Court holds Bankrupt cannot be forced to draw scheme benefits to pay creditors

In its judgment in Horton v Henry the Court of Appeal has held that where a bankrupt member has acquired a right to draw benefits, but has not yet done so (a) his rights under the scheme are not "income" over which the court can make an income payments order under section 310 of the Insolvency Act 1986; and (b) the trustee in bankruptcy cannot compel the member to take his benefits.

Background

Prior to the Court of Appeal's judgment, two conflicting High Court judgments had given rise to uncertainty over the status of uncrystallised pension rights of a bankrupt member in circumstances where the member has the right to draw his benefits from a scheme, but has not yet done so.

The general principle on an individual's bankruptcy is that all the bankrupt's property vests in his trustee in bankruptcy. Legislation exempts pension rights so that these do not vest in the trustee in bankruptcy. However, where a member is "entitled" to "income", including pension income, the trustee in bankruptcy can apply to the court for an income payments order under section 310 of the Insolvency Act, requiring that income to be paid to the trustee in bankruptcy. The court has discretion as to whether to make an order and what income any such order should cover. The court is not allowed to make an order which would reduce the income of the bankrupt below what is "necessary for meeting the reasonable domestic needs of the bankrupt and his family".

The question the Court of Appeal had to decide was whether a bankrupt is "entitled" to "income" for the purposes of making an income payments order under section 310 where a member has a right to receive his benefits, but has not exercised that right.

Court of Appeal decision

The Court held that a member is not entitled to income for the purposes of making an income payments order under section 310 where the member has the right to draw his benefits from the scheme, but has not yet exercised that right.

The Court also considered whether the trustee in bankruptcy could compel the member to draw his benefits on the basis of the bankrupt's statutory duty to do all such things as the trustee in bankruptcy reasonably requires for the purpose of carrying out his functions. It held that the trustee in bankruptcy could not do this, as this would "drive a coach and horses" through the protection which insolvency and pensions legislation give to a bankrupt's pension rights.

The Court of Appeal's judgment brings some much needed certainty to this area of the law. The judgment will be of particular interest to providers of SSASs and SIPPs, as the rules of such schemes will commonly give a member broad discretion over how and in what form to take his benefits. However, the rules of many larger occupational pension schemes also give the member considerable discretion over the timing and form of benefits.