How does the objective of achieving payment for creditors in insolvency interact with the objectives of pension legislation, which seeks to ensure that individuals are adequately provided for in retirement? The courts in New Zealand and in the UK have each recently grappled with this issue. In both of the recent cases considered in this article the pensions objectives won out and the specific pension funds in question were not made available for the bankrupt individual's creditors. However ambiguities and inconsistencies in this area remain in both the UK and New Zealand.
Similarities between the UK and New Zealand
In both New Zealand and the UK, where an individual is unable to pay his or her debts either the individual or a creditor can apply for the individual to be made bankrupt. In a restructuring context, it is most common to see bankruptcy of individuals when an individual has guaranteed a corporate debt yet is unable to pay it. When an individual is made bankrupt, a bankruptcy official (a trustee in bankruptcy in the UK and the Official Assignee in New Zealand) is appointed. That bankruptcy official will seek to realise the bankrupt's assets in order to pay the bankrupt's creditors. The creditors will, of course, want as many assets as possible to be used to meet their claims. Unlike a corporate insolvency, however, the individual debtor is entitled to be left with some assets in order to survive.
Bankruptcy legislation in both the UK and New Zealand allows individual debtors to keep assets which are essential for their basic needs (for example, clothing and household furniture). This tension between the desire to allow creditors to recover what they are owed and the desire to leave the bankrupt with sufficient assets to survive underpins the decisions considered in this article.
New Zealand: more clarity but less consistency
The recent New Zealand Court of Appeal decision in Trustees Executors Ltd v The Official Assignee  NZCA 118 (TEL) has had the effect of creating both clarity and inconsistency regarding whether a bankrupt's superannuation may be accessed by creditors. The clarity comes from a clear statement on the accessibility of New Zealand's state-sponsored, legislated superannuation scheme, KiwiSaver. The inconsistency comes from the fact that this clear statement is at odds with the position in regard to a number of other New Zealand superannuation schemes.
KiwiSaver and superannuation in New Zealand
In 2007, the New Zealand government introduced KiwiSaver as a voluntary long-term savings scheme. A KiwiSaver member, his or her employer, and the government all contribute to the member's account, which then normally becomes accessible to the member at age 65. Currently, there are almost 2.5 million KiwiSaver members – effectively, half the population of New Zealand.
Outside of KiwiSaver, there are a number of other private and public superannuation schemes. These include schemes provided by particular employers or for public sector employees. These schemes continue to exist independently of KiwiSaver.
The TEL proceeding sought to reconcile two seemingly incompatible enactments:
- Under the Insolvency Act 2006, all property (arguably including KiwiSaver) belonging to a bankrupt vests in the Official Assignee (OA). The OA is then charged with dealing with that property to allow the bankrupt's creditors to be repaid; and
- Under the KiwiSaver Act 2006, a KiwiSaver interest cannot be assigned, charged or passed to any other person (arguably including the OA).
The issue is further complicated by the fact that both enactments are made subject to any statement of law to the contrary (i.e. they are each made subject to the other), and they were both passed by Parliament within two months of each other.
The Court of Appeal confirmed that the KiwiSaver Act 2006 prevailed by holding that KiwiSaver interests of bankrupts do not vest in the OA. In deciding the appeal, the court held that the relevant provisions must be given an interpretation that is practical and sensible. It focused on the express purpose of the KiwiSaver Act 2006 of encouraging long-term savings, and the strong language of the provisions that prevent an interest from being passed to another person. In resolving this issue, the decision brings a significant degree of clarity as to how these two enactments should be reconciled.
… But less consistency
The court's judgment in TEL was grounded firmly in the express prohibitions provided by the KiwiSaver Act 2006. This means that its application is limited to KiwiSaver – it has not affected the wider law relating to the ability of creditors to claim a bankrupt's superannuation where that superannuation is not KiwiSaver.
In fact, it is at odds with the position relating to a number of other types of superannuation schemes. In Official Assignee v NZI Life Superannuation Nominees Ltd  1 NZLR 684 (HC) (NZI Life) the New Zealand High Court held that, unless allowed for by government regulations (of which none currently exist), a clause in a superannuation trust deed that attempts to protect a bankrupt member's account by forfeiting it to the trustee of the scheme is a fraud on the laws of bankruptcy and is not enforceable in most situations.
This inconsistency is not entirely new. For example, the position from NZI Life is contrary to the inalienability of superannuation for civil sector employees under section 92 of the Government Superannuation Fund Act 1956. The real impact of the TEL decision is that it makes inalienability the rule rather than the exception. The sheer percentage of New Zealanders who are KiwiSaver members ensures that this decision is likely to have far-reaching effects. Indeed, as of January 2015 there were more than 5,000 bankrupts with KiwiSaver accounts, with a total value of NZ$27.3 million.
The effect of the TEL decision is that while the law in New Zealand is clear, it is not consistent. Whether bankrupt New Zealanders’ superannuation is safe from creditors will depend on what type of superannuation they have.
UK: no clarity yet but could it be coming soon?
In the UK, whether a trustee in bankruptcy is permitted by the relevant insolvency legislation to compel a bankrupt individual to access his or her pension savings in order to pay off creditors is currently the subject of conflicting case authority. In the recent case of Horton v Henry  EWHC 4209 (Ch), the judge was asked to consider whether, in principle, the court had the power under the relevant provisions of the Insolvency Act 1986 to make an income payment order (IPO) for a pension that was not yet in payment but could be put into payment by the bankrupt making an election to do so (and, if such power existed, whether it could be exercised in the circumstances). The judge concluded that, during such time as the bankrupt had not made the necessary decisions and elections in respect of the available options, payments were not certain or contractually payable, and therefore neither the trustee nor the court had any power to compel the bankrupt to elect in any particular way.
This decision is in direct contrast to the 2012 decision in the case of Raithatha v Williamson (a bankrupt)  EWHC 909 (Ch), which extended the scope of IPOs to include a pension entitlement which a bankrupt could elect (but had not yet elected) to receive. Also, in Raithatha, while it was held that the court had jurisdiction to make an IPO, the judge stated that further argument would be necessary as to the form of appropriate order, having evaluated what was fair and just between the competing interests of the bankrupt and his creditors. In Horton v Henry, the judge concluded that he did not have the jurisdiction to make an IPO. However, he stated that if he was wrong, he felt there was no need for a balancing exercise to be carried out between the needs of the bankrupt and his creditors.
The decision in the case of Horton v Henry has been appealed by the trustee, and the Court of Appeal is due to decide on this issue in early 2016. Upholding the decision would be in line with section 11 of the Welfare Reform and Pensions Act 1999, which removes the majority of pensions from the funds available for trustees in bankruptcy. However, if the decision is reversed, then the impact on realisations for creditors could be significant. This is particularly the case in light of the changes in UK law which came into effect from April 2015 and mean that pension members are now able to access their entire pension fund as a lump sum at the age of 55. A reversal of the recent finding could therefore significantly extend the level of funds available to creditors pursuing an individual under a personal guarantee. However, denying pensions to bankrupts is seemingly completely contrary to the original intention of Parliament by virtue of the terms of the 1999 legislation, which aimed to ensure that an individual was adequately provided for in retirement. The outcome of the upcoming appeal is eagerly awaited − regarding the basic decision about to the trustees' ability to pursue an IPO on the basis of accessing bankrupts' pensions at all, but also, if it is supportive of the Raithatha approach, regarding whether, and to what extent, balancing the interests of bankrupts and their creditors shall be carried out − if at all. In the meantime, however, if a UK bankrupt's pension is in payment, there is no reason why a trustee in bankruptcy cannot seek an IPO in respect of any surplus monthly income. In addition, there is nothing to preclude a trustee in bankruptcy from reviewing and recovering excessive pension contributions made by an individual before entering into bankruptcy.
So, can a bankrupt's pension pot be used to pay creditors?
Perhaps unsatisfactorily, the answer in both New Zealand and the UK is: it depends. We have learned from these two recent cases that in New Zealand it depends on what type of superannuation scheme the bankrupt has invested in and in the UK it depends on whether the pension is in payment or not (and on what the Court of Appeal has to say about it next year).