The Court of Appeal has now confirmed that a bankrupt’s undrawn pension entitlement does not fall to be included within the assessment of his income “to which he from time to time becomes entitled” for the purposes of an income payments order application (IPO) pursuant to section 310 of the Insolvency Act IA86. Horton v Henry  EWCA Civ 989.
Horton v Henry was first heard before Mr. Robert Englehart QC, sitting as a deputy judge of the High Court, who dismissed the trustee in bankruptcy’s application for an IPO concerning funds valued in October 2014 in excess of £800,000. Deputy Judge Englehart held that uncrystallised pension rights did not fall to be assessed on the grounds that the wording of section 310 suggested that it concerned only a pension in payment. In doing so, the judge declined to follow Raithatha v Williamson (a bankrupt)  EWHC 909 (Ch), in which the court had held that a bankrupt’s entitlement to compel payment of pension benefits fell to be included in the assessment of his income within the meaning of section 310(7) IA86.
On appeal, the appellant trustee in bankruptcy argued that the judgment in Raithatha was correct; the respondent bankrupt argued that it was wrong. In a closely reasoned judgment Lady Justice Gloster considered the wording of section 310(7) IA86 and whether a right to elect might constitute: “… income of the bankrupt … which is from time to time made to him or to which he from time to time becomes entitled…”.
The appellant trustee argued through Stephen Davies QC and Simon Passfield of Guildhall Chambers that the judge had interpreted the words “becomes entitled” too narrowly by according too much importance to the fact that the bankrupt was required to elect to take the pension income. It was the appellant’s case that the bankrupt had already “become entitled” to receive the benefits, as it was within his power to compel payments from the policies. Further, that the bankrupt was under a duty, pursuant to sections 333(1) and 363(2) IA86, to do what the trustee might reasonably require in carrying out his functions.
It was common ground that, at trial, Mr Henry had shown no present requirement for the pension money; indeed Mr. Henry’s evidence was that the pension money would be passed to his children by way of inheritance. Counsel for the trustee argued that Mr Henry’s admission in this respect clearly satisfied the conditions of section 310(2) IA86 in favour of the trustee – that an IPO must not be made so as to reduce the income of the bankrupt “below what appears to the court to be necessary for meeting the reasonable domestic needs of the bankrupt and his family”. Counsel further emphasised the common law principle that “persons must be just before they are generous, and that debts must be paid before gifts can be made“.
The respondent however argued that ‘income’, which could not be protected from creditors, meant actual receipts of money or an unqualified right to such receipts. Laurent Sykes QC appeared for the respondent and argued that ‘income’ did not mean the pension rights themselves. Referring the court to the language of section 310 IA86 and changes made to this section by the Welfare Reform and Pensions Act 1999 (WRPA), counsel emphasised the necessity for clear direction from legislation when interfering with property rights and suggested that the trustee was attempting to circumvent the plain language of the statutory provision.
Court of Appeal Decision
In reviewing statute, the Court of Appeal confirmed that section 11(1) of the WRPA specifically excluded the respondent’s rights in relation to his personal pension policies from his bankrupt estate. In considering whether or not these rights could then become comprised in the bankrupt estate by way of after-acquired property provisions, the Court of Appeal referred to section 307(2)(b) IA86, which confirms they cannot. Further, where a bankrupt might attempt to abuse the protection of section 11 WRPA, sections 342A-C enable the trustee to recover excessive pension contributions that are made by a bankrupt so as to unfairly prejudice creditors. The Explanatory Notes to section 11 WRPA extended protection further so that section 11 WRPA applied to all approved pension policies; and the Explanatory Notes to paragraph 2 of Schedule 1 of the WRPA provides that “pension ‘rights’ in approved schemes that would be protected on bankruptcy, do not extend to pension ‘income’“.
The Court of Appeal unanimously agreed that a trustee’s functions could not extend to property which is expressly excluded from the bankrupt’s estate, nor could it extend to property that is specifically excluded from after-acquired property provisions. LJ Gloster stated that to do otherwise would “…drive a coach and horses through the protection afforded to a bankrupt’s pension right by the Insolvency Act and pension legislation…”.
The trustee had sought to interest the Court of Appeal in the lack of protection given to pensions prior to bankruptcy – in Blight v Brewster  EWHC 165 (Ch), Gabriel Moss QC held that prior to bankruptcy a judgment creditor could compel a judgment debtor to elect to draw down his pension; but LJ Gloster drew “a meaningful distinction” between the position prior to and after bankruptcy, with the effect that prior to bankruptcy pensions are not protected, whereas after bankruptcy there are.
The Court was struck by the lack of direction offered by statute to compel a bankrupt to draw down a pension policy, particularly where the funds comprise assets which are not readily marketable. At first instance the judge held that this was indication enough that Parliament had not intended for the court to have the power to make such directions to a bankrupt. The same concern arose in the Court of Appeal’s judgment. “The language of section 310 [IA86] 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 bankrupt estate – to generate income…“. LJ Gloster went further to say: “[Section 310(7) IA86] seems to me to be a wholly inapt description to cover the bundle of rights enjoyed by the pension holder under his scheme to elect to draw down his pension, to choose the amount and manner of draw down and to enforce the choice which he has made against his pension provider“.
In reaching its decision, the Court of Appeal has set the question to rest: Parliament’s intention was to draw a balance between encouraging people to save by way of their private pensions (so as not to be a burden on the State) (section 11 WRPA) against the interests of creditors in receiving payment for debts that are owed to them.
It remains to be seen whether the line drawn between private pensions holders and creditors’ interests will now be moved by Parliament but, until then, bankrupts with pension funds are able to wait until discharge and then draw down with impunity. Creditors must now consider fighting amongst themselves before bankruptcy, whilst trustees will be shifting their focus to the hurdles of sections 342A-C IA86 and the scope for recovering excessive pensions contributions on behalf of unpaid creditors.
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