Bankrupts, Pensions and Income Payments Orders

A recent decision by the Chancery Division may have called into question the decision of Raithatha v Williamson [2012] 1 WLR 3559.

In Raithatha, heard before Bernard Livesey QC,  the Trustee in Bankruptcy sought an Income Payments Order (IPO) after  the Bankrupt disclosed  the existence of various pension policies. These policies were not yet drawn down, but were capable of being so by the Bankrupt enabling him to obtain a lump sum payment and an income.

Section 310 of the Insolvency Act 1986 would make available to creditors the surplus income over what is needed for the reasonable domestic needs of the Bankrupt and his family. The Bankrupt argued that there was no entitlement to payment from the pension policies as he had not expressly elected to draw down his pension policies. Section 310 would apply if he had elected to draw down his pension prior to his bankruptcy.  However, the Judge queried whether it was the intention of section 310 to render a Bankrupt immune to its provisions had he not, by the date of his Bankruptcy, elected to draw down those pensions.

The Judge held that such an anolomy would discriminate creditors in favour of a class of Bankrupts, i.e. those who had not by the date of their Bankruptcy elected to draw down their pensions. In effect, the Judge’s order compelled the Bankrupt to draw down his pension policies and make that surplus income available to his creditors. However, the case was ultimately compromised and although permission to appeal was given, the Court of Appeal never had the opportunity to consider the correctness of the Raithatha decision.

In any event, the decision caused not inconsiderable controversy, and has been the subject of dispute and comment ever since. For example, in Re X [2014] BPIR 1081 the District Judge described the Raithatha decision as “controversial” and held that on the particular facts in Re X, it would not be right to make an IPO as the effect would be to reduce the Bankrupt’s future income below  the figure she required to live on.

However, in the recent case of Horton v Henry [2014] EWHC 4209 (Ch) Mr Robert Englehart QC (sitting as Deputy Judge of the Chancery Division) declined to follow the decision in Raithatha and make an IPO.

When adjudged bankrupt, Mr Henry had an interest in a Self-Invested personal Pension (SIPP) valued at approximately £930,000. If he elected to do so, Mr Henry could take a tax-free cash lump sum of £232,500. In addition to the SIPP, Mr Henry had other pension policies which together would provide an annual annuity of £2,450. Mr Henry’s Trustee in Bankruptcy applied for an IPO which effectively gathered in the SIPP lump sum and the further annuities within the following three years.

Mr Henry had no intention of drawing down the SIPP or the other pension policies as he did not require those to meet his everyday financial needs. In evidence, Mr Henry said that his aim was to preserve the value of the policies in order to transfer them to his children when he died.

The Judge was required to decide whether the Court had the power to make an IPO in relation to a pension that had not yet been drawn down and, if it had such a power, on the facts what sums should be paid to the Trustee in Bankruptcy and what sums should be retained by Mr Henry?

The Deputy Judge considered that he needed to determine whether a bankrupt becomes ‘entitled’ to payment where the pension policy has not yet crystallised. The Deputy Judge thought that the word ‘entitled’ suggested a reference to a policy that was in payment with definite amounts i.e. had been drawn down and thus effectively crystallised and therefore contractually payable.

Furthermore, the Deputy Judge held that section 310 did not allow a Court to decide how a bankrupt should exercise the numerous elections he could make in relation to the pension policies. Finally, the Deputy Judge held that a Trustee in Bankruptcy’s ability to decide for a bankrupt how his contractual rights within a SIPP or other pension policy should be exercised, could not be reconciled with the Welfare Reform and Pensions Act 1999 which excludes a bankrupt’s rights in pension schemes from the bankruptcy estate.

It seems that the Deputy Judge’s concern was the considerable number of ways in which Mr Henry could draw down these policies and that only after he made such elections, would payment be due to him. For those reasons, the Deputy Judge held, notwithstanding the decision in Raithatha, that section 310 did not provide any power to the Court to require a bankrupt to make such elections with regards to pension policies in any particularly way.

The Trustee in Bankruptcy’s application was, therefore, dismissed.

If a Bankrupt’s pension is in payment there is no reason why a Trustee in Bankruptcy should not seek an IPO if the case merits it. However, at least for the moment, Henry suggests that a Trustee in Bankruptcy cannot force a Bankrupt to draw down his or her pension policies.

It is understood that permission to appeal has been granted and the matter will come before the Court of Appeal early this year. The case will now be considered by the Court of Appeal, hopefully giving clarity on this issue.