Following a period of uncertainty in insolvency circles, the Court of Appeal has confirmed[1] that a trustee in bankruptcy does not have the right to compel a bankrupt to make an election to draw monies from his pension fund.

In late 2014, the High Court held in Horton v Henry[2] that a bankrupt’s undrawn personal pension did not represent “income to which he was entitled” within the meaning of the Insolvency Act 1986[3] (IA86).  This meant that where a bankrupt had not elected to drawdown his pension, a trustee in bankruptcy (TiB) would not be able to make an application for an income payments order (IPO) against the undrawn pension.

As we noted in a previous post, this decision was in direct contrast to the 2012 High Court decision in Raithatha v Williamson.[4] The facts in the two cases were very similar.  However in Raithatha the Court held that, to the extent an individual was able to request immediate payment of his pension, the amount he could draw was “income to which he was entitled”, which could be the subject of an IPO.

The Court of Appeal upheld the High Court’s decision in Horton v Henry by finding that a TiB cannot compel a bankrupt to draw any sum from his pension fund. In reaching its decision, the Court held that:

  • a bankrupt’s contractual right to draw down his pension (as a lump sum or income payment) did not fall within the meaning of income under the IA86. This legislative definition was intended to capture income already being received and should not be used as a means of generating new income.
  • in its view, Parliament’s intention behind the legislation was to allow TiBs to claw back excessive pension contributions which unfairly prejudiced the bankrupt’s creditors, rather than threaten the bankrupt’s savings in undrawn pension pots.

Pensions perspective

The pensions industry was expecting this outcome from the appeal.  Any other decision (eg if the approach in Raithatha had been followed) would have contradicted the established policy behind the legislation which permits a TiB to seek an IPO only over pension income which the bankrupt is already receiving.

Likewise, a decision to overturn the High Court’s decision could have led to a position where the outcome for a bankrupt would depend on his age and the type of pension arrangement in place.

For example, following the introduction of the new pension flexibilities[5], a bankrupt aged 55 or over with a money purchase arrangement could have been compelled to take some or all of his pension pot as a lump sum (assuming the rules of the scheme permitted this), whilst an individual under age 55 with the same pension arrangement would have seen his pension protected. Similarly, a member of a trust based occupational pension arrangement may have been protected where the scheme rules provided that early retirement from age 55 required the consent of the employer and/or trustees (and therefore the member did not have an absolute right to draw their pension early).

Insolvency perspective

This long-awaited appeal judgment confirms the view of Gateley Plc’s Corporate Recovery team on the likely outcome. The legislation in this area seeks to preserve the Government’s position and minimise a bankrupt’s reliance on the State for financial support in later life.

Whilst this is disappointing for many TiBs and creditors alike, it was the anticipated, rational result and we shouldn’t forget that TiBs will still be able to make claims against bankrupts, for example by challenging excessive contributions made into a pension fund.

For those debtors who may have previously struggled to convince their creditors that entering into an individual voluntary arrangement was an attractive alternative option rather than bankruptcy they may now consider making an offer to include pension monies (to which they are or may become entitled) as part of any proposed arrangement.

This post was edited by Victoria Portman and Paul WildFor more information, email 

[1] Horton v Henry [2016] EWCA Civ 989

[2] Horton v Henry [2014] EWHC 4209 (Ch)

[3] section 310(7)

[4]Raithatha v Williamson  [2012] EWCH 909

[5] See the Taxation of Pensions Act 2014 and consequential amending regulations

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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.