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

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.

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Pensions and bankruptcy – a longer wait

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.

STOP PRESS – Pension Appeal Approaches

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.

Stop Press – Pensions and Bankruptcy

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…

Hope for the Pension – Horton v Henry

Horton v Henry [2014] EWHC 4209 Ch – Robert Englefield QC

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 [2012] 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.

The Facts

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 Argument

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 Decision

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.