Chandler v Secretary of State for Work and Pensions & Anor [2007] EWCA Civ 1211

[2007] EWCA Civ 1211Case No C3/2007/1652/1652(A)
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CHILD SUPPORT COMMISSIONERS
COMMISSIONER CHARLES TURNBULL
CCS/2806/2006
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 29/11/2007
Before
THE RT HON LORD JUSTICE LATHAMTHE RT HON LORD JUSTICE DYSONTHE RT HON LORD JUSTICE JACOB
Between
ChandlerAppellant
(Transcript of the Handed Down Judgment ofWordWave International LimitedA Merrill Communications Company190 Fleet Street, London EC4A 2AGTel No: 020 7404 1400, Fax No: 020 7831 8838Official Shorthand Writers to the Court)
Martin Blount (instructed by Dutton Gregory) for AppellantZoe Leventhal (instructed by Department of Work and Pensions) for First RespondentRichard Drabble QC and James Willan (instructed by Leigh Day) for Second RespondentHearing Hearing date : 13 November 2007
Judgement
[1]This is an absent parent’s appeal from a decision of Commissioner Turnbull of 26th February 2007 (CCS/2806/2006). The Commissioner himself gave permission to appeal, rightly taking the view that an important point is involved.[2]In its broadest form the question is whether regular payments to an absent parent should be treated as his/her (I shall henceforth use “he”) income for the purposes of calculation of his liability for child maintenance even where those regular payments come purely out of capital. The Commissioner held they should. The appellant absent parent, supported by the Secretary of State for Work and Pensions, submits he was wrong. The parent with care supports the Commissioner’s decision.[3]The parties were represented by Mr Martin Blount for the absent parent, Miss Zoe Leventhal for the Secretary of State and Mr Richard Drabble QC and Mr James Willan for the parent with care. I would like to pay a tribute to all counsel for the great precision and economy with which they each advanced their arguments.[4]The facts are as follows. The absent parent is the sole director and majority shareholder in a company. The company needed money. This he raised by taking out a mortgage on his house and lending it to the company. He arranged for the company to pay him back at a rate of £2,500 per month. Although he works for the company he takes no remuneration at present. A dividend was declared in one year and Mr Blount rightly accepted that that would count as income even though it was credited directly to the absent parent’s loan account.[5]This appeal is not concerned with whether these arrangements do or might fall within the various anti-avoidance provisions of the legislation. It is confined to the issue of whether the regular payments (“re-payments” might be a better term) fall within para. 15 of Schedule 1 of The Child Support (Maintenance Assessments and Special Cases) Regulations 1992 (SI 1992 No. 1815) (“the MASC Regulations”). The key words for this case are “any other payments or other amounts received on a periodical basis …”[6]The legislative basis and background to the MASC Regulations is rather lengthy. I set it out so far as relevant in an Annex to this Judgment so as make the judgment itself more digestible.

The contentions of the absent parent and Secretary of State

[7]I start with the argument for the appellant and Secretary of State. In short it is this: that the Act and implementing regulations draw a clear distinction between capital (not available for maintenance) and income (available). Para. 15 is within Part III of Schedule 1 of the Regulations headed “Other Income.” It follows a whole series of other provisions clearly dealing only with income, e.g. para. 9 (periodic payment of pension), para. 11 (student income), para 13 (income derived from capital – particular reliance is placed on this) and so on. “Any other payments” in clause 15 is to be construed eiusdem generis with all the other forms of income and is limited to payments which can properly be called income in contrast to payments which are clearly just of capital.[8]The argument is elaborated in various ways. First by reference to the primary Act. Sched. 1, setting out how a maintenance assessment is to be calculated, works on income. Para. 2 of Sched. 1 sets out the general rule. It depends on the respective parents’ income. Para. 5 is all about the absent parent’s income – the key figure for present purposes is N – the amount of the absent parent’s net income. It is to be assessed in accordance with the regulations to be made, but its underlying characteristic is income properly so called.[9]It is significant also that, again in the primary legislation, Parliament has specifically considered capital as being distinct from income – see the express power to make regulations under which one is to be treated as the other (Sched. 1 Para. 9(e) and (f)).[10]When one comes to the delegated legislation it must follow that “income” and “capital” continue to have the same meaning as in the primary, enabling, Act and in particular that “income” is used in contradistinction to “capital”. The delegated legislation must, unless one is convinced otherwise, use words with the same meaning as the primary, enabling, legislation.[11]Going next to the MASC Regulations para. 7 is about the calculation of N (the net income of the absent parent). It brings in the Schedule to the Regulations for the detail. Under para. 7 you add the amount of earnings (para. 7(1)(a) – Part I of Sched. 1), benefit payments (para. 7(1)(b) – Part II of Sched. 1) , other income (para. 7(1)(c) – Part III of Sched. 1), amount of a relevant child’s income which is to be treated as that of the parent (para. 7(1)(d) – Part IV of Sched. 1) and any amount which is to be treated as the income of the absent parent under Part V of Sched. 1 (para. 7(1)(e)). So at this point what is to be added together are various sorts of income – not capital. Para. 7 goes on in subparas (2) and (3) to set out types of income to be disregarded – the detail does not matter for present purposes save to say that they are all obviously income and not capital.[12]By para. 8 the same rules apply to the assessment of M (income of parent with care). The scheme is looking to see what each parent’s income is.[13]The structure of the Schedule to the Regulations follows through and is that foreshadowed by para. 7 of the Regulations. Part 1 deals with “Earnings”, Part II with “Benefit Payments”, Part III with “Other Income”, Part IV with “Income of Child treated as Income of Parent” and Part V with “Amounts Treated as the Income of the Parent.”[14]Focussing now on Part III of the Schedule itself it is headed “Other income” and one expects it to be concerned with income properly so called and nothing else. Moreover in this very Part the draftsman is obviously working on a distinction between capital and income – see para. 13 about interest derived from capital particularly. The same point can be made about para. 27 (intentional deprivation of “income or capital which would otherwise be a source of income”).[15]So, when one comes to para. 15 and its language “any other payments or other amounts received on a periodical basis” the context must be “payments or other amounts” by way of income. Just regular payments from a capital sum are outside the intended meaning and scope of the language. A reasonable reader of para. 15 in the context of the Act and the remainder of the MASC Regulations would not take the reasonable legislator to have intended to include such payments in what, after all, is just a sweep-up clause.[16]The appellants and Secretary of State also urge that the court need not and should not strain to conclude that regular payments by way of reduction of capital should be counted as income out of a supposed purposive construction in favour the provision of child maintenance. For the Regulations themselves have anti-avoidance provisions under Part V. If what is really income is dressed up so as to appear not to be so, Regs. 26 (working for no payment with the principal purpose of reducing assessable income) and 27 are there for that purpose.[17]Further, the provisions about departure directions support this conclusion. A departure direction is another anti-avoidance mechanism. Such a direction is provided for by ss.28A-I of the Act, introduced by amendment in 1996. Under the regulations made thereunder if a parent has a life-style beyond his declared income then he can be ordered to pay more. But, and this is the important bit, not if that lifestyle is financed out of capital. So clearly the draftsman of this provision did not think that regular payments out of capital already counted for the purposes of assessment of N.[18]Finally the appellants and Secretary of State took us to the authority of two Commissioners. In CCS/3671/2002 Commissioner Mesher rejected a suggestion that repayment of a loan to a company by an absent parent was a profit derived from employment by the company or as holder of the office of director. He said:
“Although there is power in paragraph 9 of Schedule 1 to the Child Support Act 1991 for regulations to be made treating capital as income, general words like those quoted above should not lightly be given that effect.”
Clearly by implication he regarded regular re-payments by way of reduction of a loan from a director’s loan account as outside the MASC Regulations.[19]In CCS/3499/2004 Commissioner Jacobs set out the Secretary of State’s submissions:
“[9]… the representative of the Secretary of State supported the appeal on a number of grounds, but in particular that the contents of the director’s loan account were in effect the absent parent’s investment in the company and as such fell to be regarded as his capital that could be drawn on as required, so that the appeal tribunal had failed to give an adequate reason for not treating the drawings on that account as drawings of capital. …. [10] At the oral hearing, Mr Heaven summarised his main point of law as that the appeal tribunal had taken a legally wrong view of the nature of a director’s loan account in a small limited company, which he said operated like a savings account. It was credited with profits and dividends and directors could then write cheques on the account as they liked. He said that it was the equivalent of the money having been put into a director’s personal bank account, where it would undoubtedly be capital. He submitted that, at the least, as the appeal tribunal apparently accepted his view of the nature of the absent parent’s director’s loan account, there was no adequate explanation of why drawings should not be regarded as drawings from capital. … At [14] he accepted those submissions and added: “The ordinary formula for calculating child support maintenance is based on parents’ income and not on their capital resources. Likewise Reg. 25 of the Departure Directions Regulation expressly excludes cases where the parent’s lifestyle “is paid for … out of capital belonging to him”
. I find it hard to see how a director’s loan account, of the kind in issue in the present case, cannot be capital belonging to the director, in the same way that a bank account or savings account would constitute capital. For most of us a major element of our capital is made up of savings out of past income. The past income would be taken into account for child support purposes when it was received, but after that unspent income would become capital. Even if the capital is used to pay for day to day living expenses, the payment is “out of capital.”[20]Commissioner Jacobs went on to allow for the possibility that somehow what was really income might be dressed up as repayment of a director’s loan, but that would be for the possible application of the anti-avoidance provisions or a departure direction. In the particular case he remitted the matter to be considered for such a direction.[21]Finally in CCS/3387/2006 Commissioner Jacobs said: “[10] The withdrawals from the directors’ loan account would normally be classified as capital not income” and went on to cite from Commissioner Mesher’s decision in CCS/371/2002.[22]It was suggested that we should pay deference to these expressions of opinion (none were actually about para. 15) by experienced Commissioners as indicated by Lord Hoffmann in Hinchy v Secretary of State for Work and Pensions [2005] UKHL 16 [2005] 1 WLR 907. “[30] My Lords, I think that the Court of Appeal was wrong to overturn the decisions of the commissioners. They have practical experience of the day-to-day working of the benefit system and I think that the principles they have devised to give effect to the legislative scheme dealing with overpayments are entitled to great respect.” However the point ran into the sand, given that Commissioner Turnbull in this case has actually considered para.15 and come to a different conclusion: we have to decide between conflicting views of different Commissioners. So I say no more about the deference argument.[23]Finally, so far as the appellant’s arguments are concerned, I should record Mr Blount’s submission about the merits. He submitted that the actual effect of the Commissioner’s decision is that the absent parent has the liability to pay mortgage interest on the re-mortgage of his house and additional child support based on the repayments of capital. So the re-mortgage monies (capital) would acquire a child support liability solely by virtue of being paid into and out of a company by the mechanism of a loan. That cannot be within the contemplation of an overall scheme which is intended to disregard capital.

The contentions for the parent with care

[24]I first record an argument Mr Drabble specifically eschewed: that para. 15 is an example of a regulation authorised by para. 9(f) of Schedule 1 to the Act – allowing for a regulation under which capital is to be treated as income. I think he was right to so – the exercise of such a power would call for language much more specific than that of para. 15 – as Commissioner Mesher observed in CCS/3671/2002 (see above).[25]Mr Drabble’s argument put shortly is in two stages. First is that the very words of para. 15 – “Any other payments or other amounts received on a periodical basis” literally apply. The absent parent did and does indeed receive payments on a periodical basis. The emphasis is on the periodical receipt, not on where the money comes from.[26]The next stage is to accept that the payment must in some sense be regarded as income. But, submitted Mr Drabble “income” is a word which is capable of including receipt of money in tranches from a capital fund. For this he relied particularly on three cases, Morrell v Secretary of State for Work and Pensions [2003] EWCA Civ 526, R v West Dorset DC ex parte Poupard [1988] RVR 40 and an older case, Longsdon v Minister of Pensions and NI [1956] 2 WLR 176. None were concerned with child maintenance, but all were, he submitted, concerned with closely related subject matter and were a firm indication that “income” could include regular payments from capital. If it could in those cases, it could for child maintenance too, the policy considerations being not significantly different.[27]It followed that although para. 15 was indeed confined to regular payments in the nature of income, regular payments out of a capital fund were in the nature of income. So there was no reason not to apply the very words as they stand to such a case.[28]I turn first to Morrell, which was about income support.The Secretary of State claimed for recovery of alleged overpayments. He contended that the claimant had misrepresented her income by failing to say that she had received regular sums from her mother by way of a loan which she used for paying rent and other living expenses. It was held that the payments were by way of income. Since these had not been declared she had made a misrepresentation. Richards J (as he then was), giving the lead judgment said: [31] …. “Income” should be given its ordinary and natural meaning. The 1992 Act and the 1987 Act Regulations do not define it and there is no need to embark upon the elusive quest for a definition. There is nothing in the statutory scheme, including the various deeming provisions whereby certain capital is to be treated as income and vice versa, to compel any departure from the ordinary and natural meaning, though the statutory context, with its focus on weekly amounts available to meet outgoings, may help to inform the answer in a doubtful case. [34] If there were otherwise any doubt about the matter, then in my view reference to the statutory scheme would strongly favour the conclusion that these receipts were income. Income support is a means-tested benefit designed to meet a person’s essential needs on a weekly basis. These moneys were provided to the appellant, and were used by her, for the specific purpose of meeting her recurrent needs throughout the relevant period. It would be contrary to the purpose of the legislative scheme if such payments fell to be excluded from the calculation of income when determining entitlement to benefit. [36] The loans in the present case have the essential feature of income identified by the court in Singer [R v SBC ex parte Singer [1973] 1 WLR 713], namely an element of periodic recurrence. Indeed, they provide a good example of the situation which the court found it difficult to visualise as likely to be encountered in practice: the periodically recurrent receipt of loans qualifying as income.”[29]Poupard was about housing benefit. The Poupards had used capital to purchase assets to be used in a business which did not make any profits. They lived by using cash receipts from the business and drawings from a single account which they used both for personal and business purposes. The question was whether those amounts were “income” for the purposes of Reg. 16 of the Housing Benefit Regulations (1985 SI No. 677). It was held by this court they were. Balcombe LJ said at p.303:
“In my judgment, in calculating or estimating income for the purposes of regulation 16(4): (1) Income is that which comes in to the applicant. (2) It may, depending on the facts of the case, be appropriate to take into account cash withdrawals from the gross receipts of an applicant’s business, or withdrawals from an applicant’s bank account or other moneys received by way of loan, notwithstanding that these may not be classified as income on accountancy principles and notwithstanding that the loan may eventually be repaid out of capital. (3) Capital which is no way utilised cannot be deemed to constitute or create income. (4) However, again depending on the facts of the particular case, the utilisation of capital, whether directly so as to pay for living expenses, or indirectly as security for a loan which is used to pay for living expenses, may thereby ‘convert’ the capital so used into ‘income’.” (2) It may, depending on the facts of the case, be appropriate to take into account cash withdrawals from the gross receipts of an applicant’s business, or withdrawals from an applicant’s bank account or other moneys received by way of loan, notwithstanding that these may not be classified as income on accountancy principles and notwithstanding that the loan may eventually be repaid out of capital. (3) Capital which is no way utilised cannot be deemed to constitute or create income. (4) However, again depending on the facts of the particular case, the utilisation of capital, whether directly so as to pay for living expenses, or indirectly as security for a loan which is used to pay for living expenses, may thereby ‘convert’ the capital so used into ‘income’.”
[30]Longsdon was about national insurance contributions. The question was whether the applicant’s income exceeded the threshold requiring payment. The applicant, a farmer, had ploughed back all his profits into his business. He maintained a standard of living represented by an income well above the threshold. He did this by selling capital and bank borrowing. Havers J held that these sums constituted “income” for the purposes of the National Insurance Act 1946 and the regulations made thereunder. He said at p.182: “I have to construe this section according to its natural and ordinary meaning, unless that would lead to some repugnance or absurdity. I am asked, where the word “income” is mentioned, to construe it as “net income” or “income assessable to income tax” or “income after deduction of expenditure” or words of that kind. It would have been a perfectly simple thing if that had been the intention of Parliament to have put in the word “net” or some such word as that, which would have made it perfectly plain that what Parliament was contemplating here was the net income, or one which was assessable to tax, or some similar phrase. On the contrary, Parliament has simply used the word “income” without adding any words of limitation or qualification. I think I am bound to give that word its natural and ordinary meaning, which is, as Bronson J said in People v Niagara Board of Supervisors 4 Hill (N.Y.) 20, 23: ‘that which “comes in’”.[31]Given that in those cases the taking out of a loan in regular amounts (Morrell), the regular taking of living expenses from business receipts and a mixed account of business receipts and capital (Poupard) and the regular taking of borrowings and use of capital (Longsdon) were all treated as “income”, Mr Drabble submitted that the repayments here should be similarly treated. They are “that which comes in.”[32]As for the decisions of Commissioners Mersher and Jacobs relied upon by the appellant, Mr Drabble submitted they were largely obiter, wrong and per incuriam in that the cases he had cited here had not been cited to the Commissioners.

My conclusion

[33]I would reject Mr Drabble’s contentions. I accept the contentions and arguments of the appellant and Secretary of State which I have set out above. In summary I think the Act and Regulations draw a clear demarcation between capital and income. A periodical drawdown of capital is not “income” and is not “Any other payments or other amounts received on a periodical basis” within para. 15. Para. 15 is a “sweep-up” provision for other kinds of income not specifically dealt with in other provisions and must be read in that context. If Parliament had wanted to include periodic drawdown of capital it could have so provided. The Regulations could have expressly provided that such a circumstance was to be treated as income even though it was a drawdown of capital but did not do so.[34]I do not accept that Mr Drabble’s authorities help here. Each was under a different statute and were in different contexts from that of this statute and its regulations. More specifically none of those cases were specifically about a man simply taking regular helpings from his own capital – taking what is in substance no more than re-payment. Morrell involved taking an income by way of building up a loan, Poupard involved taking payments from sources which included a business income and Longsdon involved an obvious attempt to convert income into capital (the ploughing back), financed by borrowings. That is the sort of thing which, under this statute, would be caught by the anti-avoidance provisions.[35]Besides, as Miss Leventhal pointed out, if you start looking for analogous cases under other “analogous” statutes you can find cases which go the other way. She took us to Lillystone v SBC [1982] FLR 52 by way of example. To raise money for repairs to her house, a widow living on supplementary benefits sold her house for a capital sum payable by monthly instalments. It was contended(1) that these instalments took her income above the threshold for entitlement to benefit and/or(2) her capital resources were above the relevant threshold. This court held the latter to be so. Importantly for present purposes, however, was the holding that the regular payments of the capital were not income. Lord Denning MR said:
“Wien J was quite right in saying that the £70 a month could not be treated as income. He said: ‘It is self-evidently a payment of capital by instalments.’ That would be quite right.”
And Oliver LJ said:
“Let me say straight away that I agree entirely with the judge that what this case is concerned with is capital and not income.”
So in that case “that which came in” was not income.[36]I think there is considerable danger in jumping from one statute to another. It does not help. Each statute and its associated regulations fall to be construed as whole. The context for construing a particular phrase or word is that statute, not some other statute. This statute is clearly drawn on the basis that there is clear distinction between capital and income. That distinction is pursued right through into the detail of the Schedule to the MASC Regulation. There is no need to hold, perhaps a bit artificially, that that which is capital counts as income. There are anti-avoidance provisions which will generally cover such a case. I see no need to do so on a purposive construction of the Act.[37]I would add that although the MASC Regulations cannot be construed in the light of the departure direction provisions and regulations (the Regulation preceded it) it is comforting to conclude that my construction is consistent with those provisions.[38]There are these further reasons why I would reject Mr Drabble’s argument. On any basis para. 15 could not extend to a single re-payment of a loan. So if he were right, one would have the bizarre result that a lump sum repayment would not be caught whereas a regular repayment would. There is no rationality in that. Moreover how would one deal with intermediate situations, irregular repayments of varying amounts? The reasonable reader would not consider that a reasonable legislator had intended such odd distinctions should be drawn.

Conclusion and disposition of this appeal

[39]It follows that this appeal should be allowed. Commissioner Turnbull himself set aside the decision of the Southampton Appeal Tribunal. Mr Blount first suggested that we should do nothing more than allow the appeal. But that would mean that there is no determination at all. So I think we should remit the matter for a fresh determination.[40]For my part I think the determination should be entirely afresh. I bear in mind Mr Blount’s submission on the merits, but it is also possible (I express no view one way or the other) that the case may come within the anti-avoidance provisions. The absent parent is, after all, working for the company for no payment and has lent the money at no interest. Possibly, instead of taking loan repayments, he could instead take a salary with the consequence that the company would be worth less. It is perhaps arguable that he is in substance turning his labour into capital.[41]I agree.[42]I also agree.

Cited in 5 later judgments