  In the case of child support, this reflects the state's policy, to which Lord Bingham referred in Kehoe at [6], that children should be adequately supported, and also the United Kingdom's commitment to the welfare of children reflected in the United Nations Convention of the Rights of the Child, to which Baroness Hale referred in  Smith (at [78]).

54. There is no discernible reason for a different policy in the case of an IVA.  An IVA is a means of avoiding or making an early exit from bankruptcy. It makes no sense for child support to be excluded from the bankruptcy regime so that it can be recovered in full, whilst subjecting it to abatement if the requisite majority of creditors in an IVA so determine.  It is true that in the present case the size of Mr Whyman's liability to the Commission is such that it far exceeds all other debts, so that, if the Commission had voted, it could have prevented the IVA. In a case where, however, arrears of child support are only a small part of the total indebtedness, the Commission would be unable to prevent the imposition by other creditors of a composition of such arrears.

55. Such a result, moreover, would appear particularly odd in view of the inability of the Commission under present legislation to agree to waive or compromise arrears of, or future payments of, child support.  Mr Casement frankly accepted that under the current law the Commission, even if a creditor, could never actively support an IVA which reduced the arrears of child support or future child support, and would either have to vote against the proposal or abstain from voting altogether.

56. The Judge considered that a compelling reason for concluding that the Commission is a creditor for the purposes of the IVA is the definition of "creditors" in IA section 257(3). As I have already mentioned, the Judge said that, although Mr Whyman was not an undischarged bankrupt, "there is no reason to suppose that it was intended that creditors of a debtor who was not an undischarged bankrupt at the material time would be defined more narrowly than is the case in relation to a debtor who was an undischarged bankrupt at that time."

57. I agree, but I do not accept that inevitably leads to the Judge's conclusion that the Commission is a creditor entitled to participate in  Mr Whyman's IVA and which is bound by it.  In my judgment, it is only possible to make sense of the provisions of IA Part VIII, against the statutory background of the insolvency regimes of bankruptcy and debt relief orders, the discernible policy of the state in relation to the support and welfare of children which I have mentioned, the purpose of an IVA and its function as a consensual agreement of creditors (bound by the decision of the requisite majority), if the creditors entitled to participate in the IVA, and who are bound by it, are restricted to creditors with the capacity to make compromises of debts and liabilities. I consider that such a restriction is a necessary implication in the IA.  

58. As appears from paragraph 18 of his judgment, the Judge was not impressed with the Commission's argument based on the inability of the Commission to compromise the obligation of Mr Whyman to pay arrears and future payments of child support.  It appears from paragraph 17 of the Judge's judgment that he considered that the conclusion he had reached on this issue was consistent with the judgment of Rimer J in Bradley-Hole. I disagree.  Indeed, the judgment of Rimer J is clear authority in favour of the necessary implication of the restriction I have mentioned as to the creditors entitled to participate in, and capable of being bound by, an IVA.

59. One of the questions for decision in Bradley-Hole was whether, and to what extent, the former wife of a bankrupt could claim in his IVA (as she wished to do) for arrears of maintenance for the benefit of their children pursuant to orders for periodical payments made in the course of divorce proceedings.  The IVA was approved on 11 May 1990.  The bankruptcy order was made against the bankrupt on 6 April 1990 based on his own petition.  Some of the arrears of maintenance were due by 6 April 1990, and others became due subsequently. So far as concerned arrears which had accrued due by 6 April 1990, it was accepted that the former wife could claim in the IVA in respect of them. Rimer J, however, came to a different conclusion in respect of maintenance payments due after 6 April 1990.  

60. Rimer J said, at pages 1118F to 1119, as follows:

".... I consider that there is a more fundamental difficulty in the way of Mrs. Bradley-Hole's claim in respect of the post-6 April 1990 payments. As well as being personal and inalienable, the benefit of a periodical payments order is also incapable of being released. It can only be discharged by the court. That was decided by the decision of the Court of Appeal in Watkins v. Watkins [1896] P. 222. The principle was later succinctly expressed by Sir Henry Duke P. in Campbell v. Campbell [1922] P. 187, 192:

"The order of May 1914 assigned no property and created no debt. What is created by the order is not a chose in action in the petitioner, but an obligation in the respondent to pay to his wife what has been called a purely personal allowance for her maintenance. She cannot issue execution without leave, or assign or release her interest. This appears from cases like Linton v. Linton (1885) 15 Q.B.D. 239 and Watkins v. Watkins [1896] P. 222 . Since an express agreement by the wife would not discharge the husband's liability, it clearly cannot be discharged by tacit consent or mere inaction."

In my view, this principle prevents Mrs. Bradley-Hole from claiming in the voluntary arrangement in respect of payments destined to accrue in the period after 6 April 1990. The essence of a voluntary arrangement is that under it each creditor compromises or releases his rights against the debtor in respect of his pre-existing debt and receives in exchange and in full satisfaction whatever payment terms are being offered by the debtor. It appears to me that any claim by Mrs. Bradley-Hole in respect of these particular payments can only be on the basis that she has compromised or released her rights under the order against the bankrupt in exchange for the payment terms offered under the arrangement. In my judgment, it was not competent for her to make such a compromise or release. I therefore conclude that she is not entitled to claim in the arrangement for any maintenance payments which fell due after 6 April 1990."

61. Mr Casement submitted that the observation of Sir Henry Duke P, to which Rimer J referred, was wrong; and Rimer J was equally wrong in his analysis and conclusion; and that in any event the observations of Rimer J were distinguishable because Bradley-Hole was a case concerning future payments under a periodical payments order in divorce proceedings whereas the present case concerns arrears under a statute. Whether or not the principle stated by Sir Henry Duke P was correct, I respectfully agree with Rimer J's general approach to the status in an IVA of a creditor who is incapable of compromising or releasing the debt or liability. To interpret the provisions of IA Part VIII in the way he did is good sense and, in the case of child support, produces consistency and coherence in the different statutory arrangements in respect of personal insolvency, without doing violence to the statutory language.

62. As I have said, the Judge also considered that his conclusion on the "creditor" point was consistent with the judgment of Chadwick J in Russell and the judgment of Sir John Vinelott in  Re A Debtor (No. 488 IO of 1996).  Those cases do not however, take the matter any further. Russell was a case concerning the right of a wife, in whose favour a lump sum order had been made in divorce proceedings, to present a bankruptcy petition based on the failure to pay the lump sum. It did not concern an IVA.  Bradley-Hole was not cited to Chadwick J in Russell, and unsurprisingly no party has sought to rely in this court on the decision in that case.  In Re A Debtor (No. 488 IO of 1996) Sir John Vinelott was concerned with accrued debt under an ancillary relief order in divorce proceedings (which was not the subject of dispute in Bradley-Hole since it was accepted that the former wife was entitled to claim in the IVA in respect of such arrears).  He did not quote, or refer to, the passages in the judgment of Rimer J set out above (which concerned payments the former wife had no power to compromise or release, and which were therefore irrelevant to the facts in Re A Debtor (No. 488 IO of 1996)).  Furthermore, Sir John Vinelott considered (p.583 d-e) that he was merely following Rimer J's decision (which he was in so far as it concerned accrued arrears the former wife had power to compromise or release).

63. Accordingly, I conclude that the Commission was not a creditor entitled to vote at the creditors' meeting called to consider the proposal for Mr Whyman's IVA, and the Commission was not capable of being bound by his IVA, because the Commission was not capable of compromising Mr Whyman's liability in respect of arrears of child support, which is an implied requirement under IA Part VIII.

64. If that is wrong, I nevertheless agree with the Judge that Mr Whyman's IVA unfairly prejudiced the interests of the Commission within IA section 262(1)(a).  I agree with Mr Casement, and indeed Mr Caddick frankly accepted, that the notion of "unfair prejudice" necessarily involves an evaluative exercise of comparing the position of the objecting creditor with and without an IVA, that is to say under the IVA and bankruptcy.  In the present case, however, it is perfectly obvious that the Commission was unfairly prejudiced; and in the course of his oral submissions Mr Casement frankly acknowledged that he could not seriously challenge the Judge's conclusion on the point.    Without the IVA, the Commission could seek to recover the entire amount of the child support arrears from Mr Whyman's future income and after acquired assets, which would fall outside the insolvent estate which would vest in Mr Whyman's bankruptcy trustee.  Mr Whyman's proposal for the IVA stated that he and his wife were in secure and stable employment and his bank account was in credit. The proposal stated that the fees payable to the nominee and the supervisor would be approximately £9,700 for their role in relation to total debts of £26,394, of which just under £25,000 (£25,610.90 at the date the IVA was approved) were arrears of child support.  Under the IVA the Commission would only recover £0.27p in the pound spread over 5 years.    In the light of those facts, it is plain that Mr Casement's concession was rightly made.  Indeed, it would be a rare case in which an IVA would not obviously unfairly prejudice the Commission.

Conclusion
65. For those reasons, I would allow the appeal. I would substitute for the declaration in the Judge's order a declaration that the Commission is not a creditor of Mr Whyman capable of being bound by Mr Whyman's IVA within the meaning of IA section 260(2)(b).

66. I would also set aside paragraph 1 of the Judge's order on the ground that, since the Commission was not a creditor for the purpose of Mr Whyman's IVA, it had no standing to apply to set aside the approval of the IVA.

LORD JUSTICE TOMLINSON
67. I agree.

LORD JUSTICE WARD
68. I also agree.