Income payments orders (IPOs) are an essential tool for the trustee in bankruptcy in realising a bankrupt’s assets. Until recently, it had been assumed that, absent circumstances akin to fraud, a trustee in bankruptcy could not touch a bankrupt’s undrawn pension. However, in Raithatha v Williamson, the court decided that an income payments order may be made where the bankrupt has an entitlement to elect to draw a pension but has not exercised it at the time of the application.
Drawn versus undrawn
Under s310 Insolvency Act 1986, if a bankrupt draws his pension at any point between the making and discharge of the bankruptcy order, the trustee in bankruptcy may apply for an IPO. In Raithatha, the bankrupt had not given notice to the pension fund of his election to take up his rights under the pension scheme prior to the bankruptcy order. The court therefore had to consider whether it could either compel him to do so or authorise the trustee to exercise that power for him. The court asked itself three questions:
- Were the payments that the bankrupt was entitled to receive under his pension scheme in the nature of income within the meaning of s310(7)? The answer was that they were. The fact that a payment might be made in a lump sum did not prevent it being 'income'. Payments did not have to be periodical or regular to be in the nature of income.
- Section 11 Welfare and Reform and Pensions Act 1999 excluded a bankrupt's rights under an approved pension arrangement from vesting in his trustee in bankruptcy. Did s11 prevent the court from exercising such a power? The court found that while the bundle of contractual rights under a pension policy remained vested in the bankrupt, it was expressly empowered by s310 to make an IPO 'despite anything in s11'.
- Would the exercise of such a power constitute an unjustifiable interference with the bankrupt’s rights under the European Convention of Human Rights? The court decided that it would not.
Finally the court went on to consider the intended purpose of s310, concluding that the legislature could not have intended to create a difference between the bankrupt whose election had preceded his bankruptcy and one who had not yet elected to draw his pension at the time of his bankruptcy. This was an 'anomaly' which was difficult to justify.
Raithatha is a slightly surprising decision, which raises more questions than it answers. The court’s finding might itself be described as anomalous with the legislative purpose underpinning s11, namely to protect pension rights. Did the government intend that a trustee in bankruptcy should be able to influence or dictate the bankrupt’s decision as to when and how to draw down his pension? The benefits for creditors are clear, but the potential impact of Raithatha on bankrupts of pensionable age should not be underestimated, particularly if the government implements its proposal to allow people to draw down the whole of their fund in one lump sum from April 2015 onwards.