Good Faith / Bad Faith
Cost-effectiveness of Recovery Action
Defences Against Recovery
Specific Overpayment Situations
Annex: Overpayments Algorithm
1. This section gives guidance on how to proceed when an overpayment or a payment made in error is discovered. The guidance is aimed primarily at the constituent parts of the Scottish Administration (i.e. the core Scottish Government (SG), the Crown Office and Procurator Fiscal Service, SG Executive Agencies and non-ministerial departments) and bodies sponsored by the SG. However, other organisations to which the Scottish Public Finance Manual (SPFM) is directly applicable should ensure compliance with any relevant provisions and follow procedures consistent with the guidance.
2. In principle public sector organisations should always pursue recovery of overpayments, irrespective of how they came to be made. In practice, however, there will be both practical and legal limits to how cases should be handled. Each case should therefore be dealt with on its merits.
3. As a general rule, public sector organisations should only take a decision not to seek recovery of an overpayment on the basis of a cost benefit analysis of the options. A decision not to pursue recovery should be exceptional and should only be taken after a careful appraisal of the relevant facts.
4. Overpayments which organisations decide not to pursue are subject to the guidance in the section of the SPFM on Losses and Special Payments. Any decision not to pursue recovery, or not to pursue recovery in full, should be defensible in the public interest.
5. Any proposal by a constituent part of the Scottish Administration or a SG sponsored body to forgo recovery of the whole or part of a collective overpayment must be approved by the relevant SG Finance Business Partner (or equivalent) before the recipients of the overpayments are informed.
6. In principle public sector organisations should always pursue recovery of overpayments, irrespective of how they came to be made. In practice, however, there will be both practical and legal limits to how cases should be handled. Each case should therefore be dealt with on its merits. When deciding on appropriate action, taking legal advice, organisations should consider:
- whether the recipient accepted the money in good or bad faith;
- the cost-effectiveness of recovery action;
- any relevant personal circumstances of the payee, including defences against recovery;
- the length of time since the payment in question was made; and
- the need to deal equitably with overpayments to a group of people in similar circumstances.
7. An algorithm for dealing with overpayments is set out in the Annex.
Good Faith / Bad Faith
8. Whether the recipient of an overpayment has acted in good or bad faith will, as a matter of policy, influence the decision on how far recovery should be pursued in a particular case. Good faith alone, however, is not a valid defence against recovery.
9. Lack of good faith can be implied if the person overpaid has wilfully suppressed a material fact or has otherwise failed to give timely, accurate and complete information affecting the amount payable. Other cases may be more a matter of judgement, for example, where the failure to give information clearly involved carelessness. There may also be cases where the error is so obvious, e.g. where an amount stated is very different from that payable, that no one could claim that they had received the money in good faith.
10. In the case of pay, pay-related allowances, and superannuation payments, the regulations are not always simple. It may therefore be unreasonable to assume that all individuals will know so precisely how their entitlement is calculated, or what factors might alter it, that they can themselves immediately detect an overpayment. If, however, there are strong grounds for thinking that the payee knew or could have found out that there had been an overpayment, for example, from a handbook or office notice explaining pay entitlement, or from a pension award, or if the cause of overpayment was an obvious one such as simple arithmetical error evident to the recipient, it may be reasonable to assume that the payee did not act in good faith.
11. In seeking to establish the payee's good faith the following should be considered:
- the complexity of the entitlement calculation;
- the extent to which the payment depended on changes in the payee's circumstance that he / she was obliged to inform the payer; and
- the extent to which the basis of how the payment was calculated was explained to, or was readily accessible to, the payee.
12. Where a public sector organisation is satisfied that the circumstances of an overpayment involved bad faith on the part of the recipient, it should consider, in addition to recovery action, whether the recipient obtained the overpayment fraudulently, for example by dishonestly giving false information or knowingly failing to disclose information which he/she was under a duty to disclose. If there is evidence of fraudulent intent, where appropriate and practicable, prosecution or disciplinary action should be undertaken. (See the separate section of the SPFM on Fraud) Such action will not eliminate the debt which had resulted from the overpayment, so recovery of the debt should continue to be pursued by any means available.
Cost-effectiveness of Recovery Action
13. As a general rule, public sector organisations should only take a decision not to seek recovery of an overpayment on the basis of a cost benefit analysis of the options. A decision not to pursue recovery should be exceptional and should only be taken after a careful appraisal of the relevant facts, taking into account the legal position. The option of abating any future payments due to the recipient of the overpayment should always be considered.
Defences Against Recovery
14. A number of defences against recovery may be claimed by recipients of overpayments, including:
- the length of time that had elapsed since the overpayment was made. In Scotland, any obligation to repay is extinguished 5 years after the payment was made unless a relevant claim has been made in relation to it or its existence has been relevantly acknowledged. A relevant claim is a claim made by or on behalf of the paying organisation. A relevant acknowledgement is where the recipient of the overpayment acts in such a manner as to clearly indicate that the claim still exists or where the recipient or his agent makes an unequivocal written admission that it does so.
- hardship. As a matter of policy public sector organisations may waive recovery of overpayments if it would cause hardship, but hardship must not be confused with inconvenience. To be required to pay back money to which there was no entitlement does not in itself represent hardship, especially if the overpayment was discovered quickly. To be acceptable, a plea of hardship should be supported by reasonable evidence that the recovery action proposed would be detrimental to the welfare of the recipient or his / her family.
- change of position. It could be argued that the recipient of an overpayment may in good faith have relied on it to change their lifestyle. It might then be inequitable to seek to recover the full amount of the overpayment. The paying organisation's reaction should depend on the facts of the case. The onus is on the recipient to show that it would be unfair to repay the money
15. It is not the role of public sector organisations to advise recipients of overpayments of possible defences against recovery, particularly in cases where there is evidence of bad faith. Legal advice should be sought as and when appropriate.
16. Set-off is a right of common law which, in appropriate circumstances, provides a means of settling mutual debts between two parties. This applies where a debtor and a creditor under a contract are, in the same capacity, debtor and creditor under another contract. In these circumstances both sets of debts may be set off against each other so as to extinguish each other completely or where unequal, pro tanto.
17. Where it is decided to effect recovery other than by abating any future payments due to the recipient of the overpayment or by way of set-off an invoice should be raised on the organisation's accounting system for the sum in question.
18. Overpayments (or parts thereof) which organisations decide not to pursue or pursue further are subject to the guidance in the section of the SPFM on Losses and Special Payments. Write-off of overpayments is an area where any level of delegated authority should be modest and proportionate. It is essential to ensure the segregation of responsibilities between staff involved in some way in the overpayment and staff authorising the write-off. Any decision not to pursue recovery, or not to pursue recovery in full, should be defensible in the public interest.
19. If a group of people have all been overpaid as a result of the same mistake the members of the group should not be treated differently as regards the degree of recovery required and should thus be invited to repay on the same basis. However:
- repayments should not be pursued against any individuals who can claim one of the legitimate defences against recovery; and
- it may be impossible or disproportionately expensive to enforce recovery against some individuals - it can be expensive to trace an individual and, in some cases, the individual may not have the resources to pay and the sum would be, in practice, irrecoverable.
20. Public sector organisations should decide how best to handle collective overpayments so that they do not inhibit the maximum recovery possible. The fact that recovery cannot, in practice, be made from some members of a particular group does not mean that recovery should be waived for others in the group. The individual who pays up voluntarily (or who is worth suing) should not be regarded as having been treated unfavourably. All have been required to pay. The difference is one of practicality in pursuing the claim.
21. There is no obligation to inform other individuals of what steps are being taken, or not being taken, to recover a claim. Although there is a general principle of treating like cases alike, as a matter of the law relating to recovery, the fact that a claim is pursued against one person and not another, when they are both equally liable, does not affect the validity of the claim against either.
22. Where it is considered, as a matter of policy, that it would not be fair to recover the amount outstanding, then the individuals concerned must be informed of such a policy. However, any proposal by a constituent part of the Scottish Administration or a SG sponsored body to forego recovery of the whole or part of a collective overpayment must be approved by the relevant SG Finance Business Partner (or equivalent) before the recipients of the overpayments are informed. The Finance Business Partner will need to be satisfied that a collective waiver is defensible in the public interest or on the basis of value for money.
Specific Overpayment Situations
Overpayments to contractors, suppliers, etc.
23. Subject to the general guidance above, recovery of overpayments arising out of business transactions with suppliers, etc. should be pursued in all cases, irrespective of the cause of overpayment. If a request for repayment is not accepted, and set-off against subsequent payments is not possible, organisations should consider taking legal action. Efforts (through legal action or otherwise) should be commensurate with the amounts involved and the particular circumstances of the case.
Overpayments of grants and subsidies
24. As a general rule, payments of grants and subsidies, whether to persons or to corporate bodies, should be regarded as if they were business transactions and full refund of any overpayment should be sought.
Overpayments of pay, allowances, pensions, etc.
25. Subject to the general guidance above, recovery of overpayments of pay, allowances, pensions, etc. should be pursued in whole or in part, as appropriate. In cases of bad faith, recovery of the full amount overpaid should be sought. In cases of good faith it may not always be appropriate to seek full recovery, in accordance with the general principles of recovery expressed above. Factors to be taken into account may include how recently the overpayment was made and how long it went on for. While treating each case on its merits, it is still necessary to ensure that like cases are treated in like fashion.
26. It will often be possible to recover an overpayment through deduction from later salary. If this is the case, the individual concerned should be notified in advance. Deductions from pay should not, however, be made if the individual has a valid defence against recovery. If there is any doubt about whether recovery through deduction from pay is appropriate, legal advice should be sought.
27. Where an overpayment was wholly or partly funded by the EU organisations should, in addition to applying the general guidance set out in this section of the SPFM, take care to observe any additional EU requirements relating to the handling of overpayments.
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Page Published / Updated: December 2012