Last autumn I ran a piece about pensions and bankruptcy – I’ll Be Having That-Pensions and Bankruptcy – which produced quite a lot of interest. The piece was based on the 2012 case of Raithatha v Williamson  EWHC 909 Ch which had decided that although pensions were generally exempt from seizure by a Trustee in Bankruptcy an income payment order could be made under s310 Insolvency Act 1986 which required a bankrupt who was not yet drawing his pension but was aged 55 or over to request his pension provider to make him a 25% lump sum and then pay it over to the Trustee.
I pointed out that if you join this with the wholesale reform to pensions announced in the Budget in 2014, which will allow people to withdraw ALL of their pension pots subject only to tax penalties, then pensions will be fair game for all Trustees. Any protection that people thought they had from s11 Welfare Reform and Pensions Act 1999 would be lost.
It would appear that this was an unexpected and unintended result of the legislation, but the Treasury, on having this pointed out to them, indicated that they were proposing to leave things alone. They indicated that they considered the obligation on bankrupts to pay their debts outweighed any individual unfairness.
Things didn’t look good for the entrepreneurs and risk takers that are needed if an economy is to grow. But the courts seem to be coming to the rescue in the case named above.
Michael Henry went bankrupt to the tune of perhaps £6.5m (the figure was never established ) on 18th December 2012. He had an SIPP pension worth perhaps £900,000 and three smaller annuity policies, but these did not form part of his estate and so were not available to pay his creditors because of the effect of s11 WRPA set out above.
He would have been discharged on 18th December 2013 but his Trustee applied on 17th December for an income payment order under s310 IA. After some revision the order sought was for an immediate lump sum of 25% of the value of the SIPP plus 36 monthly payments of drawdown, and the maximum lump sum of three times the annual amount of the annuities.
The case was indistinguishable from Raithatha but as that was a decision of a (Deputy) High Court Judge it wasn’t binding on this (Deputy) High Court Judge and he could refuse to follow it if he thought it was wrong.
You start with s11(1) of the Welfare Reform and Pensions Act 1999 which provides:
Where a bankruptcy order is made against a person on a petition presented after the coming into force of this section, any rights of his under an approved pension arrangement are excluded from his estate.
The case turned on the wording of s310. The relevant parts are:
(1) The court may make an order (“an income payments order”) claiming for the bankrupt’s estate so much of the income of the bankrupt during the period for which the order is in force as may be specified in the order.
(2) The court shall not make an income payments order the effect of which would be to reduce the income of the bankrupt when taken together with any payments to which subsection (8) applies below what appears to the court to be necessary for meeting the reasonable domestic needs of the bankrupt and his family.
(3) An income payments order shall, in respect of any payment of income to which it is to apply, either –
(a) require the bankrupt to pay the trustee an amount equal to so much of that payment as is claimed by the order, or
(b) require the person making the payment to pay so much of it as is so claimed to the trustee, instead of to the bankrupt.
(5) Sums received by the trustee underan income payments order form part of the bankrupt’s estate.
(6) An income payments order must specify the period during which it is to have effect; and that period –
(a) may end after the discharge of the bankrupt, but
(b) may not end after the period of three years beginning with the date on which the order is made.
(6A) An income payments order may (subject to subsection
(6) (b)) be varied on the application of the trustee or the bankrupt (whether before or after discharge).
(7) For the purposes of this section the income of the bankrupt comprises 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 any payment in respect of the carrying on of any business or in respect of any office or employment and (despite anything in section 11 or 12 of the Welfare Reform and Pensions Act 1999) any payment under a pension scheme but excluding any payment to which subsection (8) applies.
(8) This subsection applies to –
(a) payments by way of guaranteed minimum pension
The key words are those underlined in para (7). It was not disputed that if Mr Henry had elected to receive a lump sum from his pension his Trustee would be entitled to claim an IPO from it. However, could he be made to elect for one? Without an election he had no entitlement to payment.
The Trustee argued that s 331(1) of the Insolvency Act obliged the bankrupt to co-operate with the Trustee in getting in his estate:
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 purpose of carrying out his functions under this Group of Parts reasonably require.
As sums received under IPOs are part of the bankrupt’s estate (s310(5)) the Trustee was entitled to require the bankrupt to give the necessary election so that an order could be made.
The Judge however pointed out that this was a circular argument. The Trustee was only entitled to gather in the bankrupt’s estate. If sums under an uncrystallised pension were not part of the estate the bankrupt had no obligation to help to collect them.
He also referred to the case of Barclays Bank v Holmes (2000) where Neuberger J (as he then was) said:
… it appears to me that, when using the word ‘entitlement’ in section 67(2), the legislature had in mind a case where the right to payment had arisen, in other words, to take the normal case, it covers a pension in payment. As a matter of ordinary language that is what ‘entitlement’ means …
This was in relation to a different Act but was very persuasive. Much the same thing was said in a number of commentaries and guidance notes.
And the judge also pointed out that the SIPP pension scheme in particular contained a very large number of options and choices in relation to payments, annuities, flexible drawdown and so on, and that the value of the scheme’s benefits varied constantly and could not be known with any certainty until crystallisation occurred.
The Judge declined to follow Raithatha. He said:
32. I entirely accept Mr Passfield’s submission that I should be most wary of differing from another decision of a judge at first instance. He was right to remind me that I should only come to a different conclusion if I were persuaded that the earlier decision was wrongly decided. I have most anxiously considered the decision in Raithatha but I have, albeit with considerable reluctance, come to a different conclusion. Mr Henry is not entitled to payment under his pensions “merely by asking for payment”. There is a considerable variety of options open to him. It would only be after he had made elections that any payment would be due to him. Only then would he become entitled to any payment. I do not consider that there is any power in the court under section 310 or in the trustee to require Mr Henry to elect in any particular way.
He therefore dismissed the application. There are accordingly two contrary decisions from High Court judges on this point, and District Judges and Registrars can follow either until the CA gets a chance to decide the matter. As Horton v Henry was an argument about some £300,000 it may well be taken there by the Trustee, possibly with some financial support from elsewhere.
And the Consequences?
Confusion all round. But some hope that the new pension reforms from April 2015, only a couple of months away will not mean that by going bankrupt a debtor loses not only all his estate, but all his pension too. We shall see.