There have been a number of decisions over the past decade concerning the interpretation of section 310 of the Insolvency Act 1989 (“IA 1986”) together with section 11 of the Welfare Reform and Pensions Act 1999 (“WRPA”) in respect of whether a trustee in bankruptcy has the ability to compel a bankrupt to draw down payments from his personal pensions where he was eligible to make such an election but had not done so.
The legal position
Under section 310 IA 1986, an Income Payments Order (“IPO”) allows a trustee in bankruptcy (“Trustee”) to claim any earnings, income or payments of the bankrupt beyond the amount needed to satisfy the bankrupt’s basis needs, i.e. surplus income. This permits the Trustee access to income received by the bankrupt during his bankruptcy which would not automatically vest in the Trustee on his appointment under section 283 IA 1986.
Section 310(7) IA 1986 defines “income” widely as “every 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, including…(despite anything in section 11 or 12 of the [WRPA]) any payment under a pension scheme…”. Section 301(8) IA 1986, however, excludes (a) payments by way of guaranteed minimum pension, and (b) payments giving effect to the bankrupt’s protected rights as a member of a pension scheme.
Section 11 WRPA provides that where a bankruptcy order is made, any rights from an “approved pension arrangement” are excluded from a bankrupt’s estate. Nevertheless, section 310(7) IA 1986, above, expressly states that the provision is applicable notwithstanding sections 11 and 12 WRPA.
There have been a number of cases in which it was held that the bankrupt’s entitlement to draw down his pension both did and did not fall within the remit of “income” under section 310(7) IA 1986.
Most notably, in the matter of Raithatha –v- Williamson (a bankrupt)  EWHC 909 (Ch) it was controversially held that, where a bankrupt was a member of a pension scheme and was entitled to draw down that pension but had not exercised the right to do so at the time of the application for an IPO, under section 310 IA 1986 the pension payments to which he was entitled were considered income in respect of which an IPO could be made.
Conversely, in the more recent case of Hinton –v- Wotherspoon  EWHC 721 (Ch) it was held that a bankrupt could not be forced to exercise the entitlement to draw down from a self invested pension scheme for the purpose of an IPO.
Horton –v- Henry - Background
Mr Henry was adjudged bankrupt by way of his own petition on 18 December 2012. His assets included a self-invested pension policy with a value of £848,022.76 and three personal pension policies with a guaranteed annuity income of £2,450.68 in respect of each of the policies upon Mr Henry reaching the age of 70, subject to a lump sum option exercisable on his 60th birthday.
The day before Mr Henry’s discharge from bankruptcy (when he was aged 59), the Trustee, Horton, filed an application under section 310 IA 1986 seeking a share of lump sum payments and income from Mr Henry’s pensions.
In the first instance (in the High Court), it was held that Mr Henry could not be compelled to draw down his pensions to satisfy the IPO pursuant to section 310 IA 1986. However, the Trustee appealed on the grounds that:
- The words "payment in the nature of income ... to which he from time to time becomes entitled" in section 310(7) IA 1986 were interpreted too narrowly and should be construed to mean that once a bankrupt became entitled to crystallise his pension, both his vested right and the subsequent payments fell within section 310(7); and
- Taking into account the judgment in Blight –v- Brewster  1 WLR 2841, it was irrational that the collective bankruptcy process was less effective that the ability of a judgment creditor to obtain a third party debt order against the pension trustees, where there is no bankruptcy order.
Mr Henry argued, against the appeal, that:
- Section 310 IA 1986 and the statute as a whole supported the view that only pensions in payment (where the bankrupt had elected to draw down) could be the subject of an IPO;
- In the absence of clear legislation, the court was not permitted to interfere with a person’s possessions;
- The changes made to section 310 IA 1986 by WRPA were designed to exclude pensions from a bankrupt’s estate; there was a distinction between rights (which were protected) and income (which was not protected); and
- If the trustee’s appeal was allowed, his assessment would have to be revised to permit relevant tax payments which would become payable and Mr Henry’s future expenditure.
The appeal was heard in the Court of Appeal in 2016, when Mr Henry was aged 61.
The issue to be considered was whether section 333(1) IA 1986, read in conjunction with section 310, enabled a trustee to compel a bankrupt to elect to crystallise his pension.
Section 331(1) IA 1986 states that “the bankrupt shall (a) give to the trustee such information as to his affairs, (b) attend on the trustee at such times, and (c) do all such other things, as the trustee may for the purposes of carrying out his functions under any of this Group of Parts reasonably require”.
The Court of Appeal rejected the argument that Mr Henry’s non-election to draw down his pension could be classed as non-cooperation under section 333(1) IA 1986 as the Trustee’s function in relation to property did not extend to property which was expressly excluded from the bankrupt’s estate (and which therefore had not vested in him on appointment).
It was further held that a contractual right to elect to receive a pension payment (as a lump sum or income payment) could be distinguished from an actual payment or a post-election right to receive the payment. In the context of section 310 IA 1986, "payment" did not mean a chose in action or bundle of rights which, when exercised, gave rise to the making of a payment. The section was addressed to capturing income, not requiring the bankrupt to exercise a power to generate income from property that was excluded from the bankruptcy estate. It was stated that to allow a trustee to obtain payment of a bankrupt’s pension fund despite the fact that such was not even in payment would be to “drive a coach and horses” through the protection afforded by section 11 WRPA.
The Court of Appeal specifically rejected the earlier reasoning in Raithatha stating that the High Court failed to appreciate the fundamental changes brought about by the WRPA and the protection this afforded in respect of bankrupts’ rights over personal pensions.
Following the decision in Horton –v- Henry, some much needed clarity has been introduced into a previously confusing and contradictive area of law. It is now clear that, pursuant to the provisions of section 310 IA 1986 and section 11 WRPA, that a Trustee cannot compel a bankrupt to drawn down funds from a personal pension where he has not previously elected to do so in implementing an IPO; only pension policies which are currently in payment are caught by the IPO regime for bankrupt individuals.