Judgment debts, bankruptcy annulment, pensions and Schrödinger’s cat

In quantum mechanics, the Schrodinger’s cat postulation is a thought process in which a particle can be imagined in two places or conditions at once. Schrödinger suggested a way of imagining this apparent impossibility by reference to an hypothetical cat closed in a box with something that would be fatal to the cat. Logically, the cat could be either dead or alive, but the observer doesn’t know which until the box is opened and the cat is observed. Personally, my cat would let you know that it was very unhappy about being in a box with anything less pleasant than a pile of food. In the world of personal debt, pensions law and bankruptcy, the same sort of existential problem seems to apply to a debtor’s undrawn occupational pension pot. Is it or is it not available to creditors and should it or should it not be considered by the adjudicator on considering a debtor’s application for a bankruptcy order?

As previously reported, Mr White is a judgment debtor as the consequence of a trial involving the collapse of his engineering company and a misfeasance claim against him brought by Manolete Plc, who took an assignment of the cause of action from the company’s liquidator. Sued for £6.9M, judgment was entered for £690,000 . Manolete then turned their mind to how to get paid, and applied to the trial judge for a series of orders the end result of which would have been the payment to them of parts of Mr White’s undrawn occupational pension. The basis for this argument was s.37 of the Senior Courts Act 1981 and a case by the name of Blight v Brewster [2012] 1 WLR 97. However, in bankruptcy, the Court of Appeal subsequently clarified for trustees in bankruptcy that an undrawn occupational pension is exempt from realisation, as intended by sections 11 and 15 of the Welfare Reform and Pensions Act 1999, in addition to which there is no power or jurisdiction in the Insolvency Act 1986 by which the bankrupt might be directed to put a pension into payment, whether for the purposes of an income payment order or otherwise. So, for a judgment creditor, the cat is alive but, for a trustee in bankruptcy, the cat is very much an ex cat.

In the leading judgment in the recent Court of Appeal decision on the appeal brought by Mr White, Lord Justice Snowden agreed with Mr White that when s.91 of the Pensions Act 1991 barred the front door in providing that no court shall make an order the effect of which is to deprive a person of their undrawn pension rights, the draftsman did not leave open a window through which the court might achieve the same result through a series of orders for the benefit of a judgment creditor. On Manolete’s application, the trial judge, HH Judge Hodge KC, had made a first order directing Mr White to put the pension into payment, and the proceeds to be paid into a nominated account, with information about realisation and account details to be provided to the judgment creditor, with the ultimate objective that another order or orders might be made to put those monies into Manolete’s hands. The trial judge had argued that putting the pension into payment as a first step was in fact consistent with the Pensions Act. Lord Justice Snowden was not overly delayed by this reasoning, and Lady Justice Asplin and Lord Justice Green concurred; absent fraud on the part of the judgment debtor, when the front door is barred, so too is the window. The cat is also an ex cat to judgment creditors.

Although the judgment of Lady Justice Asplin throws doubt on the fraud window by which Brewster might still be used, over in the bankruptcy box, the cat remains very much in play in the mind of the Insolvency Service in its guidance to official receivers, and to adjudicators on a debtor’s request for a bankruptcy adjudication.

As a starting point, paragraphs 57.19, 20 and 24 of the Insolvency Service’s technical guidance manual reflect the current thinking (dated to 2022) with respect to approved occupational pension schemes: they are an asset exempt from the bankrupt estate and, as seen in Henry v Horton [2016]EWCA Civ 989, the trustee has no power to compel the bankrupt to put the pension into payment for the purposes of an income payment agreement or other order. However, and in what now looks like a window being jemmied open, or the lid of the cat’s box being prised apart, official receivers are advised to obtain undrawn pension valuations to establish whether the fund value exceeds the debtor’s total unsecured liabilities. If so, it is suggested that the official receiver should apply for an annulment, on the basis that the debtor would have failed the (in)solvency test at the point of the bankruptcy order, and so the order should not have been made.

This guidance follows the judgment on appeal in The Adjudicator v Shaw [2021] EWHC 3140, another decision of HHJ Hodge KC. In Shaw, the adjudicator had refused to make a bankruptcy order because the value of the debtor’s undrawn pension exceeded the debts that they had said they could not pay. On appeal to a district judge, the order was made on the basis that the pension pots should not be called into account. On appeal to HH Judge Hodge KC the order was reversed on the basis that the debtor could have called the pension rights into payment with sufficient speed to count as cash. In a decision that pre-dates the Court of Appeal’s decision in White, Judge Hodge noted in support of his reasoning that unlike bankruptcy ( where the cat is most certainly an ex cat) the decision in Brewster allows for compunction in favour of judgment creditors, and the test of a debtor’s ability to pay at the point of bankruptcy should include access to the pension fund, even though that fund may be exempt in bankruptcy.

There are a number of problems created by this reasoning. Broadly, and on a conceptual level, there are two other classes of asset that are exempt in bankruptcy and the cash value of which is not considered by the court at the hearing stage: a debtor’s household effects, and their tools of trade. Following Shaw but ignoring the entire shielding purpose of bankruptcy for a debtor, why not consider the value of these items and whether they are readily realisable to pay creditors? On a practical level, although it is clear that Shaw is inconsistent with White, the Insolvency Service guidance still ignores the 1973 Goode Report, and the basic proposition that occupational pensions should be inalienable because of the policy priorities to save for old age that are reinforced by tax advantages that are not intended to benefit creditor pools. In practice, Shaw means that a debtor’s access to bankruptcy might depend upon the flexibility of pension scheme rules, and even the debtor’s age ( where 55 is the threshold for access to the pension, under 55s can still access bankruptcy whereas the over 55s can’t even though the pot might be the same in both cases), whereas no such criteria apply to a creditor’s petition, in which case the value analysis would not arise until the official receiver’s post-order consideration. The poor cat finds itself resuscitated for the benefit of a creditor scramble following annulment, leaving behind the principle underpinning bankruptcy that is the equal distribution of the bankrupt’s estate.

There are inconsistencies lurking in the tension between Shaw and White and it is worth wondering whether the Insolvency Service will review their guidance or whether HH Judge Hodge KC would have reached the same decision in Shaw had he had the benefit of the argument in White concerning s91 of the Pensions Act. Absent a change of position by the Insolvency Service, a further appeal may be necessary from a debtor refused the protection of bankruptcy or a bankrupt threatened with annulment.

The Edwin Coe Personal Insolvency team of Simeon Gilchrist and Nicole Davis represented Mr White on this appeal pro bono.

Our Restructuring and Insolvency team has considerable experience in advising businesses, directors and individuals facing financial distress. Should you require any assistance, please contact any one of our partners in the Restructuring & Insolvency team. We are experts in this field and are here to help.

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