Just before Christmas last year, the High Court handed down a judgment in a bankruptcy case which was contrary to a High Court decision in a previous pensions and bankruptcy case on essentially the same issues. It has left this area in some uncertainty for the time being and is the latest in a long history of developments in this area.

A little bit of history

The position in relation to personal pension schemes and bankruptcy was explored in the 1998 caseRe Landau which found that a trustee in bankruptcy was entitled to receive all the sums payable under a bankrupt's retirement annuity policy and that the contractual rights under that policy constituted 'property' for the purposes of Insolvency legislation.  Therefore, the benefits under the policy vested in the trustee in bankruptcy automatically upon his appointment. 

The Welfare Reform and Pensions Act 1999 ('the 99 Act') then introduced certain provisions which effectively overruled the effect of the Re Landau decision, because of their application to personal pension arrangements as well as occupational pension schemes.  S11 of the 99 Act (which was not retrospective) provides that where a bankruptcy order is made against a member his rights under an approved pension arrangement (now a registered pension arrangement) are not included in his estate for bankruptcy purposes and so do not automatically pass to the trustee in bankruptcy.  However, the 99 Act also made amendments to s310 of the Insolvency Act 1996, to make it clear that a trustee in bankruptcy could apply for an income payments order ('IPO') in relation to the income a bankrupt was receiving from his pension. What was not clear was whether or not such an order could be sought in relation to a pension which the member had an immediate right to, even though it was not in payment. 

This issue was picked up in the Raithatha v Williamson case in 2012 which looked at whether or not an IPO could be made in relation a bankrupt's pension policies where the bankrupt could elect to call for the pension but at the time of the IPO application had not so elected.  In looking at that question, the judge had to determine whether or not the potential pension payments in this scenario constituted a '…payment in the nature of income which is from time to time made to him or to which he from time to time becomes entitled' within the meaning of s310(7) of the Insolvency Act 1996  and therefore constituted income by reference to which the court could make an IPO. Here, the judge ruled that for the purposes of the insolvency legislation, a bankrupt did have an entitlement to payment under a pension scheme to which an IPO could be attached not only where a pension was in payment, but also where, under the pension scheme rules, a member would be entitled to payment of that pension by simply asking for it. In reaching this conclusion the judge said:

  • Where a member had elected to take his pension, the operation of s310 would 'present no problem'. Any moneys paid pursuant to that election would remain the property of the bankrupt until a trustee in bankruptcy applied for and obtained an IPO.  In considering whether or not to grant that order, the court would evaluate what was just and fair between the competing interests of, in particular, the bankrupt and his creditors and would make an order which was appropriate in all the circumstances.
  • The judge also rejected the argument that the payment of a lump sum (so for example where the member elects to commute their pension for a lump sum payment) did not constitute  a 'payment in the nature of income' for the purposes of s310 and so said that that could also be subject to an IPO under this section.
  • The argument that there was no entitlement to a payment where the member had not made an election to receive a pension seemed attractive at first.   However, the judge then struggled to see why the legislature would have made a distinction between where a member had made such an election before the bankruptcy, and so the pension could be subject to an IPO, and where the member had not and so would not.  To decide otherwise would, in his view, create an anomaly which was 'difficult to justify'.  Therefore, the judge decided that a bankrupt was entitled to a payment under a pension scheme not only where the pension was in payment but also where, under the scheme rules, he would be entitled to it simply by asking for it (and so in both cases the benefits could be subject to an IPO).

The decision in Raithatha is consistent with comments made by the Court of Appeal in Cripps v Trustee Solutions [2007] 45 PBLR and the High Court in Alexander Forbes Trustee Service Limited v Clarke, which considered when a member becomes entitled to payment of a pension in a different context  - the application of the statutory priority order on the winding up of a defined benefit pension scheme under section 73 of the Pensions Act 1995. It seems that neither case  was cited in either Raithatha or Horton.

The Horton case – dismantling the Raithatha decision

In the Horton v Henry [2014] EWHC 4209 (Ch) case (December 2014), the bankrupt had a self invested pension policy and three personal pension arrangements which had not yet come into payment but in relation to which he had a right to call for immediate payment.  The question raised in this case is whether an IPO could be applied for and granted in relation to the pension under these policies in these circumstances even though they were not yet in payment. This was essentially the same issue decided upon in the Raithatha case, which the judge appeared to acknowledge. Indeed, he noted that as a first instance High Court decision he was obliged to follow the Raithatha decision unless he thought it was wrong. 

However, in Horton, the Judge noted that the Raithatha decision had 'given rise to much comment' and had been described by one District Judge as being 'controversial'.  The judge himself here clearly felt that there was enough cause to depart from the Raithatha decision, deciding that:

  • The words 'becomes entitled' in s310 suggest a reference to where pensions in payment under which definite amounts had become payable.
  • The member had a number of rights open to him in relation to how he wanted to receive his pension, but s310 did not cater for the court or the trustee in bankruptcy to determine how those rights would be exercised.  Indeed, he rejected arguments about other parts of the insolvency legislation being sufficient to allow the trustee in bankruptcy to direct the member how to exercise the elections open to him.
  • He 'with considerable reluctance' came to a different view to the Raithana decision, saying that the bankrupt was not entitled to payment of his pension merely by asking for payment – there were a variety of options open to him and it would only be after those elections had been made that any payment would be due to him. So, he considered that s310 of the Insolvency Act did not provide a basis for an IPO to be made against an uncrystallised pension and it did not require the bankrupt to make any elections in relation to his pension in any particular way. 

So where are we now?

The judgment in the Horton case itself recognises that the position is now in some confusion, there being two first instance High Court decisions on the same issue which contradict each other. The case is due to be heard in the Court of Appeal from 14 May to 14 July this year – let us hope that the outcome gives much needed clarity on the subject. This is especially so given the new pension flexibilities in the DC context that come into effect from April 2015. If the trustee in bankruptcy is able to lay claim to a pension that a bankrupt can simply call for, and exercise the options that go with that in a certain way (or indeed force the bankrupt to) then it might be possible for the trustee in bankruptcy to require the whole of a bankrupt's pension to be taken as a lump sum and acquired for the bankrupt's creditors – an extreme result indeed.