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Court of Appeal: Pensions not yet in payment are protected from bankruptcy

On October 7, the Court of Appeal ruled in Horton v Henry that pensions not yet in payment are protected from bankruptcy. Graham McPhie explains the implications for creditors

Graham McPhie
Partner, Moon Beever

The issue at the crux of Horton v Henry was to what extent, if any, is a pension not yet in payment, available to be taken into account on an application by a trustee in bankruptcy for an income payments order?

Relevant factors for the profession before the Court of Appeal decision were:
1. What does “entitled” mean in section 310 Insolvency Act 1986? Does it mean only that money which the bankrupt has elected to take from the pension pot? Or does it include the funds for which the bankrupt could elect to take but has not yet done so?

2. Is it possible for the court to make an order requiring the bankrupt to take certain steps in relation to the pension pot?

3. What are the true effects of the amendments made to section 310 Insolvency Act 1986 by, progressively, the Pensions Act 1995 and the Welfare Reform and Pensions Act 1999? Do they allow only actual payments to be taken into account for income payment purposes? Or is the cumulative effect of those amendments to make the entire pot available?


The Court of Appeal has decided that:
The pension pot remains an asset excluded from the estate and income to which the bankrupt is entitled only applies to a pension fund that is actually in payment.

There is no right on the part of a trustee in bankruptcy to compel a bankrupt to take any particular election in relation to a pension scheme.


The reasons:
1. The clear rationale from the 1995 and 1999 Acts was to exclude pensions from the bankruptcy estate;

2. A trustee in bankruptcy cannot have rights to compel a bankrupt to take an action in relation to an asset that is not part of the estate;

3. It would drive a coach and horses through bankruptcy legislation if this were so;

4. The bundle of rights that the bankrupt has in connection with a pension fund do not naturally fit within the definition of “income” under section 310 Insolvency Act 1986;

5. The bankrupt was only “entitled” to the income that was actually in payment.


The outcome
The decision at least has now settled the issue of the position of pensions and their interaction with the income payment regime of the Insolvency Act.

There has always been a balancing act to ensure that pension pots have a measure of protection.

However, creditors are not prejudiced by this result, because income from the pension can be taken into account for income payment purpose. Plus, excessive contributions to a pension can be recouped in certain defined circumstances.

The 2012 decision in Raithatha v Williamson had cast doubt on this. That doubt has now firmly been quashed.

The Court of Appeal has restored a position that many considered it should be, i.e. that pension pots are protected, and this was the legislative intention.

The court used statutory explanatory notes as an aid to interpretation.

This made it plain that the intention was for a trustee to be able to seek an income payments order on pension plans, which were in payment and not otherwise. These notes had not been referred to in Raithatha.

Ultimately, the court agreed that the aim of the exclusion of pensions from a bankruptcy estate and the income payments regime was that only pensions in payment were susceptible to an income payments order.

The trustee has no right to force an election on a non-bankruptcy estate asset, in much the same way that there was no right to force a bankrupt to work, nor to request a payment from a discretionary trust.

Posted on 9th October 2016 by Marcel LeGouais

 

 

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