Court of Appeal provides clarity on pension rights of bankrupts (Horton v Henry)

Following on from our blog post: Court of Appeal dismisses appeal in IPO caseSimon Passfield, specialist insolvency barrister at Guildhall Chambers, examines the Court of Appeal’s judgment in Horton v Henry and discusses what it means for bankrupt pension holders and their creditors, as well as practitioners.

Original news

Horton (as trustee in bankruptcy of Michael Gerard Henry) v Henry [2016] EWCA Civ 989, [2016] All ER (D) 50 (Oct)

The Court of Appeal, Civil Division, dismissed the trustee in bankruptcy’s appeal, thus holding, that section 333(1) of the Insolvency Act 1986 (IA 1986), read in conjunction with IA 1986, s 310, did not enable a trustee in bankruptcy to require a bankrupt, who had reached the age at which he was contractually entitled to draw down or ‘crystallise’ his pension (but had not done so), to elect to do so, so that the trustee might apply for an income payments order, under IA 1986, s 310, in relation to the funds drawn, or to be drawn, down. Since rights under registered personal pension schemes no longer formed part of the bankrupt’s estate which vested in the trustee, in the absence of express statutory language conferring such a power, there was no basis for concluding that the court had power to require a bankrupt to exercise his options in any particular way.

What was the background to the appeal?

In Raithatha v Williamson (a bankrupt) [2012] EWHC 909 (Ch), [2012] All ER (D) 57 (Apr), Bernard Livesey QC held that the court could make an income payments order (IPO) in respect of a bankrupt who, having reached the age of 55, was entitled (but had not yet elected) to draw down his pension, on the basis that he had ‘become entitled’ to the income from the pension for the purposes of IA 1986, s 310(7). That decision was considered to be controversial and was the subject of significant academic criticism. However, the case settled before it reached the Court of Appeal.

In Horton v Henry [2014] EWHC 4209 (Ch), [2014] All ER (D) 193 (Dec), Robert Englehart QC reached the opposite conclusion, holding that a bankrupt did not ‘become entitled’ to payment from his pension unless and until he exercised his right to elect to crystallise the pension.

The Court of Appeal was required to resolve the uncertainty caused by these two conflicting High Court decisions.

What were the issues on the appeal?

In her judgment (at para [35]), Gloster LJ identified the following issues which (at least theoretically) arose for determination:

  • whether IA 1986, s 333(1) read in conjunction with IA 1986, s 310, enables a trustee in bankruptcy to require a bankrupt, who has reached the age at which he is contractually entitled to draw down or ‘crystallise’ his pension (but has not done so), to elect to do so, so that the trustee may apply for an IPO in relation to the funds drawn, or to be drawn, down
  • if so, what criteria apply to determine the manner in which, and the extent to which, the bankrupt may be required by the trustee to draw down his pension, and
  • how, if such a power exists, it should be exercised in the present case, having regard to the bankrupt’s reasonable domestic needs

What did the Court of Appeal decide and why?

The court held that the bankrupt’s contractual right to elect to draw down his pension was very different in character from an actual payment or the right to receive that actual payment, once the relevant election has been made. Such right did not fall within the definition of income in IA 1986, s 310(7).

Moreover, IA 1986, s 333(1) (which provides that the bankrupt must do all such things as the trustee may for the purposes of carrying out his functions reasonably require) did not enable the trustee to require the bankrupt to exercise his right to elect to receive payment because it cannot be said that the trustee has ‘functions’ in relation to property which is expressly excluded from the bankrupt’s estate.

To reach a contrary conclusion would ‘drive a coach and horses’ through the protection afforded to a bankrupt’s pension rights by the amendments made to IA 1986 by the pension legislation. It was also significant that there were no statutory criteria informing the court as to how it should direct the bankrupt to exercise the relevant options available to him.

To what extent is the judgment helpful in clarifying the law in this area? And where does it now leave practitioners?

On its face, the judgment provides welcome clarity in overruling the (somewhat unexpected) decision in Raithatha and confirming that pension income will only be included in the assessment of a bankrupt’s income on an IPO application once the bankrupt has exercised his right to elect to receive payment.

However, it leaves open the problem identified by the Insolvency Service in the guidance given to official receivers following the decision at first instance, namely that where an individual is entitled to elect to draw down his pension and the fund value exceeds his total unsecured liabilities, he may not meet the insolvency test and therefore cannot present a petition for his own bankruptcy. This means that trustees in bankruptcy may need to consider whether it is necessary to apply for an annulment in appropriate cases.

What practical lessons can those advising take away from this case?

As Registrar Jones observed in Hinton v Wotherspoon [2016] EWHC 621, [2016] All ER (D) 43 (Jun) (in which he followed the decision at first instance in Henry), in the case of bankrupt pension holders there is now a distinction to be drawn between the ‘ill informed’, who have elected to draw their pension prior to bankruptcy and thus can be subject to an IPO and the ‘better informed’, who can keep their pension ‘safe’ from their creditors by leaving it uncrystallised.

It may be thought that this has the potential to place the interests of the bankrupt unfairly ahead of those of his creditors in cases (such as Henry) where the bankrupt’s pension is more than sufficient to meet his reasonable future needs. However, Gloster LJ has highlighted the potential role which IA 1986, ss 342A–C (which enable a trustee to claw back excessive pension contributions made by the bankrupt where such contributions have unfairly prejudiced the bankrupt’s creditors) may play in redressing the balance (see paras [45] and [46] of her judgment). At present, there is paucity of jurisprudence in relation to these provisions but this is no doubt an area that will see further development in the future.

Simon Passfield undertakes litigation and advisory work in all aspects of corporate and personal insolvency law. He has been consistently recognised as a leading junior in this field by Chambers and Partners and Legal 500 and has appeared in more than 20 reported insolvency cases.

Interviewed by Kate Beaumont.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Further Reading

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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

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