In May 2015, I wrote an article about the conflicting lower court decisions in Raithatha –v- Williamson and Horton –v- Henry, concerning undrawn pension entitlements and income payment orders. The Court of Appeal has now finally handed down its long expected Judgment.
Where a pension is in drawdown and a bankrupt receives pension payments, then those payments can be taken into account when determining whether there is scope for a income payments order, under which a bankruptcy has to pay “excess income” (that is to say income above the level which is necessary to meet reasonable domestic needs) to his or her trustee in bankruptcy.
The question before the Court of Appeal was whether a pension entitlement which a bankrupt is entitled to draw down, but has elected not to do so, can be included in the assessment of income for the purpose of an income payments order. The Court of Appeal found that undrawn pension rights could not be classed as income. Pension rights are excluded from bankruptcy by virtue of the Welfare Reform and Pensions Act 1999. To allow a trustee in bankruptcy to force a bankrupt to draw down pension would “drive a coach and horses” through the protection afforded to a bankrupt’s pension rights by the Insolvency Act 1986 and pension legislation.
The decision in Horton –v- Henry has been much welcomed and praised by many as being correct and just, in light of the statutory protection given to pensions in bankruptcy. However, in accordance with the decision in Blight –v- Brewster  1 WLR 284, an individual creditor can enforce a Judgment against undrawn pension funds by compelling a debtor by injunction to make an election to draw down his pension, and obtaining a Third Party Debt Order against the pension trustees.
This case was drawn to the attention of the Court of Appeal, but the Court of Appeal held that this case did not support the argument that post-bankruptcy a trustee in bankruptcy can require a bankrupt to make such an election. Parliament has provided pension protection in the area of bankruptcy. It has not afforded this protection in the area of enforcement of Judgments.
To me, the fact that an individual Judgment creditor can get hold of a pension fund, but that it is not available to be shared amongst his creditors pro rata, goes against the rationale behind the bankruptcy legislation, namely that assets of a bankrupt should be available to all of his creditors and shared pro-rata.
Where a Judgment creditor knows that a debtor has substantial undrawn pension funds, he should now consider enforcing his Judgment, rather than going down the bankruptcy route. Furthermore, if the amount available in the pension fund is sufficient to pay the creditors of the bankrupt and the costs of the bankruptcy in full, then creditors should consider making an application for an annulment of the bankruptcy, so that the undrawn pension entitlement can be made available for enforcement.
That it would appear appropriate to have the bankruptcy order annulled, if the undrawn pension funds are sufficient to pay all of the creditors in full, seems to be consistent with The Insolvency Service guidelines, which I discussed in detail in May 2015 (click here to read my article).
Mr Henry was made bankrupt upon his own petition when he was 61 years old, owing millions to his creditors. He managed to build up a significant pension pot. He had the benefit of 4 pension policies, with one policy having a value as at October 2014 of nearly £850,000 and a right to elect to draw down 25% of the policy value as a lump sum. Mr Henry explained to the lower court that due to the generosity of his wife and family, he did not need to draw any pension. He did not want to draw down his pension, because he wished to preserve the entirety of his pension for the benefit of his children.
Many have hailed the Court of Appeal’s decision as providing justice. I don’t agree that justice was achieved. Mr Henry and his family must have considerable means to be able to afford a living, without the need for Mr Henry to draw down on his pension policies. I am not sure why Mr Henry’s children should take preference over his creditors. However, due to the fact that Mr Henry owed so much to creditors, there is no scope for an annulment of his bankruptcy and to make his pension funds available for enforcement.
We now have a situation where a less fortunate debtor can have his pension pot taken away by Judgment creditor, yet, where there are funds in a bankrupt’s pension fund, surplus to the requirement of meeting the bankrupt’s reasonable domestic needs, those funds are protected. Furthermore, where a bankrupt’s only asset is his family home (and often the home constitutes someone’s pension), this can be taken away, even if there are exceptional circumstances.
I would suggest that it is time for parliament to reconsider the current protection provided to pensions in bankruptcy.