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Horton v Henry – The Final Round – The Pension Lives!

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I have written about this case and the associated one of Raithatha v Williamson previously here and here. Horton went on appeal to the CA and after a delayed hearing, and then a reserved judgment they have finally come to a conclusion, reported at  Horton v Henry [2016]EWCA Civ 989

And the result was an emphatic win for the preservation of the pension against the attempts by the Trustee in Bankruptcy to get at it.

For those of you who have a life outside these columns the problem they was addressing was whether a pension, which would normally be exempt (by s11 Welfare Reform and Pensions Act 1999) from seizure by a Trustee, could be attacked by making an income payment order under s310 Insolvency Act 1986 requiring the bankrupt who was not yet drawing his pension but was aged over 55 to require his pension provider to pay him a lump sum and then pay it over to the Trustee. And this was given a lot more bite by the abolition of the former 25% cap on lump sums by the pensions reforms in 2015.

There were conflicting decisions from Deputy High Court Judges – in Raithatha the court said you could make such an order, but in 2014 another Deputy High Court Judge said you couldn’t in Horton – and so the CA had to break the tie.

The CA Judgment – the Problem

The lead judgment was given by Gloster LJ and is clear and comprehensive, and compulsory reading for anyone who is relying on it.

The brief facts are that Mr Henry went bankrupt on his own petition with debts of up to £6.5m (the exact figure was disputed). He had generous pension provision, with a SIPP worth about £850,000 and 3 personal pensions giving rise to additional rights at various ages. He was 58 on bankruptcy, and wasn’t receiving any of his pension entitlements because he was being maintained by his family and had no need for them. The trustee made an application under s310 (see above) for orders requiring him to claim his lump sums and pension incomes, which he was entitled to do, being over 55, and pay them over to him. He refused, claiming that these benefits were not income to which he had “become entitled” and derived from funds which were not part of the “bankrupt’s estate” and so not susceptible to these orders. The Judge below agreed.

I won’t set out all the statutory provisions as they are set out in full in the CA judgment. But the argument went:

  • s306 Insolvency Act 1986 provides for the bankrupt’s estate to vest in the Trustee;
  • s283(1) IA defines the bankrupt’s estate as being all his property at the date of bankrupty, apart from certain exemptions, including property excluded by other legislation;
  • s91 Pensions Act 1995 excluded rights under occupatioal pension schemes;
  • s11 WRPA (see above) excluded rights for approved personal pension schemes (such as his);
  • s307 IA allowed the trustee to claim after-aquired assets, but not if they were excluded;
  • nor if they were income and so susceptible to a claim for an income payment order under s310;

s310 is key so I will set it out. It provides:

“Income payments orders

(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.

(1A) An income payments order may be made only on an application instituted–

(a) by the trustee, and

(b) before the discharge of the bankrupt.

(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.

(4) Where the court makes an income payments order it may, if it thinks fit, discharge or vary any attachment of earnings order that is for the time being in force to secure payments by the bankrupt.

(5) Sums received by the trustee under an 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)[7] any payment under a pension scheme but excluding any payment to which subsection (8) applies[8].

(8) This subsection applies to–

(a) payments by way of guaranteed minimum pension; . . .

(b) payments giving effect to the bankrupt’s protected rights as a member of a pension scheme.. . ..

(9) In this section, “guaranteed minimum pension” has the same meaning as in the Pension Schemes Act 1993.

“protected rights” has the meaning given in section 10 of the Pension Schemes Act 1993, as it had effect before the commencement of section 15(1) of the Pensions Act 2007.”

There are also provisions to allow the recovery of excessive pension contributions under s324A  IA.

The HC Judge summarised the position very succinctly, with the CA’s approval:

“In short, the position since 1999 has been that rights under personal pension arrangements do not in general vest in a trustee in bankruptcy. Nevertheless, as has always been the case with occupational pensions, provision has been maintained for an IPO to be made in certain circumstances. It may be thought that the parenthetical words in section 310(7) were required in order to ensure that the position under personal pension policies did not diverge from that applicable to occupational pension schemes. There was to be no question of the 1999 Act going so far as to protect from creditors all income of a bankrupt even where such income stems from a pension. This was also the case as regards occupational pensions under the 1995 Act: see section 91(4).”

The CA set out the explanatory notes in the appropriate sections of the WRPA which explained what the Act was trying to achieve.

And finally, they quote s311 IA which imposes on the bankrupt a duty to assist the Trustee in the carrying  out of his functions.

The CA Judgment – the Answer

Gloster LJ set out the question as follows:

Whether section 333(1), read in conjunction with section 310, of the Insolvency Act enables a trustee in bankruptcy to require a bankrupt, who has reached the age at which he is contractually entitled to draw down or “crystallise” his pension (but has not done so), to elect to do so, so that the trustee may apply for an IPO under section 310 in relation to the funds drawn, or to be drawn, down;

And the two possible arguments:

i) The first is to argue that, even on the assumption that the bankrupt’s contractual rights to draw down or crystallise his pension after he has reached a certain age do not fall within the description of any “payment in the nature of income ……. to which he from time to time becomes entitled” for the purposes of section 310(7), nonetheless the trustee is entitled under section 333(1) to require the bankrupt to exercise such rights and elect to receive payment. The argument would run that, since one of the functions of the trustee is to obtain an IPO in respect of income that is potentially receivable by the bankrupt during the three-year period so as to satisfy creditors’ claims, the trustee is entitled to require the bankrupt to draw down income from his pension for the purpose of enabling the trustee to carry out his functions under section 310(7) in relation to the income payments under the pension once drawn down.

ii) The second approach (and this was the way in which Mr Davies [for the trustee] principally presented his argument before us, and indeed how the judge dealt with the case at first instance) is to argue that the italicised wording in section 310(7):

“For the purposes of this section the income of the bankrupt comprises every payment in the nature of income …… to which he from time to time becomes entitled,”

meant that, once a bankrupt pension holder had reached the required age, and was accordingly entitled to draw down his pension on request, his vested right to elect to do so, and the subsequent payments which would be made to him by the pension provider, were within section 310(7) and therefore were subject to the IPO procedure. It accordingly followed that, either under section 363(2), section 333 or the general jurisdiction of the court, the bankrupt could be compelled to elect to draw down his pension.

She doesn’t take any time to make up her mind between them:

In my judgment neither of these arguments is correct.

She wastes no time on the first argument – that the Trustee has functions in relation to property that is expressly excluded from the bankrupt’s estate.

It would drive a coach and horses through the protection afforded to a bankrupt’s pension rights by the Insolvency Act and pension legislation if a trustee were able, in effect, to require a bankrupt to make the entirety of his pension available for satisfaction of his creditors’ claims, by the simple expedient of a request under section 333 or a court order under section 363(2), thereby converting excluded property into “income”.

The fact that before bankruptcy pension rights might be accessible to a creditor – as in Blight v Brewster – merely shows the difference caused by an bankruptcy order. They don’t support the argument that the same rules could apply after an order.

The second argument takes more consideration. In essence the question is whether a right to elect to take income is equivalent to payment of the income, under s310(7) IA. But again, the result is the same. Note the italicised words:

The contractual right to elect, by service of a notice on the pension provider, to receive a lump sum or income payment, in the pension context is very different in character from an actual payment or the right to receive that actual payment, once the relevant election has been made. Indeed, normally, until well after the relevant election has been made, there will be no legal right as such to receive any specific payment, particularly in the case of a SIPP, where the fund may comprise assets which are not readily marketable. In the context of section 310, payment and payment to which he from time to time becomes entitled mean just that; payment does not mean a chose in action or a bundle of rights which, if and when exercised, and only then, give rise to the making of a payment or the entitlement to a payment. The language of section 310 is addressed to capturing income; there is no suggestion in the language that it is conferring a power on the court to require the bankrupt to exercise a power – in relation to property expressly excluded from the bankruptcy estate – to generate income.

She points out that the legislation draws a clear distinction between payments under a pension scheme and rights under a scheme. And she concludes:

As with the first argument referred to above, it would drive a coach and horses through the protection afforded to private pensions and rights thereunder by virtue of section 11 of the WRPA, if, by the simple expedient of an application for an IPO, a trustee (subject to satisfying the court that the amount drawn down could be characterised as income and that the IPO did not reduce the bankrupt’s income below what appeared to the court to be necessary for meeting his and his family’s reasonable domestic needs) could in effect obtain payment of the entirety (or almost the entirety) of a bankrupt’s pension fund into the bankrupt’s estate so as to meet the claims of his creditors, notwithstanding that the pension was not in payment. In my judgment, Parliament has decided to draw the balance between, on the one hand, the interests of the State in encouraging people to save through the medium of private pensions (so that in old age or infirmity they will not be a burden on the resources of the State), and, on the other, the interests of creditors in receiving payment of their debts, by the mechanism of sections 342A to 342C of the Insolvency Act which enable a trustee to claw back excessive pension contributions made by the bankrupt where such contributions have unfairly prejudiced the bankrupt’s creditors.

And she decides that Raithatha was wrongly decided, and that Horton was correct, and as the other members of the court (Sir Stanley Burton and McFarlane LJ) agree, the appeal is dismissed.

And the Consequence Is?

Much relief all round. This is the position that everybody thought they were in from the WRPA in 1999 until 2012, and even after that Raithatha was widely disregarded as merely being one decision of a Deputy Judge. A policy decision had been takenin 1999 to protect pensions in the case of bankruptcies and this has been upheld.

A decision the other way would have opened the gates to large numbers of applications by IPs hoping to recover at least enough to cover their own fees from very modest pension funds. Many bankrupts have had some success in the past, and fail towards the end of their working lives, and these are the sort of people who have built up modest pensions, which would be most at risk.

No, a good decision all round.

Given the devastating logic of the CA decision the Trustee looks unlikely to try to appeal to the SC, but if I hear anything about this I will let you know.

As I’m a few days late (the decision was published on 7th October) there are many commenties available on the web. They range from the friendly and extremely practical piece on Debt Camel  to pieces on Lexis Nexis and by Eversheds and many other large firms. And there will be more. But if you’ve got this far you’ve probably read enough.

Written by Coventry Man

13/10/2016 at 23:24

NEWSFLASH – Horton v Henry – the CA Speaks

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And the appeal was dismissed, so Raithatha is overruled. The trustee cannot force a bankrupt to elect to claim his pension. More shortly, but here is the Bailii report.

Written by Coventry Man

11/10/2016 at 10:33

Pensions and bankruptcy – a longer wait

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If you go bankrupt can the Trustee get at your pension? Well if you are over 55 (or even 52) then they might be able to. Or on the other hand they might not. An unsatisfactory state of affairs, brought about by two contradictory decisions of High Court judges – Raithatha v Williamson or Horton v Henry.

Fortunately Horton v Henry is going to the Court of Appeal. Unfortunately the date originally given  – 25/25 Jan 2016 – has not been effective, and the case has been relisted for 21/22 April 2016. So a bit longer to wait.

For more details of the cases see my earlier posts here and here.

Written by Coventry Man

27/01/2016 at 14:43

STOP PRESS – Pension Appeal Approaches

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If you go bankrupt can the Trustee get at your pension? Well if you are over 55 (or even 52) then they might be able to. Or on the other hand they might not. An unsatisfactory state of affairs, brought about by two contradictory decisions of High Court judges – Raithatha v Williamson or Horton v Henry.

Well there should be an answer soon as Horton v Henry is going to appeal in the Court of Appeal and is due to be heard on 26/27 January 2016. No doubt they will take a few weeks to bring out the decision, but it isn’t too long to wait now.

See my earlier piece for more details.

Written by Coventry Man

08/01/2016 at 00:41

Stop Press – Pensions and Bankruptcy

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If you go bankrupt can the Trustee get at your pension? Well if you are over 55 (or even 52) then they might be able to. Or on the other hand they might not. An unsatisfactory state of affairs, brought about by two contradictory decisions of High Court judges – Raithatha v Williamson or Horton v Henry.

Well there should be an answer soon as Horton v Henry is going to appeal in the Court of Appeal some time soon – by 14th July, and we should therefore have a judgment by the Autumn. So watch this space, and the legal press.

For more information look at my earlier pieces on Raithatha and on Horton. And then there is a good piece on Debt Camel that is well worth reading.

PS – I understand that the CA hasn’t been able to fit in the appeal by 14th July so it’s likely to be heard in October. More delay and uncertainty isn’t helpful – everybody needs to know where they are.

PPS – Debt Camel have now heard that the CA hearing is due on 26/27 January 2016, with the decision doubtlessly taking a bit longer. Unless of course this case settles too, like the Raithatha appeal did…

Written by Coventry Man

18/06/2015 at 10:19

I’ll Be Having That – Pensions and Bankruptcy

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Here’s a scenario. It is September 2015. Basil is 59. After many years of running a successful company things seem to have gone wrong. As a last effort  he poured thousands of pounds of his own money into the business to try to turn things round but eventually couldn’t afford to pay any more and the business had to close, owing debts to suppliers, the bank and his landlord. The company went into liquidation, he lost his job and income. Worse still, his bank and landlord had received personal guarantees from Basil  for the monies owed to them, and when he couldn’t pay, as he had exhausted his funds in trying to save the business, he was made bankrupt. The house where he lived with his wife Barbara would most likely be repossessed by their mortgagees, as they could no longer afford to pay the last of the mortgage, and if they managed to avoid this it would probably be seized and sold by his Trustee in Bankruptcy under  s335A Insolvency Act 1986, unless Barbara could buy out his interest by scraping together the money from her own savings and money raised from their family and friends. Things were not looking good.

But there was a future. Basil would be discharged from bankruptcy after 12 months, and although Basil’s health had been ruined by the strain of the last few years, and he was unlikely to work again he had built up a good personal pension pot of £500,000 during the golden years of his business and they could look forward to a comfortable retirement, even if it wasn’t as comfortable as they had expected a few years before.

However, a few months before the bankruptcy was over Basil received an application from the Trustee for an Income Payment Order under s310 IA 86. This asked for an order for him to pay over his “surplus income” to the Trustee. Basil laughed – his only income was state benefits and there was no “surplus”. However, he looked at the application again and was horrified to find that the application contained a request for

  1. An order for Basil, or the Trustee in Basil’s name, to make an application to his pension scheme  for an immediate payment of the whole of his pension fund, as he was now entitled to under the pension ref0rms introduced in the Finance Act 2014
  2. The money to be paid over to the Trustee and applied
    1. in payment of the income tax due, amounting to some £154,887, and
    2. the balance of £345,123 in discharge of the bankruptcy debts and costs.

Basil was outraged. He understood that his pension was protected from bankruptcy, and besides, this was a terribly wasteful way of getting at the money, incurring tax as if it was all his income in the year of payment. So he sought advice, and was told to his horror that it was now the law. And a probable oversight by the powers that be.

The background

Prior to May 2000 personal pensions went to the Trustee like everything else and were lost to the bankrupt. Employers schemes were a bit different as the only entitlement was to the benefits, not the capital sum, and these were often protected by being a discretionary payment by the trustees.

This was felt to be unfair and s11 Welfare Reform and Pensions Act 1999 provided that rights under pensions schemes approved by HMRC were excluded from the bankrupt’s estate, and the Trustee couldn’t get at them.  All he could do was challenge excessive contributions, or include any income received from the scheme in an IPO.  Even unapproved schemes could be protected if the bankrupt persuaded the court that they were needed to satisfy the reasonable needs of the bankrupt and his family. In order for a scheme to be approved it had to fulfil various criteria, one of which was that the maximum lump sum that could be withdrawn was 25% of the total, and only from the age of at least 55 years. The Act did go on to prohibit any forfeiture of rights under personal pension schemes by reference to their bankruptcy s14. But on balance the pension looked pretty secure.

Trustees were initially resigned to the change, but as time went on there were rumblings that there might be a way round and in April 2012 the Bankruptcy Court ruled in Raithatha v Williamson [2012]EWHC909Ch  that an IPO could be made ordering the bankrupt , or the Trustee, to apply for a withdrawal of the 25% maximum sum and for it to be used to pay the debts. Mr Williamson appealed on a number of grounds, including an argument that he couldn’t be forced to exercise an option that he didn’t want to exercise, and that until he did so this wasn’t “income” and so couldn’t be subject to an IPO. It was also in breach of his rights under the ECHR to personal property. However, his appeal was compromised shortly before it was heard, and so the case stands, and is binding on DJs and Circuit Judges.

The case was in fact following on from a very similar case of Blight v Brewster [2012]EWHC165Ch although that case wasn’t referred to in the judgment in Williamson. The difference in Brewster was that the Defendant wasn’t bankrupt, he just had judgments entered against him. Again he was ordered to exercise an option and call down a 25% lump sum from Sun Life, so it could be used to pay his debts, and the Claimant was authorised to write on his behalf if he wouldn’t co-operate.  Although it can’t have helped his case that the judge clearly regarded him as a fraudster.

So up to 5th April 2015 25% of a personal pension is accessible to an IPO. However, as these benefits are normally only payable from the age of 55, and applications for IPOs have to be made before the bankruptcy is discharged, and can only run for 3 years, they really only affect debtors from 55 years upwards, who have not yet crystallised their pension by the purchase of an annuity or other long-term investment.

The Change

In the Budget speech Mr Osborne announced a wholesale reform of pensions legislation. Part of this was to allow the public to manage their own pensions, and to withdraw their funds and invest or use them as they thought best. This was a generally popular proposal, and most of the discussion has been on the tax implications, the risk of people wasting their money on cars and flashy holidays and the like.

Part of the reform includes changes being imposed on pension schemes by the government requiring them to allow people to withdraw funds in accordance with the new regime. These are terribly complicated, and I won’t trouble you with them now. But they will take effect from 6th April 2015, the start of the next tax year. My understanding (and I haven’t been able to find chapter and verse while writing this piece) is that the freedom will apply from the date that the pension can be taken, and in most cases this will remain at 55 years.

What has been overlooked is the effect that this will have on IPOs against pension pots. And there is clearly only one answer: Trustees will be able to apply for ALL of the vulnerable pot to be drawn down. The first 25% will remain tax-free, but the rest will be taxed at normal income tax rates – 20% 40% and 45% according to income.

All that they will have to overcome are the provisions in s 310 IA [link above] that:

(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

S(8) refers to guaranteed minimum pensions and protected rights under pension schemes. So the bankrupt must be left with enough to live on, but only just. And then only after taking account of pension payment which cannot be actually seized themselves.

The Outcome

It seems unlikely that this was intended. It hardly seems the best way to encourage entrepreneurs and the risk-takers needed if the economy is to grow as this government wants it to. And there has been no publicity apart from a few notes on insolvency websites. But there we are. You have been warned.

Landlords and Bankruptcy – the Clash of the Titans

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Sharples v PPHL and Godfrey v A2 Dominion Homes [2011]EWCA Civ 813

An assured tenant gets in arrears of rent and then goes bankrupt, or has a Debt Relief Order made. Can the landlord get a possession order despite the fact that the Insolvency Act 1986 prohibits most actions against debtors?

This has been disputed for many years, with no authoritative decisions by the courts. On one side the tenants say that the landlord must take his place with the other creditors and prove for his debt. All he can insist on is that rent accruing after the bankruptcy is paid. The landlords say that taking possession is merely enforcing their security for the rent, and there has long been an exemption for the enforcing of security – eg by a mortgagee.

Both sides put forward the social arguments as well. The tenants say that losing ones house is socially undesirable and as assured tenancies do not generally pass to a Trustee in Bankruptcy parliament intended them to be protected. Landlords say that if there is no way to recover rent then social landlords will be at the mercy of tenants who run up arrears and then go bankrupt, and they will be unable to afford to provide the housing at all.

The Court of Appeal has now decided the matter decisively in favour of the landlords in this case, holding that they could recover possession under mandatory ground 8 of the Housing Act 1988 (8 weeks arrears of rent) despite the tenant going bankrupt. And they could also get a suspended possession order under ground 10 (discretionary rent arrears) against a tenant who had obtained a Debt Relief Order.

Key points are:
• No money judgement for the arrears can be given – the landlord has to take his chances with the other creditors for this.
• An SPO cannot be conditional on payment of pre-bankruptcy arrears. It can cover on-going rent and the landlord’s costs.
• If no money claim is made then leave of the court (under s 285(3)9b) IA 1986 is not needed before issuing proceedings.
• Landlords’ claims should not be stayed under the discretionary powers.

The practical result is:
• Shared ownership cases are simple: the mortgagees can be made to pay up any arrears or lose their security, without the landlord having to make an expensive application to the bankruptcy court for permission to sue.
• Ordinary assured tenancies change little from a practical point of view. Bankrupt tenants have rarely if ever been able to clear any arrears. Now they can’t be made to, but the landlord can still recover the property if they go under ground 8, or if the tenant fails to pay the on-going rent, or the Judge makes an outright discretionary order.

The secret is to keep proper control over the level of arrears and start legal action early, while the tenants can still afford to pay them. Easier said than done sometimes, but the only real answer.

Written by Coventry Man

22/07/2011 at 00:25

Posted in Housing, Insolvency

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