Pensions in Insolvency - A New Case

Published bySteven Docherty

17th October 2016

• Discussion
• Decision
• Horton (Trustee for Michael Henry) v Henry [2016] EWCA Civ 989
• Statutory Background

In this Briefing Note, we report on the 7 October 2016 decision from the English Court of Appeal in the case of Horton v Henry on the question of whether a Trustee in Bankruptcy has the power to require the bankrupt to draw down a pension policy under an Income Payments Order (equivalent to the Debtor Contribution Order in Scotland).

Discussion

It is useful that the Court of Appeal took the opportunity to clarify this complicated issue, by overruling the 2012 Raithatha decision.  While the decision is limited to the English bankruptcy provisions, there is little reason why the Scottish courts would view the issue any differently.  

It has therefore been confirmed that the issue of how to deal with pensions in a bankruptcy situation depends on whether the pension income is yet being drawn down – if it is, the Trustee in Sequestration may have rights to it (pursuant to an Income Payments Order / Debtor Contribution Order); if it is not, they have no right to force the debtor to trigger the drawdown.

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Decision

The Court of Appeal in Horton threw out the Trustee’s argument.  Since Section 11 of the 1999 Act came into force, the position has been that rights under personal pension arrangements do not in general vest in a trustee.  However, the wording of Section 11 makes it clear that there was never an intention to protect all pension income from creditors – the 1999 Act introduced wording to that effect into Section 310(7) of the 1986 Act which is similar to the wording of the Scottish equivalent (Section 32A(5) of the 1985 Act) which was introduced in 2014. 

The Trustee had advanced two main arguments – first, that the Trustee is entitled because of the wording of Section 333(1) of the 1986 Act (equivalent to the duty to co-operate which is found in Section 64 of the 1985 Act) to require the bankrupt to exercise his option and elect to receive payment; and second, that what vested in the Trustee when the bankrupt reached pensionable age was the right to draw down, so that the subsequent payments which would then be received would form “income” for the purposes of the legislation. 

However, the Court of Appeal was very concerned not to “drive a coach and horses” through the protection afforded to a bankrupt’s pension rights, and considered that the two arguments advanced by the Trustee would do just that.  

In relation to the first argument, the Court drew the analogy with income from work, and noted that it was common ground between the parties that a Trustee cannot require a bankrupt to work so that the salary could become subject to an IPO (or, in Scotland, a DCO).  There was the further practical difficulty of what the bankrupt was actually to be compelled to do – his rights under his pension, in the normal course, would have existed on a range of possible outcomes (eg. he could draw down 10% or 20%, or any lump sum up to 25%; or indeed no lump sum at all). 

On the second argument, the Court took the view that the protection of pensions which was introduced in the 1999 Act would be undermined (again, reference to “a coach and horses”) if a Trustee, simply by applying for an IPO / DCO could in effect obtain payment of the bankrupt’s pension fund, notwithstanding that the pension was not yet in payment.  The Court drew a clear distinction between rights under a pension scheme and payments under such a scheme, holding that, since the 1999 Act came into force, mere rights under a scheme did not vest in the Trustee, albeit actual payments which were being drawn down would do. 

The Court of Appeal therefore took the opportunity to declare that the earlier Raithatha decision was wrong, because the judge in that case had not properly accounted for the effect of the 1999 Act.

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Horton (Trustee for Michael Henry) v Henry [2016] EWCA Civ 989

This case involved a bankrupt in England, who had reached pension age before his bankruptcy, meaning that he had the right to draw down his self-invested personal pension, but had not yet exercised the option.  If he were to exercise it, he would have the commonly-available option to draw down a 25% lump sum and the remainder by way of a regular annuity.  His Trustee in Bankruptcy sought an IPO under Section 310 of the 1986 Act in respect of income which might become payable to him if he were to exercise the option. 

The statutes governing this issue (as set out above) might appear to be straightforward, but the matter was thrown into doubt by the English case of Raithatha v Williamson [2012] EWHC 909.  In Raithatha, the court had taken the view that if the bankrupt had a present entitlement to draw down, that entitlement fell within the definition of income for the purposes of Section 310 of the 1986 Act.  This caused something of a commotion in England, and led ultimately to the Horton v Henry case.

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Statutory Background

Section 310 of the Insolvency Act 1986 provides that the court can make an order (an “Income Payments Order”, or IPO) requiring the bankrupt to pay a proportion of his income into the estate.  The equivalent provision in Scotland is Section 32A of the Bankruptcy (Scotland) Act 1985, which provides for “Debtor Contribution Orders”, or DCO). 

Section 11 of the Welfare Reform and Pensions Act 1999, however, provides that the bankrupt’s rights under an approved pension scheme are excluded from his estate.  Section 32A(5) of the 1985 Act still allows a DCO, though, albeit such an order would require to be limited to pension income actually in payment.

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