Untitled

In this blog we look at a recent High Court case that has cast some light on two conflicting decisions in relation to right of a Trustee in Bankruptcy (TiB) to access a bankrupt’s undrawn pension.

Legal background

When an individual becomes bankrupt and a TiB is appointed, all assets to which the bankrupt is beneficially entitled vest automatically in the TiB.[1] If the bankrupt receives an income to which he is ‘entitled’ during his bankruptcy, the TiB may apply to the court for an income payment order (IPO) compelling the bankrupt to pay some or all of that income to the TiB.[2]

Pensions position

The starting position in respect of a bankrupt’s pension rights is that any rights under an approved pension arrangement are protected from vesting in a TiB.[3] However, if the debtor begins drawing down his pension before his discharge from bankruptcy then the payments can be included in any calculation for an IPO.

Conflicting cases

There has been contradictory case law on whether an undrawn pension can be made the subject of an IPO.

  • In a 2012 case[4] the High Court held that a bankrupt who had not elected to draw his pension before or during the bankruptcy could be compelled to do so by a TiB and this could include forcing him to take the maximum lump sum, to which a TiB could seek an IPO.
  • However, the High Court held that the above decision was wrongly decided in a more recent case [5] and refused to make an IPO. The High Court held that a bankrupt’s unexercised rights to draw his pension did not represent income to which the bankrupt was ‘entitled’ within the meaning of the legislation. Furthermore, the legislation did not permit the court, or the trustee, to require the bankrupt to elect to start drawing his pension. The case is subject to an appeal the outcome of which is not yet known at the time of this update.

The conflict resolved?

These two conflicting High Court decisions created uncertainty about the position in relation to an undrawn pension. However, a recent decision in the High Court[6] has provided some indications as to the preferred approach.

On the facts of the case the court determined that the bankrupt had elected to receive an income of a stated amount under his pension fund and accordingly an IPO could be made in relation to that income.

However, the court also considered, obiter, the contradiction between the two previous High Court decisions in this area and considered the approach in later case as ‘plainly correct.’

The court noted that even if the bankrupt had made a decision to enter drawdown, no entitlement to income arose, and so no IPO could be made unless the bankrupt had elected to receive a lump sum or quantified payments. Only once an instruction as to payment or an annuity purchase had been made was there an entitlement to income which could found the basis of an IPO.

Comment

As the High Court’s comments on the conflicting case law were obiter they are not binding. However, they do provide useful guidance on the likely preference of the approach adopted in this area.

In practice it would be unusual for a person to move funds into drawdown without making an election at the same time either to take a lump sum payment of quantified income payments. Nonetheless, the obiter comments in the recent high court decision [6] do potentially push back the point at which a bankrupt becomes ‘entitled’ to income for the purposes of an IPO.

This post was contributed by Becky Ryding. For more information, email blogs@gateleyplc.com.

[1] Section 306 Insolvency Act 1986

[2] Section 310 Insolvency Act 1986

[3] Section 11 Welfare Reforms and Pensions Act 1999

[4] Raithatha v Williamson [2012] EWCH 909 (Ch)

[5] Horton v Henry [2014] EWCH 4209 (Ch)

[6] Hinton v Wotherspoon [2016] EWCH 621 (Ch)


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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.