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Bankrupt cannot be compelled to draw pension to repay debts

Trustee in bankruptcy fails in Court of Appeal

In Horton v Henry [2016] EWCA Civ 989 the Court of Appeal has determined that a trustee in bankruptcy cannot compel a bankrupt to draw down payment from his pension entitlement, if he has not yet elected to do so. Such pension rights could not be included as part of the bankrupt's in come.

In this case the respondent made himself bankrupt on his own petition. The appellant was appointed as trustee in bankruptcy. The assets of the respondent on the date of bankruptcy included four pensions from which the respondent could have drawn down a lump sum and/or derived an income. The respondent had chosen not to do so and was supported by the generosity of his wife and family.

The day before the respondent's discharge from bankruptcy the appellant filed an application pursuant to section 310 of the Insolvency Act 1986 for an income payments order requiring the respondent to pay: (i) the tax-free lump sum that the respondent was entitled to draw down from his pensions; and (ii) further payments of any monthly/periodic income that the respondent could derive from his pensions.

At first instance, the judge held that the respondent's uncrystallised pension rights did not fall to be assessed as part of his income. The judge declined to follow Raithatha v Williamson [2012] EWHC 909 (Ch), a previous High Court decision that had reached the contrary conclusion.

The judge at first instance gave the appellant permission to appeal.

Gloster LJ summarised the issue before the Court of Appeal as follows:

"does a pension entitlement in respect of which a bankrupt has a present right to elect to draw down payment (but has not yet exercised) fall to be included in the assessment of his income"?

It was held that such pension rights did not fall to be included as income. The following reasons were given:

i. The Insolvency Act and pension legislation had explicitly excluded pension rights from the estate of a bankrupt. Parliament had decided to draw a balance between, on the one hand, the interests of the State in encouraging people to save for their retirement, and, on the other, the interests in creditors receiving payment of their debts.

ii. A trustee could not require a bankrupt to take steps to obtain property that was excluded from their estate, and convert it into income receivable by him, so that it could be subject to an income payments order. A trustee could not require a bankrupt to work so as to receive a salary, nor to request a payment from a discretionary trust of which he was a beneficiary.

iii. If a trustee were able to compel the bankrupt to draw on his pension, then the courts would have to decide both the amount and manner of the draw down. The absence of criteria in the Insolvency Act informing the court as to how it should make such a determination was a "formidable obstacle to the trustee's arguments". 

iv. As a matter of construction of s310 of the Insolvency Act, there was no basis for concluding that a bankrupt's contractual rights to draw down or crystalise his pension come within the definition of "income of the bankrupt".

v. The Insolvency Act as well as the relevant provisions of the Pensions Act 1995 and the Welfare Reform and Pensions Act 1999, drew a clear distinction between rights under a pension scheme and payments under such a scheme.

The appeal was dismissed.

For the judgment and summary by Thomas Harvey of 1 Hare Court, from which this item is derived, please click here.