Is a pension pot beyond the reach of a trustee in bankruptcy? Conflicting High Court decisions reviewed below raise an interesting conflict between practical policy and strict technical interpretation
In both cases, the question was whether a trustee in bankruptcy can obtain an Income Payments Order (IPO) in respect of pension entitlements under a personal pension plan, where no election to draw the pension had been made prior to the Bankruptcy Order.
Until 17 December 2014 the decision in Raithatha v Williamson suggested the answer “yes”. However, in Horton v Henry, the facts of which were for all practical purposes identical, a different Judge of the High Court, in a carefully reasoned judgment, has taken the unusual step of departing from the earlier decision and said “no”.
In Raithatha the Judge held that if the Court was minded to make an IPO pursuant to Section 310 of the Insolvency Act 1986, the bankrupt could be compelled to draw any lump sum to which he was entitled under a personal pension plan and also any periodic payment entitlement on such terms as their trustee in bankruptcy saw fit. The result would be that the lump sum and 3 years’ worth of payments (less any reasonable living allowance as determined by the Court) could be applied for the benefit of the bankrupt’s creditors.
The opposite decision in Horton v Henry was reached on the basis of a technical analysis of the IPO remedy: it attaches to a payment to which the bankrupt is entitled and the judge concluded that unless and until the bankrupt had exercised the option to choose between the various different ways in which pension benefits could be taken, the bankrupt was not "entitled" to any payment at all and so no IPO could be ordered. Despite describing it as “ingenious”, the Judge rejected the argument that Section 333(1), which requires a bankrupt to do all such things as the trustee may reasonably require for the purposes of carrying out his functions, could include the power to compel an election to draw a pension.
The judge in Raithatha took a rather more broad brush approach, a view that will no doubt appeal to creditors wondering why what may be one of the largest assets of the bankrupt is not available. The short answer to that of course may be that this was the will of Parliament expressed in section 11 of the Welfare Reform & Pensions Act 1999. However, the matter is not that simple, as Section 310(7) expressly states that income of the bankrupt includes any payment under a pension scheme “despite anything in Section 11 or 12 of the Welfare Reform & Pensions Act 1999”.
It is difficult to understand why a bankrupt who decided before bankruptcy to draw upon a pension (possibly in an effort to stave off bankruptcy) should be in a worse position than a bankrupt (such as Henry) who had simply decided not to take his pension, so that he could pass the benefit of it to his children rather than his unsatisfied creditors.
Given that Parliament has specifically stated in the Insolvency Act 1986 that pensions in payment may form the subject of an IPO, the effect of the decision in Henry is that those who can afford to live from resources other than their pensions will have their pensions protected but those who need to rely on their pension will have it taken away (to the extent it does more than satisfy their minimum needs). This seems to be a distinction that is difficult to justify from a policy perspective.
We understand that permission to appeal to the Court of Appeal has been granted in Horton v Henry and that the Insolvency Service intends to intervene in the appeal, to be heard in the first half of this year.
The Court of Appeal could take the view that "entitled to payment" includes being "entitled to exercise an option requiring payment" and so allow the appeal. Whether it will take this broader approach remains to be seen.
If it does, then in light of the pension reforms due to be implemented from April 2015 (which will allow 100% of a pension to be taken as a lump sum), pension pots may no longer be protected at all from trustees in bankruptcy, except to the extent that a Court determines that the bankrupt should be entitled to such of the pension income as may be necessary to meet the reasonable domestic needs of the bankrupt and his (or her) family (as provided for in Section 310(2) of the Insolvency Act 1986).
For now the issue remains uncertain and practitioners would be sensible to take advice if it arises in cases in which they are appointed.