The High Court has held that a bankrupt’s unexercised rights to draw his pension did not represent income to which the bankrupt was entitled and so refused to make an income payments order, contradicting the controversial decision in Raithatha v Williamson which held that a bankrupt’s right to draw income from a personal pension may be subject to an income payments order even if the individual has yet to draw his pension.

Horton v Henry [2014] EWHC 4209 (Ch)

The High Court has held that a bankrupt’s unexercised rights to draw his pension did not represent income to which the bankrupt was entitled within the meaning of section 310(7) of the Insolvency Act 1986 (“IA 1986”) and so refused to make an income payments order (“IPO”). This contradicts the controversial decision in Raithatha v Williamson [2012] EWHC 909 (Ch), which held that a bankrupt’s right to draw income from a personal pension may be subject to an IPO even if the individual has yet to draw his pension. Additionally, the court held that as the bankrupt’s pension did not form part of the bankruptcy estate, the trustee in bankruptcy had no power to make any elections in relation to the pensions to bring them into payment.

Facts

In December 2012 the defendant, Mr Henry, became bankrupt. His assets included four pension policies (a self-invested pension policy (“SIPP”) and three personal pension policies) which did not form part of the bankruptcy estate. He was entitled to draw his pension throughout his bankruptcy, but chose not to do so. His trustee in bankruptcy applied for an IPO seeking a share of lump sum payments and income from the pensions.

Mr Henry opposed the application, largely relying on the arguments given in Raithatha. However he did not attempt to argue that a lump sum could never constitute a payment in the nature of income for the purposes of section 310(7) of the IA 1986.

Raithatha v Williamson

The Welfare Reform and Pensions Act 1999 (“WRPA”) protects future rights under all tax approved  pensions from IPOs and distinguishes them from pensions already in payment.  It has always been assumed that a trustee in bankruptcy would have no entitlement to the proceeds of pensions falling within the protection of the WRPA.  

In Raithatha, the applicant bankrupt, opposed an IPO application made by his trustee in bankruptcy, relying upon the WRPA and alleging that his undrawn personal pension scheme benefits were not income for the purposes of section 310(7) of the IA 1986 so could not be subject to an IPO. As in Henry, the bankrupt was entitled to draw his pension under the scheme rules but had not yet elected to do so. He argued that until he elected to draw his pension, he was not ‘entitled’ to the payments and he was not receiving any pension income which may be subject to an IPO. The applicant also argued that any potential lump sum payment could never be subject to an IPO, on the basis that a lump sum could never constitute a payment in the nature of income for the purposes of section 310(7) of the IA 1986. 

Departing from the spirit of and practice under the WRPA the court ruled that both undrawn pension and any lump sum payment would both constitute income for the purposes of s310(7) IA 1986 and were subject to an IPO. The judgment effectively allowed a trustee in bankruptcy to compel a bankrupt to draw pension against his wishes.

Judgment

The court considered Raithatha, and although the circumstances were indistinguishable, it held that it was satisfied that Raithatha was wrongly decided and therefore declined to follow the case, deciding that Mr Henry’s undrawn pension could not be subjected to an IPO. The court noted that Mr Henry would have to make a number of decisions and elections in order for him to receive pension monies, and so unless and until these were made, the pension rights were uncrystallised and uncertain in value. Further, the trustee in bankruptcy had no right to make these decisions and elections on behalf of the bankrupt, as the pensions were not part of the bankruptcy estate.

Implications

The decision in Raithatha was criticised by many for circumventing pension protection under the Welfare Reform and Pensions Act 1999 which is designed to keep pension assets out of the bankruptcy estate. Although Raithatha was initially appealed, the parties settled, leaving the law in this area unclear.

The decision taken by the court in Horton not to follow the decision in Raithatha is very unusual as it is a well-established principle that courts of the same level should follow previous decisions unless it is convinced that the decision was wrong.

We understand that the trustee in Horton has been given permission to appeal and so the Court of Appeal will soon have the opportunity to rule which of these cases is correct.