Katherine Prygodicz & Ors v The Commonwealth of Australia (No 2)  FCA 634 (11 June 2021)
On 11 June 2021, the Federal Court of Australia approved the proposed settlement for a class action brought against the Commonwealth of Australia (the CommonWeath) for its use of an automated debt-collection system, which was intended to recover overpaid social security payments. The proposed settlement requires the Commonwealth to pay $ 112 million (inclusive of legal costs) in interest to certain group members, to not raise, demand or recover from certain group members any invalid debts, and to consent to court declarations that some of its administrative decisions were not validly made.
The applicants brought a class action representing some 648,000 group members against the Commonwealth for its use of an automated debt-collection system between on or about 1 July 2015 and November 2019, which was intended to recover overpaid social security payments from recipients (the Robodebt system).
The Robodebt system attempted to identify overpayments during a period of time (review period) through data matching. It used a social security recipient’s PAYG income information kept by the Australian Taxation Office (ATO data) and apportioned it over fortnightly increments in the review period to determine the person notional or assumed fortnightly income. It then compared the notional / assumed fortnightly income with the actual fortnightly income information provided by the person to Centrelink determine whether the person had been overpaid social security benefits.
Where the comparison indicated an overpayment of social security benefits, the Robodebt system sent a letter to the person, which stated that there was a discrepancy and asked them to confirm or update their reported income by a specified date. If the person did not provide this information in time, the Robodebt system assumed that the ATO data was correct and raised a debt against the person. If the person was late in repaying the debt, the Commonwealth sought repayment by a variety of methods and imposed an additional amount by way of statutory penalty.
The applicants claimed that the use of income averaging based on the ATO data to calculate the asserted debts was unlawful and brought two broad causes of action:
(a) a restitutionary unjust enrichment claim for the monies that the Commonwealth had received due to the wrongly asserted debts; and
(b) a tortious claim in negligence for damages for economic loss and “distress damages” for the stress, anxiety and stigma arising from wrongly asserted debts.
Prior to the settlement judgment, the Commonwealth had announced a program under which it withdrew approximately $ 1.763 billion in debts based on income averaging from ATO data and promised to refund approximately $ 751 million it had received or recovered from social security recipients in relation to such debts (Commonwealth-recovered amounts).
The Commonwealth conceded, and the court found, that it did not have a proper legal basis to raise, demand or recover asserted debts based on income averaging from ATO data.
Justice Murphy noted that:
The proceeding has exposed a shameful chapter in the administration of the Commonwealth social security system and a massive failure of public administration. It should have been obvious to the senior public servants charged with overseeing the Robodebt system and the responsible Minister at different points that many social security recipients do not earn a stable or constant income, and any employment they obtain may be casual, part-time, sessional, or intermittent and may not continue throughout the year. Where a social security recipient does not earn a constant fortnightly wage, does not earn income every fortnight, or only works for intermittent periods in a year, their notional or assumed fortnightly income based on income averaging is unlikely to be the same as their current fortnightly income.
However, Justice Murphy held that there was little evidence that the responsible Ministers and senior public servants actually knew that income averaging based on ATO data was an unreliable basis upon which to raise and recover debts from social security.
Noting that it is fundamental that before the state asserts that its citizens have a legal obligation to pay a debt to it, and before it recovers those debts, the debts have a proper basis in law, Justice Murphy held that the Commonwealth completely failed in fulfilling this obligation.
His Honor stated that the Commonwealth’s failure was particularly acute given that many people who faced demands for repayment of unlawfully asserted debts could not afford to repay those amounts, highlighting that recipients of social security benefits are particularly vulnerable and ill-equipped to properly understand or to challenge the basis of the asserted debts.
In relation to the applicants’ causes of action, Justice Murphy found that:
(a) the prospects of success for the unjust enrichment claims depended on the particular circumstances of each category of group members; and
(b) the applicants’ negligence claim was weak as the applicants were unlikely to be able to establish an alleged duty of care. In reaching this conclusion he considered the provisions of the Social Security Act 1991 (Cth) (SSA) and the Social Security (Administration) Act 1999 (Cth), the levels of administrative merits review provided in those Acts, and case law regarding the existence of a common law duty of care with respect to exercising powers under the SSA. He also considered that damages founded in negligence concerned the same losses as those claimed in respect of unjust enrichment and there was significant uncertainty that claims for distress damages would be successful.
Justice Murphy approved the proposed settlement, which required that the Commonwealth:
(a) consent to the Court making declarations, which, in effect, provide that any decisions made by the Commonwealth, where those decisions solely relied on income averaging from ATO data and no other evidence as to whether the person earned employment income at a constant fortnightly rate, were not validly made;
(b) not raise, demand or recover from certain group members any invalid debt; and
(c) pay $ 112 million inclusive of legal costs and interest earned on the Commonwealth-recovered amounts, to be distributed proportionately amongst relevant group members depending on the size of their debt and how long they were without their money.
Justice Murphy found the proposed settlement to be fair and reasonable between the parties. Justice Murphy noted that he was “troubled” whether the proposed settlement was fair and reasonable between the different categories of group members, as almost one-third of group members were left with no right to monetary compensation. After modifying the proposed settlement to allow for a late opt out by 680 group members who had objected to the proposed settlement, he was ultimately satisfied that it was fair and reasonable between the different categories of group members and approved the settlement.
The significance of the decision is that it puts governments on notice that they can not merely rely on automatic systems and broad assumptions in formulating and implementing policy, particularly in the context of social welfare, and especially where the consequences are particularly felt by persons who are disadvantaged in terms of resources, capacity and information.
The decision also highlights that governments, representative minsters and people charged with implementing policy, must ensure that they have a proper legal basis to undertake certain acts in the name of the State, with particular relevance in the context of raising, demanding and recovering asserted debts .
Finally, the decision shows that despite not compensating every group member, the Federal Court was prepared to find settlements of such class actions to be “fair and reasonable”, indicative of real, practical access to justice and an effective class action system.
Read the full decision here.