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Can a bankrupt’s pension income which is the subject of a drawdown arrangement be taken into account when a trustee in bankruptcy applies for an income payments order? Peter Shaw, of 9 Stone Buildings, explains the Chancery Division’s answer in Hinton v Wotherspoon.
Hinton (trustee in bankruptcy of Wotherspoon) v Wotherspoon  EWHC 621 (Ch),  All ER (D) 43 (Jun)
The Chancery Division granted a trustee in bankruptcy an income payments order pursuant to section 310 of the Insolvency Act 1986 (IA 1986) for the bankrupt’s surplus income to be used to meet the claims of the creditors. IA 1986, s 310(7) provides that, for the purposes of an order, a bankrupt’s income includes payments to which he from time to time becomes entitled. The court held that the maximum sums which a bankrupt was entitled to draw down as income from his self-invested personal pension (SIPP) fell within IA 1986, s 310(7). Applying the reasoning in Horton v Henry  EWHC 4209 (Ch),  All ER (D) 193 (Dec), the court held that the bankrupt had become entitled to the payments when he elected to receive an income from the drawdown fund. Accordingly, the court made the order, after deducting an amount from the bankrupt’s income to represent his reasonable domestic needs.
The bankrupt was a retired property developer. He had been made bankrupt on the petition of HMRC in respect of substantial tax liabilities. His trustee in bankruptcy applied to the court for an income payments order that for a period of three years, the bankrupt make contributions out of his income into the bankruptcy. For the purposes of IA 1986, s 310, ‘income’ is defined as every payment in the nature of income which is from time to time paid to the bankrupt or to which he becomes entitled.
The two principal unusual features of the case were, first, that the bankrupt’s only income consisted of sums that he was entitled to draw down under a capped drawdown SIPP and his state pension and, secondly, that the amount which he had historically drawn down under the SIPP had varied from year to year at his election.
Under a capped drawdown SIPP, the investor is free to elect to draw down his fund, subject to a cap which depends on age and government actuarial calculations.
There were four main issues:
In order to decide the first issue, the court had to consider the nature of an SIPP and whether it could be properly said that the bankrupt became entitled to draw down payments.
The trustee contended that once the bankrupt had elected to make drawdowns of the pension, then his entitlement had ‘crystallised’. In those circumstances, the pension was ‘in payment’ and it could be said that the bankrupt was ‘entitled to’ receive the pension payments. The income that he was entitled to was the maximum amount of the capped sum. The pension provider had historically notified the bankrupt of the capped amount that he was entitled to draw each year. The trustee contended that this capped amount was the basis of the bankrupt’s income (together with the state pension) for the purpose of determining his income under IA 1986, s 310.
It was argued that this case was distinguishable from two conflicting first instance decisions—Raithatha (as Trustee in Bankruptcy of Michael Roy Williamson) v Williamson  EWHC 909 (Ch),  3 All ER 1028 and Horton v Henry, each of which concerned the court’s powers to make income payments orders in circumstances in which the pension was not yet in payment (for further reading on Horton v Henry, see blog post: Can a trustee in bankruptcy force a bankrupt to crystallise a pension policy?).
Further, the trustee contended that it was immaterial to the exercise of the court’s powers that it was open to the bankrupt to vary the amounts that he drew down. Under the terms of the pension he had a contractual right to payments, which he exercised by an election to receive income drawdown. A bankrupt in receipt of pension income could not defeat the claims of creditors through the trustee to obtain an income payments order by electing to receive a reduced sum during his bankruptcy any more than a bankrupt in self-employed business could defeat a trustee’s claim by electing not to draw an income.
The trustee’s remaining arguments concerned particular items of expenditure that the bankrupt claimed were reasonably necessary for the domestic needs of himself and his family.
The bankrupt did not contest that his income from the SIPP amounted to income that was capable of falling within IA 1986, s 310. The main focus of his submissions were that his pension income was the principal source of income for the family and that in determining the level of an income payments order he was not to be a slave to his creditors.
The court decided that once the pension had crystallised, ie the policy holder had elected to take benefits from it in the form of income, then it would be treated as being ‘in payment’ and was capable of falling within IA 1986, s 310 as income to which the bankrupt was entitled. In so holding, the court applied Horton v Henry in which it had been held that once the bankrupt had made an election exercising his options under the pension policy, he would thereafter become entitled to payment of income which was capable of falling within IA 1986, s 310 and could be the subject of an income payments order.
The case is helpful in that it is the first case that appears to have expressly considered a trustee’s application for an income payments order in circumstances in which a pension had already vested and benefits had been drawn down.
It confirms that pension income that is the subject of a drawdown arrangement may be taken into account in determining an application for an income payments order. On a practical note, in the case it was fundamental to establish precisely what was the available pension drawdown. The figures that had been provided by the pension provider to the trustee in bankruptcy changed during the course of the proceedings, such that the actual available income was less than first anticipated.
Further, in a case in which the pension income may be the only (or principal) income for the family, it may well be the case that most of it will be taken up in meeting the reasonable domestic needs of the family and the bankrupt. If that is the case, there would need to be serious consideration by a trustee and his advisers as to whether an application was commercially worthwhile.
Peter Shaw appeared for the trustee in bankruptcy in this case.
Interviewed by Robert Matthews.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
If you are a LexisPSL subscriber, click the links below for further information:
How a pension is dealt with in bankruptcy
Income payments orders under section 310 of the Insolvency Act 1986—what is an IPO, who can apply and when, what can be caught and how much can the trustee claim?
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Stephen qualified as a solicitor in 2005 and joined the Restructuring and Insolvency team at Lexis®PSL in September 2014 from Shoosmiths LLP, where he was a senior associate in the restructuring and insolvency team.
Primarily focused on contentious and advisory corporate and personal insolvency work, Stephen’s experience includes acting for office-holders on a wide range of issues, including appointments, investigations and the recovery and realisation of assets (including antecedent transaction claims), and for creditors in respect of the impact on them of the insolvency of debtors and counterparties.
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