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The Court of Appeal has handed down its long-awaited judgment in Horton (as Trustee in Bankruptcy of Michael Gerard Henry) v Henry dismissing the appeal brought by Mr Horton against the decision of Robert Englehart QC (sitting as a Deputy Judge of the Chancery Division) dated 17 December 2014. The High Court had held that the court did not have the power to require Mr Henry (or indeed any bankrupt) to elect to draw down his pension in any particular way within the context of an application by a trustee in bankruptcy (trustee) for an income payments order (IPO) under section 310 of the Insolvency Act 1986 (IA 1986).
Horton (as Trustee in Bankruptcy of Michael Gerard Henry) v Henry  EWCA Civ 989
Many IPO applications issued in light of Raithatha v Williamson  EWHC 909 (Ch),  All ER (D) 57 (Apr) (see below) were stayed pending the appeal in Horton. The Court of Appeal's decision means that those applications can now be reactivated and dealt with appropriately.
In dismissing Mr Horton's appeal, the Court of Appeal has confirmed that a trustee may not apply for an IPO in circumstances solely where the bankrupt has an uncrystallised pension but has decided not to make any election, which had generally been through to be the position before Raithatha because of the policy reasons behind section 11 of the Welfare Reform and Pensions Act 1999 (WRPA 1999). The decision is likely to put off creditors from petitioning for a debtor's bankruptcy where they are aware the debtor has valuable pension policies, is entitled to make an election, and has little or no other assets that would form part of the bankruptcy estate—had the appeal been allowed, that may have been an option available to them.
The decision is also important in light of the changes brought about by the Taxation of Pensions Act 2014—the relevant provisions of which came into force on 6 April 2015. These changes now allow members of defined contribution (DC) schemes aged 55 or over (or those who satisfy the ill health condition under the Finance Act 2004) to draw down their entire pension pot as cash (whereas generally a cash lump sum payment was previously limited to 25% of the fund value), and removes the requirement to purchase an annuity. The concern was that, relying on Raithatha, trustees could have required a bankrupt to elect to draw down the lesser of their entire DC pension pot value or an amount sufficient to pay in full the costs, expenses, and claims of their bankruptcy estate, potentially leaving the bankrupt with nothing in retirement. That is now not the case.
For debtors themselves, they can be confident in planning for their retirement without the risk that their pension pot might be claimed in the event they are adjudged bankrupt, except where they make excessive contributions to it which are challengeable under IA 1986, s 342A. The decision also removes a potential difficulty that pensions advisers had come up against both since the Raithatha decision was handed down, and subsequently when the first instance decision in Horton was handed down.
Mr Henry was adjudged bankrupt, and Mr Horton was appointed his trustee. Mr Henry held four separate pension policies, one of which was a self-invested pension plan (SIPP), but under WRPA 1999, s 11, those policies did not form part of Mr Henry's bankruptcy estate.
The policies were uncrystallised—Mr Henry had not, and did not, want to make any election in respect of his policies as he did not require any income from them for his reasonable domestic needs, and he wished to preserve their capital value in order to transfer them to his children when he died. Relying on the decision of Bernard Livesey QC (sitting as a Deputy Judge of the Chancery Division) in Raithatha, Mr Horton applied for an IPO under IA 1986, s 310 requiring Mr Henry to crystallise his policies and exercise his elections in the way desired by Mr Horton.
The decision in Raithatha effectively paved the way for trustees to pursue the 25% lump sum element of a bankrupt's pension (which was generally the maximum lump sum that could be paid at that time) through the IPO regime where the bankrupt was entitled to draw down such lump sum, but had elected not to do so. The decision received a great deal of attention and criticism. It had been generally thought that all aspects of pensions were excluded from the bankruptcy regime (except where the bankrupt was already drawing an income from them and such income could properly form part of an IPO). It was also considered to be contrary to the policy behind WRPA 1999, s 11 which essentially was to allow individuals to provide for their own retirement without having to rely on the state.
The facts in Horton (as Trustee in Bankruptcy of Michael Gerard Henry) v Henry  EWHC 4209 (Ch),  All ER (D) 193 (Dec) (first instance decision) and Raithatha were so similar that the Deputy Judge felt unable to distinguish them, and reluctantly declined to follow Raithatha on the basis that it was wrongfully decided, and that uncrystallised pensions envisage further steps beyond merely asking for payment, including choosing how, in what amount, and in what combination to take pension payments. As the Deputy Judge said 'there is an almost infinite variety of possible permutations of payment available under the SIPP' and that the court did not have the power to order any particular form of election. He therefore dismissed Mr Horton's application, with the result that there were two conflicting High Court decisions on the issue.
Mr Horton appealed, and the Court of Appeal heard the appeal on 21 April 2016.
For further reading on the Horton first instance decision, see blog post: Can a trustee in bankruptcy force a bankrupt to crystallise a pension policy?
The Lexis®PSL Restructuring & Insolvency team will be publishing further analysis on the Court of Appeal's decision in Horton in due course, focussing on the Court of Appeal's reasoning in dismissing the appeal.
If you are a LexisPSL Subscriber, click the link below for further information:
Income payments orders: What is an IPO, who can apply when, what can be caught and how much can the trustee claim?
How a pension is dealt with in bankruptcy
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First published on LexisPSL Restructuring and Insolvency and LexisPSL Pensions
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