Pensions and bankruptcy: a difference of opinion

12 / 02 / 2015

A recent decision of the High Court, that an Income Payments Order could not be made against a bankrupt’s unexercised rights to draw his pension, has contradicted an earlier decision that pension benefits can be the subject of such an order. Other than “perplexed” and “confused”, where does this decision leave us?

In Horton v Henry[1] the High Court has held that a bankrupt’s unexercised rights to draw his pension does not represent income to which the bankrupt is entitled within the meaning of s.310(7) of the Insolvency Act 1986, and so refused to make an Income Payment Order (“IPO”) against those benefits. The decision has caused much head-scratching throughout the insolvency and pensions industries as it blatantly contradicts an earlier (controversial!) High Court decision in the case of Raithatha v Williamson[2] – in this case, it was held that the pension benefits of a bankrupt can be the subject of an IPO. The court did consider Raithatha in the course of the Horton judgment but declined to follow it, feeling that it had been decided wrongly in the first place.

It is very unusual to have two different, conflicting decisions from courts at the same level. It is a well-established principle that a judge at first instance should, in general, follow another decision at first instance, unless convinced that the earlier decision was wrong.

Background

When an individual becomes bankrupt and a trustee in bankruptcy is appointed, all assets to which the individual is beneficially entitled vest in the trustee. The job of the trustee is to then realise the value of the bankrupt’s estate and distribute the proceeds to outstanding creditors.  If the bankrupt receives an income during his bankruptcy, the trustee may apply to court to have all or some of that income included in the bankrupt’s estate – an IPO.

Pensions and bankruptcy generally

The Welfare Reform and Pensions Act 1999 is responsible for establishing the well known position that a bankrupt’s rights under a registered pension scheme (or an approved pension scheme as it was in those days) do not vest in his trustee in bankruptcy. However, the same legislation made it clear that where a bankrupt was in receipt of income from his pension, the trustee in bankruptcy might seek an IPO over that income.

Unfortunately, as with all things pension-related, the legislative draftsmen failed in their task to cover every possible eventuality as far as pensions and bankruptcy is concerned (no surprise there!). There was silence about whether a trustee in bankruptcy could seek an IPO over income from a pensionscheme were the member had reached the age at which he could access benefits but had chosen not to do so.

Mr Henry’s circumstances

Mr Henry (aged 58) was adjudged bankrupt in December 2012. At that time his assets included four pension pots – a SIPP and three personal pension policies. These did not form part of the bankrupt’s estate and throughout the bankruptcy, Mr Henry chose not to crystallise payment under any of these plans.

True to form, the trustee in bankruptcy sought an IPO over lump sum benefits and three years’ worth of income from the plans. Mr Henry opposed the application stating that he did not need to access the funds and had no intention of drawing down his pensions – he advanced arguments that he wanted to preserve the value of the pots for as long as possible with the aim of benefiting his children in due course.

Decision

The High Court held that Mr Henry’s uncrystallised pensions could not be made subject to an IPO, rejecting  the trustee in bankruptcy’s application.

In reaching its decision the High Court looked at the Raithatha case in some detail. The judge in that case had concluded that a bankrupt has “an entitlement to a payment under a pension scheme not merely where the scheme is in payment of benefit but also where, under the rules of the scheme, he was entitled to payment merely by asking for a payment”.

Although the facts underpinning  the application in the Horton case could not be distinguished from those in Raithatha, the judge found that Raithathawas wrongly decided and so declined to follow it.

In determining whether the court had power to make the IPO, the judge considered “whether a bankrupt “becomes entitled” to a pension under an uncrystallised pension even though … he would not be receiving any payments from the pension trustees and would have no enforceable claim for payment against them”. He found that the word “entitled” in s. 310(7) of the Insolvency Act 1986 was a reference to a pension in payment, under which definite amounts have become contractually payable.

The judge went on to state that pensions not in already in payment, could not be said to be payments to which the bankrupt was therefore “entitled”. Unless and until Mr Henry had made the necessary decisions and elections, payments were neither certain nor contractually payable.  Furthermore, the trustee in bankruptcy had no right, on behalf of the bankrupt, to make decisions and elections relating to a bankrupt’s pensions, as (in accordance with the Welfare Reform and Pensions Act 1999) those pensions were not part of the bankrupt’s estate.

Wedlake Bell comment

The decision in Raithatha is clearly at odds with the legislative aim of protecting pensions from the bankrupt’s estate. It has received criticism from many quarters and although the case was initially appealed the parties settled, leaving the law in this area unclear.

We understand that permission to appeal the Horton decision has been given to the trustee in bankruptcy – the hearing window is between 14 May and 14 July 2015.

The introduction of the new pension flexibilities from April 2015, where an individual with defined contribution pension savings will be able to access their fund in full from age 55, makes the Horton appeal very important for pensions and insolvency practitioners alike. If the appeal follows Raithatha, a lot of insolvency practitioners will be rubbing their hands with glee – uncrystallised contract based defined contribution pots could well become fair game for an IPO.

We will keep you posted on developments.

[1] [2014] EWHC 4209 (Ch)
[2] [2012] EWHC 909 (Ch)