The Court of Appeal resolves some of the conflict between insolvency and pensions law in its decision on Horton v Henry.

The Court of Appeal has upheld the High Court decision of the Deputy Judge in Horton v Henry (2014) confirming that a trustee in bankruptcy cannot access uncrystallised funds in a bankrupt's pension arrangements (or force the bankrupt to access them himself).

This means that the earlier conflicting High Court decision in Raithatha v Williamson (2012) was wrongly decided, as the judge in Horton v Henry had, as it turns out correctly, concluded.

In an alert last year, we highlighted the issue and what this might mean for pension scheme trustees.

What's the problem again?

​There are two regimes in competition with each other: the insolvency regime and the pensions regime.

Section 310 of The Insolvency Act 1986 enables a trustee in bankruptcy to apply for an Income Payments Order (IPO) from a bankrupt's income, including payments to which the bankrupt "becomes entitled".

The Welfare and Pensions Act 1999 (section 11) excludes pension rights under approved pension arrangements from a bankrupt's estate (though (i) excessive contributions into a pension scheme may in some cases be recoverable for the benefit of creditors and (ii) any pension actually in payment can be the subject of an IPO).

So what about pension rights which have not actually crystallised but which the bankrupt could access if he chose to do so? Are these available for the trustee in bankruptcy or not? This was the question before the Court of Appeal.

In 2012 in Raithatha, the judge had said the trustee in bankruptcy could potentially obtain an IPO against the bankrupt's pension policies which were not in payment but were capable of crystallisation. The bankrupt, as a matter of fact in that instance, had not decided how his pension should be paid (such as whether or not to take a lump sum and therefore what the level of pension income could be). The judge did not feel that a bankrupt who could elect to take his pension because he qualified in age terms etc, but who had not yet exercised that right should be "immune" from his creditors. Although he gave leave to appeal, the matter was compromised, so there was never a decision on the amount of the IPO.

In 2014 in Horton v Henry, the judge took a different view and decided Raithatha was wrong and that the trustee in bankruptcy was unable to access uncrystallised funds of the bankrupt (or to compel the bankrupt to access the funds). The fact that there were lots of decisions still to be made by the bankrupt (such as when and how to access the benefits) was an important factor. Although the bankrupt was as a matter of fact stated to be living on the generosity of friends and family, having made a decision not to access his pensions in order to be able to leave them for the benefit of his children, the judge did not feel it appropriate for the court to override this decision.

Update on Horton v Henry

​In the Court of Appeal, Lady Justice Gloster agreed with the Deputy Judge in Horton v Henry. She decided it would "drive a coach and horses" through the protection afforded to a bankrupt's pension rights by the insolvency and pensions legislation if a trustee in bankruptcy were permitted to require a bankrupt to make the entirety of his pension available for creditors.

If a trustee in bankruptcy could not force a bankrupt to work so as to receive a salary which might then be subject to an IPO or to request payment from a discretionary trust, he equally couldn't force a bankrupt to take steps to turn excluded property (such as pension rights) into income in order to allow an IPO to be made.

She also considered that a prospective right to a future payment of income from a pension fund was not the same thing as an "entitlement" to that income and further noted there was no statutory criteria to enable a court to decide how to direct the fund to "pay" up pension rights in any event. Such an exercise would involve the court determining what pension savings a bankrupt might need for the rest of his life - a far more complex exercise than determining the income needs of the bankrupt over three years (the period during which an IPO can be made).

Lady Justice Gloster said it was for parliament to decide where the line should be drawn between protecting the interests of the creditor on the one hand and safeguarding the savings of private pension holders on the other.

The case effectively puts to bed the contradicting cases, so unless the trustee in bankruptcy is able to appeal further, there is now some certainty on what a trustee in bankruptcy can recover, particularly important given the pension flexibilities on offer in the DC space. Although Horton v Henry preceded the introduction of those freedoms (so the trustee in bankruptcy in that case couldn't have called for the bankrupt to take an uncrystallised funds pensions lump sum of the full fund value), the outcome of this case in the post-April 2015 flexible world suggests that trustees in bankruptcy still can't step into the shoes of the bankrupt for the purpose of exercising rights to convert pension rights into hard cash.

As an aside, Lady Justice Gloster was unconvinced by an argument based on the case of Blight v Brewster (a pre-bankruptcy case where the creditor successfully compelled the debtor to drawdown pension in order to satisfy the creditor's judgement), which the trustee in bankruptcy argued supported his assertion that it should be possible to require a bankrupt to elect to access his pension post-bankruptcy. The pre-bankruptcy position therefore remains the same - it is potentially open to a creditor to enforce a judgement against pension assets.

Actions for trustees and administrators

The action points for trustees and administrators of occupational pension schemes in our alert last year still stand: don't panic if a trustee in bankruptcy comes knocking, read the scheme rules and beware of the data protection requirements. Where the pension is uncrystallised, a polite but firm "no" will probably be the answer to the knock on the door.